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

                                    FORM 10-K
(Mark One)

[X]     ANNUAL  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES
        EXCHANGE ACT OF 1934 For the fiscal year ended November 1, 1998
                                                        or
[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
        EXCHANGE ACT OF 1934
        
                          Commission file number 1-9474
                                                 ------
                            FORSTMANN & COMPANY, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

         GEORGIA                                        58-1651326
--------------------------------            ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
  incorporation or organization)

   498 Seventh Avenue, New York, N.Y.                         10018
----------------------------------------                   ----------
(Address of principal executive offices)                   (Zip Code)

       Registrant's telephone number, including area code: (212) 642-6900
                                                           --------------
        Securities registered pursuant to Section 12(b) of the Act: None
                                                                    ----
           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.01 par value
                          ----------------------------
                                (Title of class)

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

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

         The aggregate  market value of the common stock held by  non-affiliates
of the registrant as of February 10, 1999 was  $2,000,809,  based on the trading
price in the over-the-counter market on such date.

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

As of February 11, 1999 there was 4,391,458 shares of Common Stock outstanding.


Total Number of Pages: 256
Exhibit Index starts on sequentially numbered page 115.

<PAGE>
Item 1.  BUSINESS

GENERAL

         Forstmann & Company, Inc., a Georgia corporation (the "Company"),  is a
leading designer,  marketer and manufacturer of innovative, high quality woolen,
worsted  and  other  fabrics  which  are used  primarily  in the  production  of
brand-name  and private  label  apparel for men and women,  as well as specialty
fabrics for use in billiard and gaming tables,  sports caps and school uniforms.
The apparel industry  represents the majority of the Company's customers for its
fabrics.  The Company  manufactures fabrics produced from 100% wool, wool blends
and blends of other natural and man-made fibers. The Company believes that it is
the largest  manufacturer of domestically  produced woolen fabrics.  Through its
wholly-owned  subsidiary,  Forstmann Apparel,  Inc. ("FAI"), the Company designs
and markets women's suits primarily under the "Oleg Cassini" label.  The Company
contracts the manufacturing of women's suits through  manufacturers based in the
Caribbean and sources complete apparel packages internationally.

         During the Company's  1998 fiscal year (the  fifty-two week period from
November 3, 1997 through  November 1, 1998)  ("Fiscal Year 1998"),  women's wear
and outerwear fabrics  accounted for  approximately  64.0% of revenues and men's
wear fabrics accounted for approximately 19.6% of revenues. During the Company's
1997  fiscal year (the  fifty-two  week  period  from  November 4, 1996  through
November 2, 1997)  ("Fiscal  Year  1997"),  women's wear and  outerwear  fabrics
accounted for  approximately  67.8% of revenues and men's wear fabrics accounted
for approximately 19.9% of revenues.  During the Company's 1996 fiscal year (the
fifty-three week period from October 30, 1995 through November 3, 1996) ("Fiscal
Year 1996"),  women's wear and outerwear  fabrics  accounted  for  approximately
66.8% of revenues and men's wear fabrics  accounted for  approximately  19.1% of
revenues.  Specialty fabrics, including government and other, and FAI sales (see
"Business Acquisition" below) accounted for remaining revenues during each year.

         Although  Forstmann was incorporated in December 1985, its predecessors
have been in business  for over 100 years.  The Company is the  successor to the
business of the Woolen and Worsted Fabrics Division of J.P. Stevens & Co., Inc.,
the assets of which the Company acquired in February 1986.

         The  principal  executive  offices of the  Company  are  located at 498
Seventh  Avenue,  New York,  New York 10018,  and its telephone  number is (212)
642-6900.

BUSINESS ACQUISITION

         The  Company  formed  FAI in May  1998  to  acquire  the  business  and
substantially  all of the assets of Arenzano  Trading  Co.,  Inc.  ("Arenzano").
Arenzano had instituted  voluntary  bankruptcy  proceedings in April 1998. FAI's
purchase was made pursuant to an order signed by United States  Bankruptcy Judge
Burton R.  Lifland,  dated May 8, 1998,  in the cases  entitled,  In re Arenzano
Trading Company,  Inc. and In re B&B Corporation,  Case Nos. 98 B 42508 and 98 B
42520 (BRL).  The  transaction was completed on May 13, 1998 at a purchase price
of $2.0 million and FAI assumed the obligation to pay future  minimum  royalties
related to a licensing  agreement.  The purpose of the transaction was to permit
the Company to expand its fabrics business into the apparel business.

         The acquisition of Arenzano was accounted for using the purchase method
of accounting. The purchase price paid for Arenzano was assigned $0.9 million to
tangible assets and the remainder to intangible assets. The Company subsequently
wrote off the intangible  assets, as such costs are not expected to be recovered
by  future  operations,   and  accrued  the  remaining  future  minimum  royalty
obligation  assumed.  The Company's  results of operations  for Fiscal Year 1998
include the results of operations of FAI for the period May 13, 1998 to November
1, 1998.

EMERGENCE FROM BANKRUPTCY

         On  September  22,  1995,  as a result  of a decline  in the  Company's
results of operations  during Fiscal Year 1995 reflecting,  among other factors,
rising wool costs,  sluggish retail apparel sales,  and high debt leverage,  the
Company  filed a petition  for  relief  under  Chapter  11 of the United  States
Bankruptcy Code (the "Bankruptcy  Code") with the United States Bankruptcy Court
for the Southern District of New York (the "Bankruptcy Filing").  From September
22, 1995 to July 23, 1997, the Company  operated as a  debtor-in-possession.  On
May 14, 1997,  the Company filed its First Amended Plan of  Reorganization  (the
"Plan of Reorganization") and an accompanying First Amended Disclosure Statement
Pursuant to Section 1125 of the Bankruptcy Code (the "Disclosure Statement"). On
May 15, 1997,  the  Bankruptcy  Court  entered an order  approving the Company's
Disclosure  Statement.  Shortly thereafter the Company began to solicit the vote
of its creditors and stockholders  with respect to the Plan of Reorganization in
accordance  with the  Bankruptcy  Code. On July 9, 1997,  the  Bankruptcy  Court
entered an order  confirming the Plan of  Reorganization.  On July 23, 1997 (the
"Effective Date"), the Plan of Reorganization was consummated by the Company and
the Company emerged from bankruptcy.

         Pursuant to the Plan of  Reorganization,  all general  unsecured claims
against  the  Company  were  converted  into  100% of the  common  stock  of the
reorganized  Company  based on a ratio of 50 shares  per each  $1,000 of allowed
unsecured claim.  Secured claims against the Company  aggregating  approximately
$60.1 million were either  refinanced,  reinstated or restructured as more fully
described  in Note 9 to the  Financial  Statements  contained  in Item 8 of this
Annual Report (the "Financial Statements"). In addition, pursuant to the Plan of
Reorganization, as of the Effective Date:

         (i)      holders of the Company's  redeemable  preferred stock received
                  in the aggregate  warrants  entitling them to purchase  43,878
                  shares of the new common stock of the Company within two years
                  of the Effective  Date at an exercise  price of $23 per share,
                  and the preferred stock was canceled;

         (ii)     holders of the  Company's  old common  stock  received  in the
                  aggregate warrants entitling them to purchase 43,878 shares of
                  the new common  stock of the  Company  within two years of the
                  Effective Date at an exercise price of $23 per share,  and the
                  old common stock was canceled;

         (iii)    holders of options to purchase common stock of the predecessor
                  Company  received  no  distributions  under the Plan,  and the
                  options were canceled;

         (iv)     an  aggregate  of  487,528  shares  of  common  stock  of  the
                  reorganized  Company were  reserved for issuance upon exercise
                  of options granted or to be granted  pursuant to the Company's
                  Management  Stock Option Plan and, as of the  Effective  Date,
                  146,258  options  were  granted  to certain  employees  of the
                  Company at an exercise price of $12.88 per share;

         (v)      the Company  entered into a Loan and Security  Agreement dated
                  as of July 23, 1997 (the "Loan and Security  Agreement")  with
                  BankAmerica Business Credit, Inc. ("BABC"),  as agent, and the
                  financial   institutions   named  therein,   providing  for  a
                  revolving  line of credit  (including a $10 million  letter of
                  credit  facility)  of up to $85 million (the  "Revolving  Loan
                  Facility") and term loans of approximately  $31.5 million (the
                  "Term  Loan  Facility"),  the  proceeds  of which were used to
                  repay all amounts  outstanding  under the Company's GE Capital
                  DIP Facility  (hereinafter defined) and CIT Equipment Facility
                  (hereinafter  defined),  repay the  principal and a portion of
                  the accrued and unpaid  interest due under the Senior  Secured
                  Notes  (hereinafter   defined)  and  fund  other  amounts  due
                  pursuant  to the  Plan  of  Reorganization  and the  Loan  and
                  Security Agreement.
<PAGE>
BUSINESS

Markets and Products.  The Company  fulfills many of the diverse fabric needs of
leading men's,  women's and outerwear apparel makers by offering a collection of
100% wool, wool-blend, synthetic and synthetic-blend fabrics, as well as fabrics
blended  with natural  fibers such as wool,  linen and silk.  These  fabrics are
offered in a wide  variety of styles,  colors,  weaves and weights  which can be
used in tailored clothing,  sportswear,  coats for men and women, as well as for
specialty  applications.  The Company introduces new collections  throughout the
year to ensure that its  customers  are  frequently  presented the latest fabric
offerings and to accommodate seasonal retail cycles.

         Women's Apparel Fabrics. The Company designs,  markets and manufactures
woolen and  worsted  fabrics  for women's  apparel in the  moderate,  better and
bridge price ranges, primarily for sportswear,  suits and dresses.  Forstmann is
also a  significant  supplier of fabrics for  women's  and men's  woolen  coats,
providing  fabric  for most  major  domestic  women's  outerwear  manufacturers.
Outerwear  fabrics  include  piece dyed solids,  stock dyed mixtures and novelty
weaves.  Forstmann  offers  a  spring/summer,  fall/winter  and  holiday  fabric
collection  for  women's  apparel  with  each one  varying  in  terms of  fabric
composition,  weight,  color palette and styling to fit the appropriate  season.
The  fall/winter  collection  includes  traditional  fabrics  such as 100% wool,
flannels,  luster  and matte,  meltons  and  velours  and 100%  worsted  crepes,
tricotines and twills. It also includes more fashionable fabrics made with silk,
mohair,  alpaca,  cashmere,  polyester,  viscose and other synthetic and natural
fibers.

         The  spring/summer  and holiday  collections  are generally  lighter in
weight and texture. As U.S. consumer habits demand,  there is a greater emphasis
on non-wool or "wool-poor" products in these collections.  The spring/summer and
holiday  collections  include a number of 100% worsted viscose and viscose-blend
fabrics,  as well as a variety of combinations of fibers such as linen, silk and
polyester.  Forstmann  also offers a  collection  of  lightweight  worsted  wool
fabrics,  some of which are suitable for  year-round  wear and contain Lycra (R)
brand spandex* or other synthetic or natural fibers.

         With  three  distinct  collections,  Forstmann  is seeking to serve its
women's  wear  customers  all year  long.  The  women's  apparel  fabrics  group
accounted for approximately 64.0% of total revenue in Fiscal Year 1998, 67.8% of
total  revenue in Fiscal  Year 1997 and 66.8% of total  revenue  in Fiscal  Year
1996.


-------------------------------
* Lycra (R) brand spandex is a registered trademark of E.I. Dupont de 
  Nemours & Company, Inc.
<PAGE>
         Men's Apparel Fabrics.  The Company  designs,  markets and manufactures
fabrics in the moderate and better  price  ranges for men's  apparel.  The men's
wear group presents a fall/winter and  spring/summer  collection for two general
apparel  categories:  sportswear  (woolen  sportcoats,  trousers)  and  tailored
clothing  (worsted  suits,  formal wear,  blazers).  The product  ranges include
traditional fabrics such as tropicals,  gabardines and flannels in wool and wool
blends,  as well as  fabrics  made with  man-made  fibers  such as  viscose  and
polyester  and natural  fibers such as linen,  camel hair,  lambswool  and silk.
Through market-specific product styling and composition,  the Company is able to
serve  emerging  apparel  categories  such as suit  separates and "casual dress"
sportswear as well as its traditional base of tailored  clothing and sportswear.
Men's wear  accounted  for  approximately  19.6% of total revenue in Fiscal Year
1998,  19.9% of total  revenue in Fiscal Year 1997 and 19.1% of total revenue in
Fiscal Year 1996.

         Specialty  and  Government  Fabrics.  The  Company  produces  specialty
fabrics for a wide variety of end uses,  including  billiard and gaming  tables,
sports  caps and school  uniforms.  The Company is a leading  domestic  billiard
table  fabric  manufacturer,  selling  directly  to  manufacturers  and  through
distributors.  Forstmann  is  the  primary  supplier  of  wool  fabric  used  in
production of official major league baseball caps.

         The  Company  also  sells a  limited  quantity  of  fabric  to the U.S.
government for a variety of military apparel uses. These fabrics are designed to
meet stringent requirements for tailoring, comfort and durability. The Company's
sales to the  government  are  generally in the form of long-term  contracts for
high-volume,  lower-margin goods. Therefore,  the Company bids opportunistically
on  contracts  that will  balance its  manufacturing  capacity  during  off-peak
periods.  The actual awarding of government contracts can be a long-term process
with  legislative  approval of funding  sometimes  required.  During Fiscal Year
1998,  the Company was awarded  $4.0  million in  government  contracts  and, at
November 1, 1998,  $2.5 million in orders were open and unfilled.  Specialty and
government  sales accounted for  approximately  12.7% of total revenue in Fiscal
Year 1998, 10.5% of total revenue in Fiscal Year 1997 and 10.2% of total revenue
in Fiscal Year 1996.

         Women's  Suits.  Through FAI, the Company  designs and markets  women's
suits primarily under the "Oleg Cassini" label. During Fiscal Year 1998, women's
suits accounted for approximately 3.1% of total revenue.

         Discontinued  Product  Lines.  During  Fiscal  Year 1996,  the  Company
discontinued its civilian uniform, converted fabrics and Carpini fabrics product
lines.  Sales from the Company's  discontinued  product lines,  civilian uniform
fabrics, converted fabrics and Carpini fabrics, accounted for approximately 1.0%
of total revenue in Fiscal Year 1998,  1.9% of total revenue in Fiscal Year 1997
and 3.9% of total revenue in Fiscal Year 1996.  All three  discontinued  product
lines were unprofitable in each of these fiscal years.

         Additionally,  in connection with the 1998  Restructuring  and the 1999
Realignment (each as defined and discussed below under "Management's  Discussion
and Analysis of Financial Condition and Results of Operations"),  the Company is
exiting  a  portion  of its  men's  wear  worsted  business  as well as its U.S.
government worsted top-dyed business.  During Fiscal Year 1998, the discontinued
men's wear worsted business  accounted for  approximately  9.1% of total revenue
and the U.S.  government  worsted top-dyed business  accounted for approximately
2.5% of total revenue. Accordingly,  based on the described discontinued product
lines and  prevailing  market  conditions,  the  Company  expects  fabric  sales
revenues  in its 1999  fiscal year (the  52-week  period  from  November 2, 1998
through  October 31, 1999  ("Fiscal Year 1999")) to be  approximately  24% lower
than in Fiscal Year 1998. The 1998  Restructuring  and the 1999  Realignment are
intended  to  align  the  Company's  costs  during  Fiscal  Year  1999  with the
significant  decline in sales experienced in Fiscal Year 1998 and anticipated in
Fiscal Year 1999.

Styling,  Merchandising and Marketing. The Company's styling,  merchandising and
marketing  functions are integrated and include the  conceptualization  (styling
and  merchandising)  and  the  sales  (marketing)  of the  product  line.  These
functions are directed  from its New York offices and are  organized  around the
Company's  four  customer-end  use divisions:  women's  apparel  fabrics,  men's
apparel  fabrics,  specialty and  government  fabrics,  and women's  suits.  The
primary sales force is based in New York, with a sales representative in Dallas.
The Company also retains sales agents in Canada, Germany and California.

Product Development.  Over the course of each fiscal year,  approximately 30% of
products   offered  by  the  Company  are  new   introductions.   The   ultimate
accountability for the successful, cost-effective development of new products is
firmly placed with the senior manager of each of the Company's  customer-end use
divisions.  In addition,  the Company has established a protocol for new product
development  that requires  analysis of such factors as research and development
costs,  potential margin contribution,  and market potential prior to adopting a
new  product.  The  Company's  objective  is  to  cultivate  innovative  product
development   that   utilizes  the   Company's   resources   and  maximizes  its
manufacturing  capabilities,  while addressing the ever changing requirements of
its targeted markets.

Manufacturing. The Company owns and operates vertically integrated facilities at
which it performs operations from yarn manufacturing through weaving, dyeing and
finishing of fabric.  This vertical  integration  not only provides  significant
flexibility  in the  production  of woolens and worsteds  fabrics,  but also the
ability to produce a wide variety of other natural and synthetic-blend  fabrics.
The  Company  operates  the only major  United  States  mill which  manufactures
fabrics on both the woolen and worsted systems.

         For the production of woolen  fabrics,  the Company  purchases  scoured
(degreased) wool which consists of the shorter fiber taken from the sheep.  When
spun into yarn, woolen yarns generally tend to have a "bulky"  appearance due to
the length of the fiber.  Woolen  fabrics are used in  garments  such as flannel
blazers,  outerwear  (coats) and sports  coats.  Woolen  fabrics can be produced
piece-dyed (solid color) or as fancies (patterned).  In piece dyeing, the fabric
is dyed after it is woven. In fancies,  the raw wool is dyed or yarn is dyed and
then woven into the desired pattern. Finishing of woolen fabrics is the critical
value added step in the  manufacturing  process.  It is finishing that gives the
woolen fabric its "hand" (feel) and appearance.

         For the production of worsted fabrics,  the Company  purchases wool top
which  consists  of the long fiber  taken from sheep  which has been  combed,  a
process which parallels and straightens the fibers.  The combination of the long
fibers and additional yarn manufacturing steps to straighten the fibers produces
worsted  yarn,  which is  generally  fine and has a smooth  appearance.  Worsted
fabrics are used in garments such as men's suits, women's crepe skirts and men's
trousers.  Worsted  fabrics,  like woolen  fabrics,  can be produced  piece dyed
(solid)  or fancy  (patterned).  Other  fibers  such as  viscose,  linen,  silk,
polyester,  nylon or cotton can be blended or woven into both woolen and worsted
applications.

         The curtailment of certain of the Company's Milledgeville operations as
part of the 1999 Realignment  will result in the Company  becoming  dependent on
outside  sources  for some of its  worsted  yarn  needs  and all of its top dyed
worsted needs.

Capital Investment Program. Capital expenditures during Fiscal Year 1998, Fiscal
Year 1997 and  Fiscal  Year 1996  were  limited  to  maintaining  the  Company's
facilities,  emergency  replacements and the relocation of certain wool blending
machinery and equipment from the Company's  previously  owned Tifton facility to
its Dublin  facility.  During Fiscal Year 1998 and Fiscal Year 1997, the Company
invested $4.2 million and $1.9  million,  respectively,  in property,  plant and
equipment and $1.0 million and $0.4 million,  respectively,  in the  development
and implementation of certain computer  information systems. The Company expects
to spend less than $5.0 million in capital-related expenditures (including costs
associated  with the  development  and  implementation  of computer  information
systems) during Fiscal Year 1999.

Raw Materials. The Company's raw material costs constituted approximately 40% of
its cost of goods manufactured during Fiscal Year 1998. The primary raw material
used by the Company is wool. As a result,  the Company's  costs are dependent on
its  ability  to  manage  its  wool   inventory  and  control  its  wool  costs.
Approximately  three-quarters  of the Company's  wool is imported from Australia
and  substantially  all of the balance is  purchased in the United  States.  The
Company purchases its wool from both brokers and processors and is not dependent
on a single supply source.  The Company's foreign wool purchases are denominated
in U.S. dollars and the Company  generally does not incur any currency  exchange
risk.  However,  future  changes in the exchange rates between United States and
Australian dollars can materially affect the Company's results of operations for
financial  reporting  purposes.  The Company does not have adequate  alternative
sources of wool if the existing wool  suppliers are unable to supply wool to the
Company.

         Based  on the  Company's  forward  purchase  commitments,  the  Company
expects its wool costs to be a weighted  average of 20% lower during Fiscal Year
1999 as compared to Fiscal Year 1998. See "Management's  Discussion and Analysis
of Financial  Condition and Results of Operations",  below,  for a discussion of
the  effects  of changes in wool  prices and the impact of  fluctuations  in the
exchange rate between the U.S. and Australian dollars.

Customers.  The Company has more than 400 active  customers.  During Fiscal Year
1998,  one of the Company's  customers  accounted for  approximately  20% of the
Company's  revenues.  No other customer of the Company accounted for 10% or more
of the Company's revenues in Fiscal Year 1998.

         Substantially  all of the Company's  customers  are located  within the
United States.  During each of Fiscal Years 1998,  1997 and 1996,  less than two
percent of the Company's revenues were derived from exports.

Backlog.  The Company's fabric sales order backlog at January 31, 1999 was $34.8
million,  a decrease of $15.6 million from the  comparable  period one year ago.
Excluding  government and men's worsted orders,  which have historically yielded
lower gross profit margins, the backlog at January 31, 1999 was $33.5 million or
$10.7 million lower than the comparable period one year ago. The decrease in the
backlog,   excluding   government  and  men's  worsted   orders,   is  primarily
attributable to a decrease in coating and men's woolen fabric orders, as well as
a decline in women's  woolen and worsted fabric  orders,  slightly  offset by an
increase in specialty  fabric  orders.  The decrease in coating fabric orders is
primarily due to the unseasonably warm winter experienced throughout much of the
U.S. in 1997-1998.  As a result, initial coating fabric orders have been delayed
by retailers,  which has delayed orders from apparel  manufacturers.  Changes in
fashion  trends,  coupled with  increased  imports  pressures have resulted in a
decline in demand for the  Company's  men's woolen  fabrics.  The decline in the
backlog of sales orders for women's fabrics is twofold.  First, an over capacity
of woolen  flannel  manufacturing  coupled with  excessive  women's wool flannel
apparel  inventory  at retail has lead to a decline in demand for the  Company's
women's wool flannel  fabrics.  Second,  the reduction in the Company's  worsted
fabrics  manufacturing  capacity  has caused the Company to limit  somewhat  its
women's  worsted  product  offerings.  The increase in specialty sales orders is
attributable  to an increase in orders for fabrics  used in baseball  caps.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations", below.

Seasonality.  The wool fabric  business is seasonal,  with the vast  majority of
orders placed from  December  through  April for  manufacture  and shipment from
February  through July to enable apparel  manufacturers  to produce  apparel for
retail sale during the fall and winter  seasons.  As a result of normal  payment
terms for the sale of such  fabrics,  the Company  receives the major portion of
its payments from May through October.  The Company's worsted fabrics sales tend
to be less  seasonal  because  the  lighter  weight of such  fabrics  makes them
suitable for retail sale in the spring and summer seasons as well as in the fall
and winter seasons.

Competition. The textile business in the United States is highly competitive and
the Company  competes with many other  textile  companies.  However,  due to the
capital intensive nature of wool fabric  production,  there are a limited number
of domestic textile mills that produce woolen and worsted  fabrics.  The Company
believes that it is the largest  domestic  manufacturer of woolen  fabrics.  The
Company's principal competitors in the sale of woolen fabrics are Warshaw Woolen
Associates,  Inc.,  Carleton  Woolen  Mills,  Inc.  and Novalan S.A. De C.V. Its
principal  competitors in the sale of worsted fabrics are Burlington  Industries
Equity, Inc., Clyne and Tinker, Inc. and The Worcestor Company, Inc.

         Almost all of the fabrics the Company produces for apparel are consumed
in the United States,  although the finished  garments are  increasingly cut and
sewn in other  countries.  For several years,  the Company has faced  increasing
competition,  particularly  foreign,  in virtually all segments of its business.
This trend has increased with the economic  downturn  experienced in Asia and is
expected to continue as tariffs are  reduced.  Competition  is  increasing  from
global  woolen and  worsted  textile  manufacturers  as well as from  imports of
finished goods.

         The Company believes that the principal  competitive factors are price,
quality,  service and fashion,  with the  significance of each factor  depending
upon the product and market  involved.  The competitive  position of the Company
varies  among the  different  fabrics it  manufactures.  In the  current  retail
environment,  the Company believes that price is the primary factor  influencing
its customers to make a purchasing decision.

         U.S.  Department of Commerce  statistics  indicate that there was an 8%
annual  increase in the import of chiefly  wool suit type coats for both men and
boys from November 1997 to November  1998.  The increase in this category can be
attributed to the world wide increase of production coupled with the downturn of
the economies in Asia. For the same period,  there was an 8% annual  decrease in
the import of womens and girls  chiefly wool coats.  Additionally,  there was an
annual  decrease of 5% for womens and girls suits of chiefly wool from  November
1997 to  November  1998.  The  decrease  in womens  wool  suits and coats can be
attributed to lower demand from  consumers for wool garments in general,  milder
winter  weather for the last few years,  and a glut of production  capacity both
domestically and internationally.

         NAFTA,  which became  effective in 1994,  has resulted in an increasing
percentage  of garments for sale in the United  States,  Canada and Mexico being
manufactured  in Canada or Mexico,  taking  market  share from the Far East.  In
order for such  garments  to qualify  for  duty-free  treatment  into the United
States and Canada,  the fabric has to be sourced from the United States,  Canada
or Mexico. Historically, there has been limited capacity for wool production and
garment assembly in Mexico and Canada.  Under NAFTA, a Canadian  manufacturer is
permitted  to export high  volumes of men's suits into the United  States.  This
activity  has had little  effect on the  Company's  overall  business  since the
portion  of the  Company's  business  represented  by men's  suiting  fabrics is
relatively small.  However,  in Mexico,  certain competitors have added capacity
for woolen and worsted fabric production and garment packaging. This development
poses  greater  competitive  challenges  for the Company as,  currently,  Mexico
benefits  from lower labor  rates,  lower wool  tariffs and much less  stringent
environmental regulations.

         The Carribean Basin Initiative trade agreement provides reduced duties
under the "807" provision.  The General Agreement on Trade and Tariffs ("GATT"),
reduces  tariffs on wool fabric from about 33% to 25% over the next seven years.
In exchange for the tariff reduction, market access for products manufactured in
the United States to countries that are parties to GATT is improved.

Trademarks.  The Company owns the Forstmann  (R) name,  which it uses as a trade
name, as a trademark in connection  with various  merchandise,  and as a service
mark in the United  States.  The  Forstmann  name is also  registered in various
countries,  including Austria, Australia, the Benelux countries,  Canada, China,
Denmark,  France, Germany, Hong Kong, Indonesia,  Ireland, Italy, Japan, Norway,
Portugal, Spain, Sweden, Switzerland and the United Kingdom, under International
Class 24. The Company  believes that no  individual  trademark or trade name, is
material to the Company's business.  Through its licensing agreement,  FAI holds
the North American  right to  manufacture,  market and distribute  women's suits
under the "Oleg Cassini" label through 2000.

Employees.  As of January 31, 1999,  the Company  employed  approximately  1,200
hourly-paid,  full-time  skilled  personnel at its plants and  approximately 175
additional salaried, supervisory,  management and administrative employees. None
of the Company's  employees is represented  by a union or a labor  organization.
The Company has never  experienced a strike and believes that its relations with
its employees are good.

Environmental   Matters.  By  the  nature  of  its  operations,   the  Company's
manufacturing  facilities  are  subject  to  various  federal,  state  and local
environmental  laws and  regulations  and  occasionally  have  been  subject  to
proceedings and orders pertaining to emissions into the environment.

         Dublin,  Georgia.  On December  29,  1995,  the  Georgia  Environmental
Protection   Division  ("EPD")  issued  separate   administrative   orders  (the
"Administrative  Orders")  to  the  Company  and to  J.P.  Stevens  & Co.,  Inc.
("Stevens")  which relate to three sites on the Georgia Hazardous Site Inventory
- the "TCE site", the "1,1-DCA site" and another site known as the "Burn Area" -
at the Company's Dublin,  Georgia facility.  The Administrative  Orders required
the Company and Stevens to submit a compliance  status report  ("CSR") for these
sites that would  include,  among other things,  a  description  of the release,
including its nature and extent,  and suspected or known source, the quantity of
the  release and the date of the  release.  The CSR would also have to include a
determination of cleanup standards  (called "risk reduction  standards") for the
sites  and a  certification  that  the  sites  were  in  compliance  with  those
standards;  alternatively,  the party submitting the CSR could  acknowledge that
the site is not in compliance  with risk  reduction  standards.  Pursuant to the
Administrative  Orders,  if a site is not in compliance  with the risk reduction
standards,  then a  Corrective  Action  Plan (a  "Corrective  Action  Plan") for
remediating the release would have to be submitted to EPD.

         Since both the Company  and  Stevens  had been  required to perform the
same  work at all  three of these  sites,  the  Company  and  Stevens  agreed to
allocate responsibilities between themselves pursuant to an Agreement Concerning
Performance of Work ("Agreement") dated January 24, 1997. The Agreement required
the Company to prepare and submit to EPD the CSR for the TCE and 1,1-DCA  sites,
while  requiring  Stevens to  prepare  and submit to EPD a CSR for the Burn Area
site. The Agreement does not commit either party to perform corrective action at
these  sites.  On January 27, 1998 EPD provided  comments to the CSR  previously
submitted by Stevens and requested  clarification  of the Stevens CSR. By letter
dated March 5, 1998,  Stevens  submitted a "draft" response to EPD and by letter
of April 6, 1998,  a final  response.  It is the  Company's  understanding  that
Stevens is waiting for a response to this letter from EPD.


         The  Company  submitted  a CSR for the TCE  and  1,1-DCA  sites,  which
certified compliance with risk reduction standards for both sites. EPD indicated
that it did not agree to the  certification  with respect to the TCE site. After
extensive  discussions  with EPD concerning the issue,  the Company  submitted a
Corrective  Action Plan for the TCE site by letter dated May 15, 1997. By letter
dated  September  29, 1997,  EPD  responded to the  Corrective  Action Plan with
notice of deficiency.  The Company  submitted a revised  Corrective  Action Plan
("CAP") on October 31, 1997.  The revised CAP calls for  continued  operation of
the Company's  existing  groundwater  recovery system, as well as one additional
groundwater  recovery well and a groundwater  collection  trench near the former
dry cleaning  basement.  On July 28, 1998 EPD approved  the  Company's  CAP. The
Company  has  begun  installation  of  the  recovery  well  and  design  of  the
groundwater  collection  trench.  In addition to the  installation  of these two
systems,  the CAP requires the submission of an Annual  Corrective Action Status
Report to EPD.

         Tifton,  Georgia.  In January  1997,  the  Company  was  notified  by a
potential  buyer of the  Company's  Tifton  facility  that soil and  groundwater
samples had been obtained from that facility and that certain  contaminants  had
been identified.  Subsequently,  through  sampling and testing  performed by the
Company's  environmental  consultants,  the Company  confirmed  the  presence of
contaminants in groundwater samples taken at the site. On February 28, 1997, the
Company  notified EPD of such  findings,  and the site was placed on the Georgia
Hazardous Site Inventory.

         The Company  subsequently  consummated its sale of the Tifton facility.
As part of that transaction,  the Company, the Tift County Development Authority
as purchaser ("TCDA") and Burlen Corporation as operator ("Burlen") entered into
an   Environmental   Cost  Sharing  and  Indemnity   Agreement   ("Cost  Sharing
Agreement").   Under  the  Cost   Sharing   Agreement,   the  Company   retained
responsibility for remediating certain contamination,  to the extent required by
law, that originated prior to Burlen's occupancy of the premises.  Likewise, the
Company  assumed the  obligation to indemnify  TCDA and Burlen in regard to such
contamination to the extent that a claim is made by an unaffiliated  third party
or  governmental  agency.  In exchange,  Burlen agreed to pay to the Company the
lesser of (1) $150,000 minus any payments  already made to the Company  (certain
expenses  had  already  been  shared)  to respond  to the  contamination  or (2)
one-half of the costs incurred by the Company in response to such contamination.

         By letter  dated  December  21, 1998,  EPD  requested  that the Company
submit a CSR for the  site by June  21,  1999.  EPD  indicated  that it had sent
Burlen a similar request.  The Company intends to submit the CSR for the site by
the requested deadline.

         At November 1, 1998, the Company had $0.3 million  accrued for costs to
be  incurred  in  connection   with  the  TCE,   1,1-DCA  and  Tifton   facility
environmental  matters.  The Company,  subject to EPD's response to J.P. Stevens
revised CSR and compliance status certification and EPD's response to the Tifton
site,  believes  the  accrual  for  environmental  costs at  November 1, 1998 is
adequate.

FINANCING AGREEMENTS

         The Company's  indebtedness  for borrowed  money as of November 1, 1998
consisted  of  amounts  outstanding  under the Loan and  Security  Agreement,  a
promissory note and certain capital lease obligations.

Loan and Security Agreement.  In connection with the consummation of the Plan of
Reorganization  on July 23, 1997, the Company entered into the Loan and Security
Agreement with a syndicate of financial  institutions  led by BABC. The Loan and
Security  Agreement  provided for a revolving line of credit  (including a $10.0
million letter of credit facility),  subject to a borrowing base formula,  of up
to $85 million (the "Revolving  Loan Facility") and term loans of  approximately
$31.5 million (the "Term Loan  Facility").  Borrowings on July 23, 1997 of $28.0
million under the  Revolving  Loan Facility plus the proceeds from the Term Loan
Facility were used to repay all  borrowings  outstanding  under the Company's GE
Capital  DIP  Facility   (hereinafter   defined)  and  CIT  Equipment   Facility
(hereinafter  defined),  repay the  principal  and a portion of the  accrued and
unpaid  interest due under the Senior  Secured Notes  (hereinafter  defined) and
fund other amounts due pursuant to the Plan of  Reorganization  and the Loan and
Security Agreement.

         The Revolving  Loan Facility and Term Loan Facility  mature on July 22,
2000.  If the Company  elects to terminate  the  Revolving  Loan  Facility,  the
Company must pay a termination  fee. The fee, as subsequently  amended,  will be
equal to one half of one percent (.50%) of the sum of the Maximum  Revolver ($70
million)  plus the then  outstanding  principal  balance of the Term Loan if the
Loan and Security Agreement is terminated prior to April 23, 2000. The Term Loan
Facility can be prepaid, at the Company's election, without a termination fee at
any  time  prior to  maturity.  The  Company's  obligations  under  the Loan and
Security  Agreement are secured by liens on  substantially  all of the Company's
assets.

         Borrowings under the Revolving Loan Facility and the Term Loan Facility
bear interest,  at the Company's option, at a floating rate (which is based on a
Bank of America  reference  rate  ("Prime"))  or a fixed rate (which is based on
LIBOR), payable monthly. Under the Revolving Loan Facility, the floating rate is
0.25% per annum above  Prime and the fixed rate is 2.50% per annum above  LIBOR.
Under the Term Loan  Facility,  the floating rate is 0.75% per annum above Prime
and the fixed rate is 3.00% per annum above LIBOR.

         The  Term  Loan  Facility  required  monthly   principal   payments  of
approximately  $374,000  which began August 31, 1997.  Further,  the Company was
required to pay 50% of "excess  cash flow" for each fiscal  year,  as defined in
the Loan and Security  Agreement,  as long as the outstanding  principal balance
under the Term Loan Facility was greater than $23.3  million.  Such "excess cash
flow"  payments are due on April 30 of each year  following  the fiscal year for
which an "excess  cash flow"  payment is due.  Such  payments  are to be applied
against  the  unamortized  principal  portion of the Term Loan  Facility  in the
inverse  order of  maturity.  In  accordance  with this  section of the Loan and
Security  Agreement on April 27, 1998, the Company repaid the Term Loan Facility
by  approximately  $1.4 million  through  borrowings  under the  Revolving  Loan
Facility.

         In connection with entering into the Loan and Security  Agreement,  the
Company paid BABC  approximately  $728,000 as an underwriting  fee and agreed to
pay the  financial  institutions  party to the Loan and  Security  Agreement  an
unused  line fee of  0.50%  per  annum  on the  average  unused  portion  of the
Revolving Loan Facility.  The Company paid approximately  $582,000 as a facility
fee to  participants  in the  syndicate to the Loan and Security  Agreement.  In
addition,  the Company  pays BABC an agency fee of $125,000  per annum,  payable
monthly  commencing  August 1, 1997,  and pays certain fees in  connection  with
letters of credit.  Further,  the Company pays BABC a loan administration fee of
0.25% per annum on the principal  amount  outstanding  under the Revolving  Loan
Facility and Term Loan Facility.

         The Loan and Security Agreement contains certain restrictive covenants,
including limitations on the incurrence of indebtedness, the sale of assets, the
incurrence of liens, the making of certain  restricted  payments,  the making of
specified  investments,  the payment of cash dividends and the making of certain
fundamental   corporate  changes  and  amendments  to  the  Company's  corporate
organizational and governance instruments.  In addition, the Company is required
to  satisfy,   among  other  things,  certain  financial  performance  criteria,
including  minimum interest and fixed charge coverage  ratios,  minimum adjusted
tangible net worth  requirements  and maximum  capital  expenditure and software
development costs.

         The  Company  and its  lenders  as of March 24,  1998  entered  into an
amendment to the Loan and Security Agreement modifying,  among other things, the
definition  of  earnings  before  interest,   income  taxes,   depreciation  and
amortization  and  reorganization  items  ("EBITDAR") and Adjusted  Tangible Net
Worth, and modifying certain loan covenants so as to increase  permitted capital
expenditures   and  lower  the  minimum  fixed  charge  coverage   ratio.   Such
modifications  were made in  anticipation  of the effects of the Company's  1998
Restructuring.  In  accordance  with the  amendment,  the Company  prepaid  $3.0
million of the Term Loan Facility  through  borrowings  under the Revolving Loan
Facility on April 29, 1998.

         The Company and its lenders as of September  14, 1998  further  amended
and restated the Loan and Security  Agreement to  incorporate  FAI into the Loan
and Security Credit  Agreement,  fund the on-going  working capital needs of FAI
and modify certain existing  financial  covenants to incorporate FAI and reflect
the Company's  financial results through the end of its third quarter as well as
expected results for all of Fiscal Year 1998 and Fiscal Year 1999. Additionally,
the letter of credit  facility  within the Revolving Loan Facility was increased
from $10.0 million to $15.0  million.  In  accordance  with the  amendment,  the
Company  prepaid $1.5 million of the Term Loan Facility and fees of $0.1 million
through borrowings under the Revolving Loan Facility on October 28, 1998.

         Subsequently,  as of  February  8,  1999 the  Company  and its  lenders
amended the Loan and  Security  Agreement,  waived  certain  financial  covenant
defaults arising from the Company's  financial results for Fiscal Year 1998 and,
among other things, set new financial  covenants for Fiscal Year 1999.  However,
there can be no  assurance  that the Company will be able to achieve the amended
financial  covenants  during Fiscal Year 1999. In connection with the amendment,
the Company  agreed to prepay $5.6 million of the Term Loan  through  borrowings
under the Revolving Loan Facility.  Additionally, the Company agreed to increase
its monthly  Term Loan  Facility  principal  payment  from  $374,000 to $450,000
beginning  March 1,  1999.  Further  based on the  Company's  declining  working
capital needs in light of declining revenues, the Company and its lenders agreed
to reduce  the  Revolving  Loan  Facility  commitment  from $85  million  to $70
million.  This reduction is expected to reduce the Company's  unused line fee by
approximately  $75,000 per annum.  The Company further agreed to repay a portion
of its Term Loan  Facility  in the  future if  subsequently  obtained  appraised
orderly  liquidation  values for the  Company's  property,  plant and  equipment
securing the Term Loan Facility fall below 83.1% in relation to the outstanding
amount owed under the Term Loan Facility.  In connection  with entering into the
amendment to the Loan and Security Agreement, the Company agreed to pay BABC for
the  benefit of the  lenders  $200,000  which is  payable in four equal  monthly
installments commencing March 31, 1999. Additionally, BABC as Agent, retains the
right to withhold up to approximately $1,694,000 in aggregate availability which
arose from the expiration of certain letters of credit previously outstanding as
a security deposit for the Company's former New York headquarters lease.

DIP Facility.  In connection with the Bankruptcy  Filing,  the Company  obtained
debtor-in-possession ("DIP") financing from General Electric Capital Corporation
("GE  Capital")  under a revolving  credit  facility  which was  approved by the
Bankruptcy Court (the "GE Capital DIP Facility").  As noted above, in July 1997,
the Company repaid all amounts outstanding under the GE Capital DIP Facility and
paid approximately $103,000 in unpaid amendment fees and legal fees and expenses
through borrowings under the Loan and Security Agreement.

Deferred Interest Rate Notes and Senior Secured Notes. Prior to the commencement
of its bankruptcy proceeding,  the Company issued an aggregate of $30 million of
its Senior Secured Notes due October 30, 1997 (the "Senior Secured  Notes").  On
the Effective Date, the outstanding principal amount of the Senior Secured Notes
was repaid in full and the Company issued subordinated  floating rate notes (the
"Deferred  Interest  Rate  Notes") in respect  of  accrued  but unpaid  interest
(approximately  $1.6 million) due the holders of the Senior  Secured  Notes.  In
connection  with the issuance of the Deferred  Interest Rate Notes,  the Company
paid a closing fee of  approximately  $31,400.  Further,  in accordance with the
Plan of Reorganization, the Company paid $157,000 in trustee fees and legal fees
and expenses.  In December 1997,  the Company repaid the Deferred  Interest Rate
Notes  and  accrued  interest  thereon  in full  through  borrowings  under  the
Revolving Loan Facility.

Note and Capital Lease Obligations.  In connection with the Company's  emergence
from bankruptcy,  the Company  restructured or refinanced certain of its secured
capital lease  obligations by issuing a promissory  note and modifying the terms
of certain  other  capital  leases.  At November 1, 1998,  an  aggregate of $2.3
million was  outstanding  under the note and capital  leases with interest rates
ranging from 5.1% to 11.1% and varying maturity dates through September 1, 2001.
<PAGE>
Item 2.  PROPERTIES

         Information regarding the Company's  manufacturing  facilities,  all of
which are owned, is as follows:
                                         Approximate
                                       Square Feet of
                                           Building                     Acreage
                                       --------------                   -------
Dublin Plant                               363,000                        295
Dublin, Georgia

Nathaniel Plant                            313,000                         (1)
Dublin, Georgia

Milledgeville Plant                        580,000                        141
Milledgeville, Georgia

Louisville Plant (2)                       153,000                        393
Louisville, Georgia

(1) The  Nathaniel  plant  adjoins  the Dublin  plant and is located on the same
property.
  
(2) As of January 31, 1999, the Louisville  Facility was closed.  The Company is
currently  evaluating   alternative   solutions  for  its  Louisville  facility,
including a possible sale.

         The Company owns a 24,000  square foot office  building  adjoining  its
Dublin plant, which is used for administrative offices.

         The Company leased  approximately 35,000 square feet of office space at
1155 Avenue of the  Americas,  New York,  New York (the "1155  Lease"),  for its
principal executives offices,  its styling, and sales and marketing  operations.
During  Fiscal  Year 1998,  the Company and the  landlord of its  corporate  and
marketing  offices entered into a lease surrender  agreement whereby the Company
vacated its former  headquarters.  On January 25, 1999, the Company relocated to
498  Seventh   Avenue,   New  York,  New  York  under  an  operating  lease  for
approximately 16,500 square feet expiring on March 31, 2009. Further, FAI leases
approximately  11,500  square feet of office  space at 500 Seventh  Avenue,  New
York,  New York for its  principal  executive  offices,  designing and marketing
operations,  which lease  expires on January 31,  2002.  The Company also leases
storage facilities in Georgia, primarily on a short-term basis.

         The Company  believes that its  facilities are adequate for its present
needs.  Substantially all of the Company's properties,  plants and equipment are
encumbered  by security  interests  under the Loan and Security  Agreement.  See
"Business -- Financing  Arrangements"  in Item 1. of this Annual  Report on Form
10-K.
<PAGE>
Item 3.  LEGAL PROCEEDINGS

         The Company is a party to legal actions  arising in the ordinary course
of  business.  Other than  environmental  matters,  the  Company has no material
pending legal  proceedings.  See Item 1. of "Business - Significant  Events" and
"Description  of  Business -  Environmental  Matters"  in Item 1. of this Annual
Report on Form 10-K.

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

         The Company held its annual meeting of shareholders on August 14, 1998.
At the meeting, the shareholders:

         (i)      elected Bruce W. Gregory and James E. Kjorlien as directors of
                  the  Company  to  serve  until  the  next  annual  meeting  of
                  shareholders,  by a vote of 4,058,647  votes in favor of their
                  election, with 871 votes against and no abstentions and broker
                  non-votes;

         (ii)     approved  the  Board  of  Directors'   adoption  of  the  1997
                  Directors  Compensation  Plan, by a vote of 3,306,049 votes in
                  favor of the  proposal,  with 1,411  votes  against  and 8,735
                  votes abstaining and broker non-votes.

         (iii)    approved  a  proposal  to  amend  the  Company's  Amended  and
                  Restated  Articles of  Incorporation to increase the number of
                  authorized  shares of Common Stock from  10,000,000  shares to
                  35,000,000  shares,  by a vote of 4,032,662  votes in favor of
                  the  proposal,  with  20,615  votes  against  and 6,241  votes
                  abstaining and broker non-votes.

         (iv)     approved a proposal to amend the Amended and Restated Articles
                  of  Incorporation  to  authorize  a  class  of  "blank  check"
                  Preferred  Stock in one or more  series and to  authorize  the
                  Board of Directors to fix the rights, powers,  preferences and
                  other terms of such series,  by a vote of  3,288,085  votes in
                  favor of proposal,  with 21,395 votes  against and 6,241 votes
                  abstaining and broker non-votes.

         (v)      approved a proposal to amend the Amended and Restated Articles
                  of  Incorporation  to reduce the minimum  number of  directors
                  that the  Company  may  have  from  five to two,  by a vote of
                  4,030,574  votes in favor of the  proposal,  with 28,229 votes
                  against and 715 votes abstaining and broker non-votes.

         (vi)     approved a  proposal  to ratify the  selection  of  Deloitte &
                  Touche LLP as the Company's  independent auditors for its 1998
                  fiscal  year,  by a vote of  4,052,779  votes  in favor of the
                  proposal,  with 127 votes  against and 6,612 votes  abstaining
                  and broker non-votes.
<PAGE>
                                     PART II

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

         Prior to October  1995,  the  Company's  Common Stock was traded on the
NASDAQ National Market System ("NASDAQ-NMS"),  the automated quotation system of
The National  Association  of  Securities  Dealers,  Inc. (the "NASD") under the
symbol  "FSTM".  In October 1995,  the NASDAQ  National  Market System  delisted
Forstmann & Company,  Inc.  because the closing  price of the  Company's  Common
Stock had been less than  $1.00 for more than 30  consecutive  days.  Since such
time,  there has been no  established  public  trading  market for the Company's
Common Stock.

         The following table sets forth the high and low sales prices for Fiscal
Year 1998 and the 1997 91-Day  Period  Ended  November 2, 1997 of the  Company's
Common Stock. There were no over-the-counter market transactions during the 1997
12-Day  Period Ended August 3, 1997 (the period from the  Effective  Date to the
end of the  Company's  third  fiscal  quarter).  These  quotations  are based on
reported  over-the-counter  market  transactions  and represent  prices  between
dealers,  do not include  retail  markup or commission  and may not  necessarily
represent actual transactions.

                                          High Sales Price       Low Sales Price
                                          ----------------       ---------------
         Fiscal Year 1998
         1st Fiscal Quarter
         (November 3,1997 through
         February 1, 1998)                     $14-7/8                $10-3/4

         2nd Fiscal Quarter
         (February 2, 1998 through
         May 3, 1998)                          14-1/16                 13-1/2

         3rd Fiscal Quarter
         (May 4, 1998 through
         August 2, 1998)                        13-5/8                  9-1/8

         4th Fiscal Quarter
         (August 3, 1998 through
         November 1, 1998)                      9-3/16                  9-1/8

         At 1997 91-Day Period Ended
         (August 4, 1997 through
         November 2, 1997)                      13-1/2                 11-3/4


         At January 29, 1999,  the Company had 416 record  holders of its Common
Stock,  including CEDE & Company, the nominee of Depository Trust Company,  that
held  4,107,170  shares of common  stock as  nominee  for an  unknown  number of
beneficial holders.

         Pursuant to the Plan of  Reorganization,  all general  unsecured claims
against  the  Company  were  converted  into  100% of the  common  stock  of the
reorganized  Company  based on a ratio of 50 shares  per each  $1,000 of allowed
unsecured  claim.  Such shares were not registered  under the Securities Act. On
the Effective Date, pursuant to the Plan of Reorganization,  the Company entered
into a Registration Rights Agreement (the "Registration  Rights Agreement") with
certain holders of its common stock. The Registration  Rights Agreement required
that the Company  file a  registration  statement  covering the shares of common
stock held by such  holders no later than March 31,  1998.  The  Company is also
required to use its best  efforts to have the  registration  statement  declared
effective by the Securities and Exchange Commission and to keep the registration
statement  effective  for a period of two years.  The Company has been unable to
file a registration  statement  covering the shares of common stock held by such
holders that are a party to the  Registration  Rights  Agreement and on November
25, 1998 the Registration Rights Agreement was amended to delete the requirement
that a holder of common stock covered under the  Registration  Rights  Agreement
hold at least 1% of the total  number of shares of common stock  outstanding  in
order to enjoy registration  rights with respect to its shares. The Registration
Rights Agreement was further amended to be binding upon and inure to the benefit
of the  holders  of the  common  stock  covered  under the  Registration  Rights
Agreement and their respective heirs, successors and permitted assigns.

         On October 9, 1997,  the Company  adopted a  shareholders'  rights plan
(the "Rights Plan") whereby  shareholders of record on October 29, 1997 received
one right (the  "Right(s)") to purchase one share of common stock at an exercise
price of $60 for each  common  share held on the record  date.  The Rights  will
become exercisable in the event that any person or group acquires 25% or more of
the Company's common shares,  or announces a tender offer for 25% or more of the
Company's common stock. However, the Rights Plan "grandfathers" positions in the
Company's  common stock in  existence on October 9, 1997 and the  ownership by a
person or group of 25% or more of the Company's  common shares on such date will
not  trigger  the  exercisability  of the Rights so long as such person or group
does not acquire an additional 1% or more of the Company's common shares. Should
any  "non-grand-fathered"  person  or group  acquire  25% or more of the  common
shares of the Company,  all Rights not held by such person or group will entitle
the holders  thereof to purchase  common shares of the Company at a 50% discount
from the then current market price for such common stock. Alternatively, after a
person or group  crosses the 25%  threshold and before such person or group owns
50% or more of the Company's common shares, the Company's Board of Directors may
issue one common  share in exchange for each right (other than those held by the
acquiring person) in lieu of permitting the Rights to be exercised. In the event
of a merger of the Company,  the Rights Plan requires that the provision be made
for the conversion of the Rights into rights to purchase shares of the acquiring
person at a 50%  discount.  The  Rights,  which  have a  ten-year  term,  may be
redeemed  for $0.01 per Right by the  Company  at any time prior to the time the
Rights become exercisable.

         The Company has not paid,  and has no present  intention  to pay in the
foreseeable  future, any cash dividends in respect of its Common Stock. The Loan
and Security Agreement  prohibits the payment of cash dividends.  The payment of
future cash dividends,  if any, would be made only from assets legally available
therefor,  and would  generally  depend on the  Company's  financial  condition,
results of operations,  current and anticipated capital requirements,  plans for
expansion,  if any,  restrictions  under its then existing credit and other debt
instruments and arrangements, and other factors deemed relevant by the Company's
Board of Directors, in its sole discretion.

         Except   for  the   securities   issued   pursuant   to  the   Plan  of
Reorganization, no sales of equity securities that were not registered under the
Securities  Act have been made by the Company  during the period covered by this
Annual Report.
<PAGE>
Item 6.  SELECTED FINANCIAL DATA

         Presented  below  are  selected   operating   statement  data  for  the
Reorganized  Company for the fiscal year ended November 1, 1998, the Reorganized
Company 1997 103-Day Period ended November 2, 1997 (as hereinafter defined), the
Predecessor  Company  1997 261-Day  Period  ended July 22, 1997 (as  hereinafter
defined)  and the  predecessor  Company for the fiscal  years ended  November 3,
1996, October 29, 1995 and October 30, 1994. Also presented are selected balance
sheet data for the  Reorganized  Company as of November 1, 1998, the Reorganized
Company as of  November  2, 1997 and the  predecessor  Company as of November 3,
1996, October 29, 1995 and October 30, 1994. Also,  presented below are selected
operating  data for Fiscal  Year 1997 (the  combined  Reorganized  Company  1997
103-Day Period Ended November 2, 1997 and the  Predecessor  Company 1997 261-Day
Period Ended July 22, 1997). The selected  financial data have been derived from
the audited financial  statements of the Company,  are not covered by the report
of the Company's  independent  auditors and should be read in  conjunction  with
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations", below and the Company's Financial Statements (and the related notes
and schedules  thereto).  Due to the effects of the  consummation of the Plan of
Reorganization  and the application of "fresh start"  accounting,  the operating
statement data and balance sheet data for different  periods are not necessarily
comparable.

         The selected operating data for the Reorganized  Company for the fiscal
year ended  November 1, 1998 includes the applicable  operating  results for FAI
for the period May 13, 1998 through November 1, 1998. The selected balance sheet
data for the Reorganized  Company as of November 1, 1998 includes the applicable
balance  sheet  data for FAI.  All  significant  intercompany  transactions  and
accounts have been eliminated.


















                            (continued on next page)
<PAGE>
<TABLE>

                         Reorganized     Combined    Reorganized                      Predecessor Company
                           Company        Company      Company                             
                         -----------     --------    ------------    -------------------------------------------------------
                         Fiscal Year                 1997 103-Day    1997 261-Day   Fiscal Year   Fiscal Year    Fiscal Year
                            Ended         Fiscal     Period Ended    Period Ended      Ended         Ended          Ended
                         November 1,       Year       November 2,      July 22,     November 3,   October 29,    October 30,
                             1998          1997          1997            1997           1996          1995          1994
                             ----          ----          ----            ----           ----          ----          ----
Operating   Statement                         (amounts  in  thousands,   except  per  share  and  share information) 
Data (1):
<S>                    <C>              <C>            <C>            <C>           <C>           <C>            <C>

Net sales               $149,597         $199,010       $57,126        $141,884      $195,028      $222,217       $237,085
Gross profit               7,837(5)(6)     26,393         7,726(5)       18,667        22,755        26,323         47,852
Operating income         
  (loss)                 (12,399)(7)        9,894         2,965           6,929         3,274          (248)        23,417
Income (loss) before
  reorganization
  items, income taxes      
  and extraordinary 
  gain (loss)            (18,888)           3,213         1,242           1,971        (5,789)      (19,817)         5,900
Reorganization items(2)       99           33,796           395          33,401        12,055        10,904            -
Income tax                   
  (provision) benefit         -               461           461(4)          -             -           4,250         (2,331)
Income (loss) before
  extraordinary            
  gain or (loss)         (18,987)         (31,044)          386         (31,430)      (17,844)      (26,471)         3,569
Net income (loss)        (18,987)          (7,005)          290          (7,295)      (17,844)      (26,471)         3,569
Income (loss)
  applicable to
  common shareholders    (18,987)          (7,005)          290          (7,295)      (17,844)      (26,701)         3,339
Per share and share
information:
Income (loss) before
  extraordinary
  gain (loss)                
  applicable to common   
  shareholders - basic
  and diluted              (4.33)            n/a           0.09           (5.59)        (3.18)        (4.75)          0.60
Income (loss)
  applicable to                       
  common shareholders
  - basic and diluted     $(4.33)            n/a          $0.07          $(1.30)       $(3.18)       $(4.75)         $0.60
Weighted average
  common shares          
  outstanding- basic
  and diluted          4,385,955             n/a      4,384,436       5,618,799     5,618,799     5,618,799      5,592,022

</TABLE>







                                                 (continued on next page)
<PAGE>
<TABLE>

                          Reorganized     Combined    Reorganized                      Predecessor Company
                           Company        Company      Company                             
                         -----------     --------    ------------    -------------------------------------------------------
                         Fiscal Year                 1997 103-Day    1997 261-Day   Fiscal Year   Fiscal Year    Fiscal Year
                            Ended         Fiscal     Period Ended    Period Ended      Ended         Ended          Ended
                         November 1,       Year       November 2,      July 22,     November 3,   October 29,    October 30,
                             1998          1997          1997            1997           1996          1995          1994
                             ----          ----          ----            ----           ----          ----          ----
Other Operating Statement              (amounts  in  thousands,   except  per  share  and  share information) 
 Data (1):
<S>                    <C>            <C>             <C>            <C>            <C>           <C>            <C>
Income (loss) before
  depreciation and
  amortization,
  restructuring items,
  impairment
  reorganization items,     
  interest expense, 
  income taxes and
  extraordinary 
  gain (loss)           $(3,052)(5)(6) $21,088(5)       $4,333         $16,755        $15,236       $13,581        $37,074
Net cash flow
  provided (used)                 
  by operating
  activities              4,663          6,573          15,261          (8,688)        36,232        27,473        (1,700)
Net cash flow
  provided (used)               
  by investing
  activities             (7,132)           313            (974)          1,287         (1,743)      (14,980)      (13,207)
Net cash flow
  provided (used)            
  by financing
  activities              1,888         (5,883)        (13,968)          8,085        (34,493)      (12,490)       14,903
</TABLE>

<TABLE>


                         Reorganized                  Reorganized                             Predecessor Company
                           Company                      Company
                         -----------                  -----------                  -----------------------------------------
                            As of                        As of                         As of         As of          As of
                         November 1,                  November 2,                   November 3,   October 29,   October 30,
                            1998                       1997(2,3)                      1996(2)       1995(2)         1994
                            ----                       ---------                      -------       -------         ----
Balance  Sheet  Data(2,3):               (amounts  in  thousands,   except  per  share  and  share information) 
<S>                      <C>                         <C>                           <C>           <C>            <C> 

Current assets            $71,003                      $87,192                       $82,058      $116,475       $140,801
Property, plant and
  equipment, net of
  accumulated              
  depreciation and
  amortization             22,235                       24,779(3)                     65,664        78,784         79,479
Total assets               95,243                      113,641                       149,929       198,203        229,256
Long-term debt,
  including current
  maturities of
  long-term debt                 
  and long-term
  debt included
  in liabilities subject
  to compromise            51,184                       48,304                       109,031       142,935        158,311
Senior preferred                    
  stock, redeemable             -                            -                         2,655         2,655          2,425
Shareholders' equity           
  (deficit)                31,670                       50,631                        (9,328)        7,667         35,836

</TABLE>
<PAGE>
(1)      The  Reorganized  Company  year ended  November 1, 1998  ("Fiscal  Year
         1998")  consisted of a 52-week  period.  The  Reorganized  Company 1997
         103-Day  Period ended November 2, 1997 consists of the period from July
         23, 1997 (the  Effective  Date) to November  2, 1997.  The  Predecessor
         Company 1997 261-Day  Period Ended July 22, 1997 consists of the period
         from November 4, 1996 to July 22, 1997. The year ended November 3, 1996
         ("Fiscal  Year 1996")  consisted of a 53-week  period.  The years ended
         October 29,  1995  ("Fiscal  Year 1995") and October 30, 1994  ("Fiscal
         Year 1994")  consisted  of 52-week  periods.  No cash  dividends on the
         common stock were paid during any of these periods.

(2)      On September 22, 1995, the Bankruptcy  Filing  occurred.  The financial
         statements  of  the  Reorganized  Company  1997  103-Day  Period  ended
         November 2, 1997 and the Predecessor  Company 1997 261-Day Period ended
         July 22, 1997 and Fiscal Years 1996 and 1995 financial  statements have
         been  prepared in accordance  with the American  Institute of Certified
         Public Accountants  Statement of Position 90-7, "Financial Reporting of
         Entities in Reorganization  Under the Bankruptcy Code" ("SOP 90-7"). In
         accordance with SOP 90-7,  professional fees and restructuring  charges
         directly  related to the bankruptcy  have been  segregated  from normal
         operations during each of the applicable periods.  Reference is made to
         Note 16 to the Financial Statements for a description of reorganization
         items.

(3)      In accordance with SOP 90-7, the Company established its reorganization
         value and adopted  "fresh start"  accounting.  Under the  principles of
         "fresh start" accounting,  the Company's total net assets were recorded
         at  assumed   reorganization   value,   which  was  then  allocated  to
         identifiable  tangible  and  intangible  assets  on the  basis of their
         estimated fair value. In accordance with "fresh start" accounting,  the
         difference between the assumed  reorganization  value and the aggregate
         fair value of the identifiable  tangible and intangible assets resulted
         in a reduction in the value assigned to property,  plant and equipment.
         See Note 2 to the Financial Statements.

(4)      In  accordance  with SOP 90-7,  an income tax  provision not payable in
         cash was recognized for the Reorganized  Company 1997 103-Day Period at
         an effective  income tax rate of 54.43%.  Such  provision  was credited
         against  additional  paid-in capital as net operating  losses generated
         during the  Predecessor  Company 1997 261-Day Period and can be used to
         offset net taxable income  generated  during the Reorganized  Company's
         1997 103-Day Period.

(5)      At the Effective Date, the Company  adjusted its inventory  balances to
         fair  value  resulting  in the  elimination  of  the  LIFO  reserve  of
         approximately $2.7 million and a write-up of approximately $3.8 million
         above the  predecessor  Company's FIFO cost. Such write-up was credited
         against  reorganization  items during the Predecessor Company 1997 261-
         Day Period.  This write up will be  allocated  to cost of goods sold as
         the  inventory  on hand at July 22,  1997 is sold.  Approximately  $0.7
         million  and $0.6  million was charged to cost of goods sold during the
         Reorganized   Company  1997  Fourth   Quarter  and  Fiscal  Year  1998,
         respectively.

(6)      During Fiscal Year 1998, the Company implemented the 1998 Restructuring
         and subsequently  announced the 1999 Realignment.  Such  restructurings
         impaired the value of certain of the Company's inventories. Included as
         a reduction in gross  profit is the  write-off  of  approximately  $2.6
         million in the carrying value of such impaired inventories

         Throughout  Fiscal Year 1998,  the cost of wool  declined.  The Company
         commits  to the  purchase  of its  expected  wool  needs  on a  forward
         purchase  order  basis.  The Company was able to defer the  delivery of
         such wool used in the  manufacture of worsted  fabrics.  However,  as a
         result of the Company significantly  reducing its worsted manufacturing
         capacity,  its  forward  purchases  exceeded  the  Company's  needs  at
         November 1, 1998 and the Company's on order purchase  orders to be used
         in the  manufacturing  of worsted  fabrics  exceeded  the then  current
         market  price by  approximately  $1.5  million.  Such  market  loss was
         accrued in the fourth  quarter of Fiscal  Year 1998 and  resulted  in a
         reduction in gross profit.  The Company's policy is to recognize a loss
         on open purchase  commitments  whenever the Company  estimates that the
         contractual  cost can not be recovered  through  future sales at normal
         profit margins.

         Substantially all of the Company's inventories are carried at the lower
         of LIFO cost or market.  The decline in wool costs  during  Fiscal Year
         1998  resulted in the LIFO carrying  value of the  Company's  inventory
         exceeding replacement cost by approximately $3.0 million as of November
         1, 1998.  Accordingly,  the Company wrote its LIFO inventory value down
         to market value,  generally net realizable  value or replacement  cost,
         during the  fourth  quarter  of Fiscal  Year  1998.  Such write off was
         charged  to cost of goods sold which  resulted  in a decrease  in gross
         profit in Fiscal Year 1998.

         During  the fourth  quarter  of Fiscal  Year  1998,  the  Company  also
         recognized  severance  expense of $0.4 million in  connection  with the
         termination  agreements entered into with the former owners of Arenzano
         and a $1.0  million  charge  relating  to  the  write  off  of  certain
         intangible assets of FAI. Further,  the Company expensed  approximately
         $0.8 million for the  remaining  royalty  payments due under  licensing
         agreement  which were assumed in connection  with FAI's  acquisition of
         Arenzano.

(7)      During the fourth quarter of Fiscal Year 1998, the Company recognized a
         $1.0  million  loss  from  abandonment,   disposal  and  impairment  of
         machinery and equipment and other assets which related to the write off
         of certain intangible assets of FAI.

         During Fiscal Year 1998, in connection with the 1998  Restructuring and
         the subsequently announced 1999 Realignment, the Company recognized the
         following restructuring related expenses (in thousands):

         Severance and "stay-put" bonus expense and related
          employee benefits paid during Fiscal Year 1998 $803
         Loss on impairment of machinery and
          equipment                                                  1,423
         Loss associated with operating lease cancellation
          liability                                                  1,585
         Gain associated with New York office lease surrender         (368)
         Other                                                          52
                                                                 ---------
                  Total                                             $3,495
                                                                 =========


<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS

Forward Looking Statements

         Certain  matters  discussed in this Annual  Report are forward  looking
statements  which  reflect the  Company's  current  views with respect to future
events and financial performance.  These forward-looking  statements are subject
to certain risks and  uncertainties  which could cause actual  results to differ
materially from historical results or those  anticipated.  Readers are cautioned
not to place undue  reliance on these  forward-looking  statements,  which speak
only as of their dates. The Company  undertakes no obligation to publicly update
or  revise  any  forward-looking   statements,   whether  as  a  result  of  new
information,  future  events or  otherwise.  The  following  factors could cause
actual  results  to  differ   materially  from   historical   results  or  those
anticipated:  demand for the  Company's  products,  competition,  the  Company's
production needs, wool market  conditions,  foreign currency exchange rates, the
adequacy  of  the  Company's  current   financing,   any  unexpected   financing
requirements, and changes in the general economic climate.

         The  following  discussion  should  be read  in  conjunction  with  the
Financial Statements and the related notes included in this Annual Report.

Recent Events

Financial Results

        The Company incurred net losses of $19.0 million, $7.0 million and $17.8
million in Fiscal Years 1998, 1997 and 1996, respectively.  Such losses were, in
part,  due to the  development  and  implementation  of the  Company's  Plan  of
Reorganization  (hereinafter defined),  unstable wool commodity prices and, most
recently,  increased  international  competition  which has been  compounded  by
consumer  fashion  trends moving away from the Company's core woolen and worsted
fabrics.  Net sales  declined from $199.0  million in Fiscal Year 1997 to $149.6
million in Fiscal Year 1998 and  management  expects a similar  reduction in net
sales during Fiscal Year 1999. The Company has responded to these  challenges by
deleveraging  its financial  position  through the  consummation  of the Plan of
Reorganization  and  has  more  recently  implemented  numerous  cost  reduction
programs  to more  closely  align its  manufacturing  and  overhead  costs  with
expected revenues.

         On March 6, 1998, the Company  announced that, as part of its long term
strategy, it would discontinue the production of top dye worsted fabrics used to
manufacture men's suits and government uniforms (the "1998 Restructuring") after
completing  orders for its fall season.  In Fiscal Year 1998,  top dyed worsteds
accounted for  approximately  $14 million in men's suiting fabric and $4 million
in  government  uniform  fabric  sales.  In Fiscal Year 1997,  top dye  worsteds
accounted for  approximately $18 million in men's suiting fabric and $10 million
in  government  uniform  fabric sales.  This decision  resulted in the Company's
previous  overall  workforce of  approximately  2,500  people  being  reduced by
approximately 730 people.

         In October 1998, the Company's Board of Directors  approved the closing
of  its  Louisville  plant,  the  realignment  of  the  Company's  manufacturing
facilities located in Georgia and further reductions of its selling, styling and
administrative overhead costs (the "1999 Realignment"). The Company expects that
this move will align its overhead with the current reduced market demand for its
products. The Louisville plant was closed as of January 31, 1999. The Company is
currently  evaluating   alternative   solutions  for  its  Louisville  facility,
including a possible sale.  Implementation  of the 1999 Realignment has resulted
in the Company's workforce being further reduced by approximately 410 people.

        Implementation  of the  1998  Restructuring  and  1999  Realignment  has
resulted in the Company incurring certain costs,  including,  among other costs,
salaried  severance,  special  one-time  hourly "stay put" bonuses and equipment
relocation  costs.  Additionally,  certain  of  the  Company's  inventories  and
machinery and equipment  have been  impaired or rendered  obsolete,  and certain
equipment  covered under operating lease  agreements will no longer be required.
Accordingly, during Fiscal Year 1998, the Company recognized severance and "stay
put" bonus  expense of  approximately  $0.8  million,  recognized a loss of $1.4
million  relating to the impairment of certain  machinery and equipment based on
appraisal  values,  increased  inventory  market  reserves by $2.6 million,  and
recognized a loss associated with operating lease cancellation liability of $1.6
million.  Severance expense,  expense associated with the stay put bonuses, loss
on impairment of certain  machinery and equipment and the loss  associated  with
operating lease  cancellation  liability were recognized as restructuring  items
during Fiscal Year 1998. The Company expects to incur approximately $1.2 million
of severance expense as a restructuring  item during its first quarter of Fiscal
Year 1999 in connection  with the 1999  Realignment.  Inventory  market reserves
associated  with the 1998  Restructuring  were  included  in cost of goods  sold
during  Fiscal Year 1998.  Any  additional  impairment  of  inventories  will be
included  in cost of goods  sold in the  periods  in  which  the  impairment  is
indicated  and  can  be  reasonably  estimated.  Any  additional  impairment  in
property,  plant and equipment will be recognized as a restructuring item in the
periods in which the  impairment is indicated  and can be reasonably  estimated.
The Company incurred costs of approximately $0.2 million during Fiscal Year 1998
related to the relocation of certain  machinery and equipment which was included
in cost of goods sold during Fiscal Year 1998. Any additional  costs incurred to
relocate  certain  machinery and equipment will be charged to cost of goods sold
in  the  periods  incurred.  See  Note  15 to  the  Financial  Statements  for a
description of restructuring items recognized during Fiscal Year 1998.

     Although  the  consummation  of the  Plan of  Reorganization  significantly
reduced the Company's leverage,  the operating results for Fiscal Year 1998, the
effect of the 1998  Restructuring  and the 1999 Realignment and the formation of
FAI, including the purchase of substantially all of the assets of Arenzano, have
negatively impacted the Company's availability under its Revolving Loan Facility
(hereinafter  defined).  The Company's  availability  under its  Revolving  Loan
Facility was approximately $5.8 million at November 1, 1998 as compared to $36.0
million at November  2, 1997.  As of January 31,  1999,  availability  under the
Revolving  Loan  Facility was $1.6 million.  The  Company's  ability to maintain
adequate  availability  to  meet  its  operating  needs  and to  fund  the  1999
Realignment is dependent on achieving future sales consistent with  management's
expectations  for Fiscal  Year 1999 and  successful  implementation  of its cost
reductions.  The majority of the Company's customers are in the domestic apparel
industry which has continued to suffer an economic decline as a result of higher
levels of imports and changing fashion trends. See "Management's  Discussion and
Analysis of Financial Condition and Results of Operation -- Financial Condition,
Liquidity and Capital Resources" contained herein.

Formation Of FAI

         On May 11, 1998,  the Company  announced  that it had agreed to acquire
the  business  and  substantially  all of the assets of  Arenzano.  Arenzano had
instituted  voluntary  bankruptcy  proceedings  in  April  1998.  The  Company's
purchase was made pursuant to an order signed by United States  Bankruptcy Judge
Burton R.  Lifland,  dated May 8, 1998,  in the cases  entitled,  In re Arenzano
Trading Company,  Inc. and In re B&B Corporation,  Case Nos. 98 B 42508 and 98 B
42520 (BRL).  The  transaction was completed on May 13, 1998 at a purchase price
of $2.0 million.  Additionally, the Company assumed the obligation to pay future
minimum  royalties  related  to  a  licensing  agreement.  The  purpose  of  the
acquisition  was to permit the Company to expand its fabrics  business  into the
apparel  business.  The Company is operating the new apparel venture through its
wholly-owned subsidiary, FAI.

         The  acquisition of Arenzano by the Company was accounted for using the
purchase method of accounting. The purchase price paid for Arenzano was assigned
$0.9 million to tangible  assets and the  remainder to  intangible  assets.  The
Company  subsequently  wrote off the intangible  assets of FAI as such costs are
not  expected to be  recovered by future  operations  and accrued the  remaining
future minimum royalty obligation  assumed.  The Company's results of operations
for Fiscal Year 1998  include the results of  operations  for FAI for the period
May 13, 1998 to November 1, 1998.

Prior Reorganization and "Fresh Start" Accounting

         On September 22, 1995, the Company filed for relief under Chapter 11 of
the United States  Bankruptcy  Code with the  Bankruptcy  Court for the Southern
District of New York (the  "Bankruptcy  Filing").  On May 14, 1997,  the Company
filed its Plan of Reorganization and Disclosure Statement.  On May 15, 1997, the
Bankruptcy Court entered an order approving the Company's  Disclosure  Statement
and shortly  thereafter,  the Company began to solicit the vote of its creditors
and stockholders  with respect to the Plan of  Reorganization in accordance with
the  Bankruptcy  Code. On July 9, 1997,  the  Bankruptcy  Court entered an order
confirming the Plan of Reorganization.  On July 23, 1997 (the "Effective Date"),
the Plan of Reorganization was consummated by the Company.

         Pursuant to the Plan of  Reorganization,  all general  unsecured claims
against  the  Company  were  converted  into  100% of the  common  stock  in the
reorganized  Company  based on a ratio of 50 shares  per each  $1,000 of allowed
unsecured claims.  Secured claims against the Company aggregating  approximately
$60.1 million were either  refinanced,  reinstated or restructured as more fully
described in Note 9 to the Financial Statements.  Further,  pursuant to the Plan
of Reorganization,  administrative claims (which includes reclamation claims and
approved  professional fees),  priority claims and convenience claims (unsecured
claims  in the  amount  of $400 or less)  were  paid in full.  See Note 2 to the
Financial  Statements  for a more  detailed  description  of the  effects of the
consummation of the Plan of Reorganization.

         In  accordance  with  the  American   Institute  of  Certified   Public
Accountants  Statement  of Position  90-7,  "Financial  Reporting by Entities in
Reorganization  Under the Bankruptcy Code" ("SOP 90-7"), the Company established
its reorganization value and adopted "fresh start" accounting. See Note 2 to the
Financial  Statements for a description of the methodology used to determine the
Company's reorganized value and the affect of adopting "fresh start" accounting.
As a  result  of  the  consummation  of  the  Plan  of  Reorganization  and  the
application of "fresh start" accounting,  the Company was required to report its
financial results for the fifty-two weeks ended November 2, 1997 in two separate
periods in this Annual Report.
<PAGE>
         The following  table  describes the periods  presented in the Financial
Statements  and related  notes  contained  elsewhere  in this Annual  Report and
discussed herein:

Period                                  Referred to as
------------------------------------    ----------------------------------------

Results for the Reorganized Company
   Fifty-Two Weeks Ended
   November 1, 1998                    "Fiscal Year 1998"

Results for the Reorganized Company
   From July 23, 1997 to
   November 2, 1997                    "Reorganized Company 1997 103-Day Period"

Results for the Reorganized Company
   From August 4, 1997 to
   November 2, 1997                    "Reorganized Company 1997 Fourth Quarter"

Results for the Predecessor Company
   From November 4, 1996 to
   July 22, 1997                       "Predecessor Company 1997 261-Day Period"

Combined Reorganized Company
   1997 103-Day Period and
   Predecessor Company 1997
   261-Day Period (Results for
   the Fifty-Two Weeks Ended
   November 2, 1997)                   "Fiscal Year 1997"

Results for the Predecessor Company
   Fifty-Three Weeks Ended
   November 3, 1996                    "Fiscal Year 1996"

         Due to the effects of the  consummation  of the Plan of  Reorganization
and  application of "fresh start"  accounting,  results for the periods  defined
above are not necessarily comparable.

Results of Operations

         The discussion below compares the results of operations for Fiscal Year
1998 to Fiscal Year 1997 and Fiscal  Year 1997 to Fiscal  Year 1996.  Due to the
effects of the consummation of the Plan of Reorganization and the application of
"fresh start" accounting, results for Fiscal Year 1997 are not necessarily fully
comparable  to the results  for Fiscal Year 1998 or Fiscal Year 1996.  Except as
indicated, management believes that the impact of the Plan of Reorganization and
the  application of "fresh start"  accounting did not  significantly  affect the
results of operations for Fiscal Year 1997.  However,  management  believes that
the combined  operating  results of the Reorganized  Company 1997 103-Day Period
and the Predecessor  Company 1997 261-Day Period provide a reasonable  means for
the discussion of the operating comparisons described herein.

         The 1998  Fifty-Two  Weeks ended  November 1, 1998 ("Fiscal Year 1998")
compared to the Fifty-Two Weeks ended November 2, 1997 ("Fiscal Year 1997")

         Net sales in Fiscal Year 1998 were $149.6 million,  a decrease of 24.8%
from Fiscal Year 1997.  Total yards of fabric sold decreased 27.0% during Fiscal
Year 1998.  The average per yard selling  price  declined to $7.31 during Fiscal
Year 1998 from $7.33 in Fiscal Year 1997.  Sales  declined in all major  product
lines except for specialty fabric sales. Additionally, the Company added apparel
sales of $4.7 million during Fiscal Year 1998 as a result of the  acquisition of
Arenzano  (see  Note 4 to  the  Financial  Statements).  Menswear  fabric  sales
declined due, in part, to the Company's  decision made in March 1998 to exit the
men's top dyed suit business. Coating fabric sales decreased due, in part, to an
unseasonably   warm  fall  and  winter  season  which  resulted  in  lower  than
anticipated women's coats selling at retail. This has resulted in delayed fabric
shipments  and order  assortment  by the  Company's  coating  fabric  customers.
Further,  government  uniform fabric sales decreased during Fiscal Year 1998 and
are expected to decline during Fiscal Year 1999 due to the Company's decision in
March 1998 to exit this line of business.

         Cost of goods sold  decreased  $30.9 million to $141.8  million  during
Fiscal  Year 1998  primarily  as a result of the decline in sales and changes in
product mix and a $5.7 million decline in depreciation and amortization  expense
primarily  due to the effect of "fresh  start"  accounting  discussed  elsewhere
within.  Gross profit decreased $18.6 million or 70.3% to $7.8 million in Fiscal
Year 1998,  and gross  profit  margin for Fiscal Year 1998 was 5.2%  compared to
13.3% for Fiscal Year 1997.  Included  in cost of goods sold during  Fiscal Year
1998 is a $2.6 million charge relating to increased market reserves  recorded as
a result of the 1998  Restructuring  (see Note 1 to the  Financial  Statements).
Cost of goods sold includes a $3.0 million charge  relating to the write down of
inventory  to market at  November 1, 1998 and a $1.5  million  loss on open wool
purchase  commitments as discussed in "Currency Risks" below. During Fiscal Year
1998, FAI's gross profit was $0.5 million and its gross profit margin was 11.8%.

         Selling, general and administrative  expenses,  excluding the provision
for uncollectible  accounts,  decreased to $14.9 million in Fiscal Year 1998, as
compared to $15.9 million in Fiscal Year 1997. Included in selling,  general and
administrative  expenses is $3.1 million  related to FAI,  which includes a $0.8
million charge  relating to the expense  associated  with the recognition of the
future  minimum  royalty  payments  due under a  licensing  agreement.  Selling,
general and  administrative  expenses relating to FAI also includes $0.4 million
which relates to the termination  agreements entered into with the former owners
of Arenzano.

         The provision for uncollectible  accounts  increased to $0.9 million in
Fiscal Year 1998 as compared to $0.7 million in Fiscal Year 1997.  See Note 3 to
the Financial  Statements for a discussion of the Company's  accounting policies
regarding the establishment of its allowance for uncollectible accounts.

         Restructuring items were $3.5 million in Fiscal Year 1998 and consisted
of (in thousands):

    Severance and "stay-put" bonus expense
       and related employee benefits                                    $   803
    Loss on impairment of machinery and equipment                         1,423
    Loss associated with operating lease cancellation liability           1,585
    Gain associated with N.Y. office
       lease surrender                                                     (368)
    Other                                                                    52
                                                                         -------
    Total                                                                $3,495
                                                                         =======

         Reference  is  made  to  Note  15 to  the  Financial  Statements  for a
discussion of restructuring  items incurred during Fiscal Year 1998. The Company
expects  to  incur  additional  restructuring  items  associated  with  the 1999
Realignment (see Note 1 to the Financial Statements) during its first quarter of
Fiscal Year 1999.

         Interest  expense for Fiscal Year 1998 was $6.5  million as compared to
$6.7  million in Fiscal  Year  1997.  This  decrease  is  attributable  to lower
interest  rates in effect under the Loan and Security  Agreement  during  Fiscal
Year1998 as compared to interest rates in effect during Fiscal Year 1997.

         Loss  from  abandonment,  disposal  and  impairment  of  machinery  and
equipment  and other  assets  increased to $1.0 million in Fiscal Year 1998 from
$7,000 in Fiscal Year 1997. The increase  during Fiscal Year 1998 related to the
write off of certain intangible assets of FAI which costs are not expected to be
recovered by future operations.

         As a result  of the  foregoing,  a loss  before  reorganization  items,
income tax and  extraordinary  item of $18.9 million was realized in Fiscal Year
1998  as  compared  to  income  before  reorganization  items,  income  tax  and
extraordinary item of $3.2 million in Fiscal Year 1997. During Fiscal Year 1998,
FAI realized a loss before  reorganization  items,  income tax and extraordinary
item of $3.7 million.  Loss before  depreciation and  amortization,  impairment,
reorganization  and  restructuring  items,  interest  expense,  income taxes and
extraordinary  item  during  Fiscal  Year 1998 was $3.1  million as  compared to
income before  depreciation and  amortization,  impairment,  reorganization  and
restructuring  items,  interest expense,  income taxes and extraordinary item of
$21.1  million  during  Fiscal  Year  1997.  However,  included  in loss  before
depreciation and  amortization,  impairment,  reorganization  and  restructuring
items, interest expense,  income taxes and extraordinary item during Fiscal Year
1998 was a $2.6  million  charge to cost of goods  sold  relating  to  increased
market reserves  recorded as a result of the 1998  Restructuring  (see Note 1 to
the  Financial  Statements).  Cost of goods sold also  includes  a $3.0  million
charge relating to the write down of inventory to market at November 1, 1998 and
a $1.5 million loss on open wool purchase  commitments as discussed in "Currency
Risks" below.

         Reorganization  items were $0.1 million in Fiscal Year 1998 as compared
to $33.8 million in Fiscal Year 1997 and consisted of (in thousands):

                                                  Fiscal Year       Fiscal Year
                                                     1998              1997
                                                     ----              ----
   Professional fees                                 $ 75          $  3,390
   Write off of deferred financing cost and
      expense and other financing fees incurred         -               403
   Impairment of assets                                 -             4,199
   Expense (gain) incurred due to the rejection
      and amendment of executory contracts            (40)            3,314
   Default interest expense and professional
      fees associated with the Senior Secured
      Notes                                             -              (388)
   Severance expenses                                   -               156
   Adjustment of accounts to fair value                 -            22,076
   Other                                                64              646
                                                      ----          -------
     Total                                            $ 99          $33,796
                                                      ====          =======

         Reference  is  made  to  Note  16 to  the  Financial  Statements  for a
discussion of  reorganization  items incurred during Fiscal Year 1997 and Fiscal
Year 1998.

         During fiscal year 1995,  the Company fully  utilized its net operating
loss carrybacks as permitted by the Internal  Revenue Code. For Fiscal Year 1998
and the  Predecessor  Company  1997  261-Day  Period,  no income tax benefit was
recognized from the realization of net operating  losses. In accordance with SOP
90-7,  an income  tax  provision  not  payable  in cash was  recognized  for the
Reorganized Company 1997 12-Day Period at an effective income tax rate of 39.0%.
Such provision was credited against  additional paid-in capital as net operating
losses generated during the Predecessor  Company 1997 261-Day Period can be used
to offset net taxable income generated in future periods.

         As a result of the  consummation of the Plan of  Reorganization,  which
resulted in the exchange of the general unsecured claims against the Company for
equity in the reorganized  Company, the Company recognized an extraordinary gain
on debt  discharge of $24.1 million during the  Predecessor  Company 1997 79-Day
Period.  The Company had sufficient net operating loss  carryforwards  to offset
this gain and therefore, no income tax was recorded.

         As a result of the  foregoing,  net loss for Fiscal Year 1998 was $19.0
million as  compared to a net loss of $7.0  million in Fiscal Year 1997.  During
Fiscal Year 1998, FAI realized a net loss of $3.7 million.

         As a result of the 1998 Restructuring and 1999 Realignment and based on
the current backlog of sales orders for womenswear  fabric sales,  market trends
and increased competitive pressures,  the Company expects overall apparel fabric
sales to be lower in Fiscal  Year 1999 than in Fiscal  Year 1998.  Overall,  the
Company  expects  menswear  fabric  sales  to be lower in  Fiscal  Year  1999 as
compared to Fiscal  Year 1998.  Further,  government  uniform  fabric  sales are
expected to decline  during  Fiscal Year 1999 due to the  Company's  decision in
March  1998 to exit  this line of  business.  Based on these  trends  (increased
competitive  pressures in the woolen and worsted markets, the decline in backlog
of orders,  and the effect of  discontinued  product lines) the Company  expects
sales revenue for fabric sales in Fiscal Year 1999 to be approximately 24% lower
than in Fiscal Year 1998. In March 1998, the Company began implementation of the
1998  Restructuring  and by the end of  Fiscal  Year 1998 had  discontinued  the
production  of top dye  worsted  fabrics  used to  manufacture  men's  suits and
government   uniforms  after   completing   orders  for  its  fall  season.   By
discontinuing top dye worsted fabrics,  the Company believes it can focus all of
its  resources  on its  strengths  in  men's  and  women's  woolen  and  worsted
sportswear, coating and niche specialty markets. Further, in addition to exiting
the  production  of top-dyed  worsted  fabrics,  the  Company,  through the 1999
Realignment,  is consolidating certain manufacturing operations and implementing
other plans designed to align its costs during Fiscal Year 1999 with the decline
in sales anticipated in Fiscal Year 1999. However,  there can be no assurance as
to the level of sales that will  actually be  attained  in Fiscal Year 1999,  as
sales are dependent on market  conditions and other factors beyond the Company's
control,  nor  can  there  be  assurance  that  the  1999  Realignment  will  be
implemented successfully.

         The 1997  Fifty-Two  Weeks Ended  November 2, 1997 ("Fiscal Year 1997")
compared to the Fifty-Three Weeks Ended November 3, 1996 ("Fiscal Year 1996").

         The application of "fresh start" accounting resulted in property, plant
and  equipment  being  written  down by  $28.6  million,  which  resulted  in an
approximate  $6.4 million  reduction in annual  depreciation  expense.  Further,
annual amortization  expense is approximately $0.3 million lower, as a result of
the Company writing off certain  intangible assets (primarily  deferred software
development costs) and certain other assets and liabilities  associated with the
Company's  headquarters  lease. The write off of the intangible  assets occurred
during the Predecessor Company 1997 261-Day Period and was charged to operations
($0.9  million to cost of goods sold and $0.3  million to  selling,  general and
administrative  expenses). The write off of certain other assets and liabilities
associated with the Company's  headquarters  lease was charged to reorganization
items during the  Predecessor  Company 1997 261-Day  Period ($0.9  million).  In
addition,  as  described  in Note 9 to the  Financial  Statements,  the  Company
incurred  additional  deferred  financing costs in connection with entering into
the Loan and Security  Agreement and other financing  arrangements and wrote off
certain  deferred  financing costs associated with the debt  restructuring.  The
write  off  of  deferred   financing   costs  ($0.2   million)  was  charged  to
reorganization items during the Predecessor Company 1997 261-Day Period.

         Net sales in Fiscal Year 1997 were $199.0 million,  an increase of $4.0
million or 2.0% from Fiscal Year 1996. Total yards of fabric sold increased 3.7%
during  Fiscal Year 1997.  The increase in sales was primarily  attributable  to
increases in women's outerwear  (coating),  men's wear (both woolen and worsted)
and  government  fabric sales.  Such  increases in sales during Fiscal Year 1997
were partly  offset by declines in sales of women's  wear fabrics and the effect
of the strategic decision during Fiscal Year 1996 to discontinue certain product
lines (career uniforms,  converting and  international).  The decline in women's
wear sales was the result of a decline in women's  worsted  fabric sales,  which
was somewhat offset by an increase in women's woolen fabric sales.  The increase
in woolen fabric sales is  attributable to the favorable  market  conditions for
women's woolen  fabrics,  improved market  conditions for domestic  suppliers of
women's outerwear and reduced pressure from import of women's outerwear.  Due to
this shift in product mix, the average per yard selling price  declined to $7.33
during  Fiscal  Year 1997 from $7.45 in Fiscal Year 1996.  Excluding  government
sales of $10.1 million in Fiscal Year 1997 and $8.9 million in Fiscal Year 1996,
net sales increased 1.5% during Fiscal Year 1997 compared to Fiscal Year 1996.

         Cost of goods sold in Fiscal Year 1997 was $172.6 or approximately  the
same as in Fiscal Year 1996 when cost of goods sold was $172.3 million. However,
included in cost of goods sold in Fiscal Year 1997 is the effect of $2.2 million
in higher group  medical  claims due to the Company's  self-insured  health care
plan  experiencing  approximately  28  individual  claims in  excess of  $50,000
whereas,  in Fiscal Year 1996 only 4 individual claims in excess of $50,000 were
realized.  Gross profit in Fiscal Year 1997  increased to $26.4  million or $3.6
million  higher  than Fiscal Year 1996.  The gross  profit  margin was 13.3% for
Fiscal Year 1997 as compared to 11.7% for Fiscal Year 1996.

         The  Company's  reduction of inventory  levels in Fiscal Years 1997 and
1996 resulted in the liquidation of LIFO inventory layers carried at lower costs
prevailing in prior years which  increased gross profit by $0.5 million and $2.2
million, respectively. The effect of the liquidation of LIFO inventory layers in
Fiscal Year 1997 was  recognized  during the  Predecessor  Company  1997 261-Day
Period.  At the Effective Date, the Company  adjusted its inventory  balances to
fair value  resulting in the  elimination  of the LIFO reserve of  approximately
$2.7 million and a write up of approximately  $3.8 million above the predecessor
Company's FIFO cost.  Such write up was credited  against  reorganization  items
during the Predecessor Company 1997 261-Day Period and will be allocated to cost
of  goods  sold  as the  inventory  on  hand  at the  Effective  Date  is  sold.
Approximately  $0.7  million  was  charged  to cost of  goods  sold  during  the
Reorganized Company 1997 Fourth Quarter.

         The  improvement in gross profit in Fiscal Year 1997 is attributable to
improved  manufacturing  efficiencies  and shifts in product  mix. As  described
above,  during the Predecessor  Company 1997 261-Day Period,  certain intangible
assets  were  written off and certain  plant and  equipment  which was idled was
written down to fair value.  This resulted in the  recognition of  approximately
$1.3 million in depreciation and amortization expense in the Predecessor Company
1997 261-Day Period which was offset by $1.6 million in lower  depreciation  and
amortization  costs during the  Reorganized  Company 1997 103-Day  Period due to
"fresh start" accounting.

         Selling, general and administrative  expenses,  excluding the provision
for uncollectible accounts,  decreased 12.5% or $2.3 million to $15.9 million in
Fiscal  Year  1997,  as  compared  to $18.1  million in Fiscal  Year 1996.  This
decrease  is  primarily  due to  lower  human  resources  related  expenses  and
professional  fees.  Since the Bankruptcy  Filing,  the Company has continued to
streamline  its  organization  structure  and  reduce  its  overhead  to be more
responsive  to  customer  needs and more  closely  match  selling,  general  and
administrative expenses to market conditions and expectations.  These decreases,
among others,  were partially offset by higher incentive  compensation  expense,
which was  related to the  Company's  retention  and  confirmation  bonus  plan.
Further,   depreciation  and  amortization  charged  to  selling,   general  and
administrative expense was approximately $231,000 lower primarily as a result of
the effects of lowering the value of property, plant and equipment in connection
with "fresh start" accounting.

         The provision for uncollectible accounts decreased from $1.4 million in
Fiscal Year 1996 to $0.7 million in Fiscal Year 1997.  Such  decrease  primarily
occurred during the Predecessor Company 1997 261-Day Period.

         Interest  expense for Fiscal Year 1997  decreased $2.4 million or 26.3%
to $6.7 million, as compared to $9.1 million for Fiscal Year 1996. This decrease
is primarily attributable to lower average borrowings under the Company's credit
facilities  which was facilitated by decreased  working capital needs mainly due
to the further  reduction in  inventories.  Further,  due to the refinancing and
debt restructuring described above, amortization expense during Fiscal Year 1997
was $0.3 million lower.

         As a result  of the  foregoing,  income  before  reorganization  items,
income tax and extraordinary  item for Fiscal Year 1997 improved $9.0 million to
$3.2  million  from  a  loss  before   reorganization   items,  income  tax  and
extraordinary  item  of  $5.8  million  for  Fiscal  Year  1996.  Income  before
depreciation and amortization,  reorganization items,  interest expense,  income
taxes and  extraordinary  item  during  Fiscal  Year 1997 was $21.8  million  as
compared to $15.2 in Fiscal Year 1996.

         Reorganization  items, which are more fully described in Note 16 to the
Financial  Statements,  were $33.8  million in Fiscal  Year 1997 as  compared to
$12.1  million in Fiscal  Year 1996.  Included in Fiscal Year 1997 is the "fresh
start"  accounting  adjustment of $28.6 million to adjust the carrying  value of
property,  plant and  equipment in  accordance  with SOP 90-7, a loss on sale of
$2.9 million on certain  unerected  equipment  at the  Company's  former  Tifton
facility,  a credit of $6.5 million to adjust  inventory to fair market value in
accordance  with SOP 90-7,  the write off of certain  assets and  liabilities of
$1.7 million,  net associated with the Company's former headquarters leases, the
rejection of certain  pre-petition  contracts of $1.6 million, and the write off
of certain  deferred  financing costs of $0.2 million related to the refinancing
and restructuring.

         During Fiscal Year 1995,  the Company fully  utilized its net operating
loss  carrybacks as permitted by the Internal  Revenue Code. For the Predecessor
Company  1997  261-Day  Period and Fiscal  Year 1996,  no income tax benefit was
recognized from the realization of net operating  losses. In accordance with SOP
90-7,  an  income  tax  provision  not  payable  in cash was  recognized  in the
Reorganized  Company  1997  103-Day  Period at an  effective  income tax rate of
54.43%.  The income tax  provision  not  payable  in cash was  credited  against
additional  paid-in  capital  as  net  operating  losses  generated  during  the
Predecessor  Company  1997  261-Day  Period  can be used to offset  net tax able
income, if any, generated during the Reorganized Company's 1997 103-Day Period.

         As a result of the  consummation  of the Plan of  Reorganization  which
resulted in the exchange of the general unsecured claims against the Company for
equity in the reorganized Company, as more thoroughly described in Note 2 to the
Financial  Statements,  the Company  recognized  an  extraordinary  gain on debt
discharge of $24.1 million  during the  Predecessor  Company 1997 261-Day Period
which was offset by additional  costs associated with the debt discharge of $0.1
million which was recognized during the Reorganized Company 1997 103-Day Period.
The Company had sufficient net operating loss carry forwards to offset this gain
and therefore, no income tax was recorded.

Financial Condition, Liquidity and Capital Resources

         The implementation of the Plan of Reorganization, which is discussed in
Note 2 to the  Financial  Statements,  significantly  deleveraged  the Company's
balance  sheet  and,  enhanced  the  Company's  borrowing  availability  and the
implementation  of  "fresh  start"  accounting   significantly   lowered  annual
depreciation and amortization expense. In addition, since the Bankruptcy Filing,
in  response  to  continuing  changes in market  conditions,  management  of the
Company   formulated  and  implemented   business  plans,   including  the  1998
Restructuring  and the 1999  Realignment,  that have  focused  on  significantly
reducing  product   offerings;   tightening   management  of  inventory  levels;
significantly  reducing costs and enhancing cost controls;  and reducing capital
expenditures.

         On the  Effective  Date,  as  described  in  Note  9 to  the  Financial
Statements,  the Company  entered  into the Loan and Security  Agreement  with a
syndicate of financial institutions led by BABC. The Loan and Security Agreement
provided for a Revolving  Loan  Facility  (including a $10.0  million  letter of
credit facility), subject to a borrowing base formula and certain borrowing base
limitations,  of up to $85 million and the Term Loan  Facility of  approximately
$31.5 million.

         Subsequently,  as of  February  8,  1999 the  Company  and its  lenders
amended the Loan and Security  Agreement,  waived  financial  covenant  defaults
arising from the  Company's  financial  results for Fiscal Year 1998 and,  among
other things, set new financial covenants for Fiscal Year 1999.  However,  there
can be no  assurance  that  the  Company  will be able to  achieve  the  amended
financial  covenants  during Fiscal Year 1999. In connection with the amendment,
the Company  agreed to prepay  $5.6  million of the Term Loan  Facility  through
borrowings under the Revolving Loan Facility.  Additionally,  the Company agreed
to increase its monthly Term Loan  Facility  principal  payment from $374,000 to
$450,000  beginning  March 1, 1999.  Further,  based on the Company's  declining
working  capital  needs in light of  declining  revenues,  the  Company  and its
lenders agreed to reduce the Revolving Loan Facility commitment from $85 million
to $70 million.  This reduction is expected to reduce the Company's  unused line
fee  approximately  $75,000  per annum.  The Company  further  agreed to repay a
portion  of its Term  Loan  Facility  in the  future  if  subsequently  obtained
appraised  orderly  liquidation  values for the  Company's  property,  plant and
equipment  securing the Term Loan  Facility  fall below 83.1% in relation to the
outstanding  amount  owed  under  the Term Loan  Facility.  In  connection  with
entering  into the  amendment  to the Loan and  Security  Agreement  the Company
agreed to pay BABC for the benefit of the lenders $200,000 which is payable over
four equal monthly installments commencing March 31, 1999. Additionally, BABC as
Agent, retains the right to withhold up to approximately $1,694,000 in aggregate
availability  which  arose  from the  expiration  of  certain  letters of credit
previously  outstanding as a security  deposit for the Company's former New York
headquarter's  lease.  (See  Note 9 to  these  Financial  Statements  for a more
thorough discussion of the Company's secured indebtedness.)

         Although the consummation of the Plan of  Reorganization  significantly
reduced the Company's leverage,  the operating results for Fiscal Year 1998, the
effect of the 1998 Restructuring,  and the 1999 Realignment and the formation of
FAI, including the purchase of substantially all of the assets of Arenzano, have
negatively  impacted the Company's  borrowing  availability  under its Revolving
Loan  Facility  (hereinafter  defined).  The  Company's  availability  under its
Revolving  Loan Facility was  approximately  $5.8 million at November 1, 1998 as
compared to $36.0 million at November 2, 1997. As of January 31, 1999, borrowing
availability  under the Revolving Loan Facility was $1.6 million.  The Company's
ability to maintain  adequate  availability  to meet its operating  needs and to
fund the 1999 Realignment is dependent on achieving future sales consistent with
management's  expectation for Fiscal Year 1999 and successful  implementation of
its cost reductions. The majority of the Company's customers are in the domestic
apparel  industry which has continued to suffer an economic  decline as a result
of higher levels of imports and changing fashion trends. Expected cash flow from
operations is dependent upon  achieving  sales  expectations  during Fiscal Year
1999,  which are  influenced by market  conditions,  including  apparel sales at
retail, that are beyond the control of the Company.  Further, the collectibility
of  accounts  receivable  is  dependent  upon the state of the  economy  and, in
particular,  the financial condition of the apparel industry.  Also,  continuing
refinement  of the Company's  strategies  in response to evolving  circumstances
could materially change the Company's  working capital and capital  expenditures
requirements. There can be no assurance that the Company will be able to achieve
an adequate level of sales consistent with management's  expectations for Fiscal
Year  1999 to  enable  the  Company  to  generate  sufficient  funds to meet its
operating  needs or to fund  its  1999  Realignment.  Further,  there  can be no
assurance that the 1999  Realignment  will be  successfully  implemented.

         The Company  will  continue to make  significant  efforts to reduce its
costs,  rationalize its product lines and maintain and increase its sales in the
increasingly  difficult  market  conditions it  confronts.  The Company may also
consider seeking  additional  financing from  alternative  sources and strategic
alliances  or  combinations  with other  companies.  Management  believes  that,
despite the financial hurdles and uncertainties in the apparel industry,  it has
developed a business plan that if successfully implemented, should significantly
improve operating results.  However, the Company will still be likely to realize
a net loss in Fiscal Year 1999.  Continued  support of the Company's  employees,
shareholders,  lenders,  vendors and  customers  will be important to the future
success of the Company.

     Proceeds from the Company's  operations  (as defined) are applied to reduce
the principal amount of floating rate borrowings outstanding under the Revolving
Loan  Facility.  Unused  portions of the Revolving Loan Facility may be borrowed
and reborrowed  subject to  availability  in accordance with the then applicable
commitment  and borrowing base  limitations.  At January 31, 1999, the Company's
availability, net of outstanding advances, letters of credit and reserves, under
the Revolving Loan Facility was approximately $1.6 million.

     The  Company's  fabric  sales  order  backlog at January 31, 1999 was $34.8
million,  a decrease of $15.6 million from the  comparable  period one year ago.
Excluding  government and men's worsted orders,  which have historically yielded
lower gross profit margin,  the backlog at January 31, 1999 was $33.5 million or
$10.7 million lower than in January 1998. The decrease in the backlog, excluding
government and men's worsted orders, is primarily  attributable to a decrease in
coating and men's woolen fabric  orders,  as well as a decline in women's woolen
and  worsted  fabric  orders,  which  were  slightly  offset by an  increase  in
specialty fabric orders.  The decrease in coating fabric orders is primarily due
to the unseasonably warm winter experienced  throughout much of the U.S. in 1997
- 1998.  As a  result,  initial  coating  fabric  orders  have been  delayed  by
retailers  which has  delayed  orders  from  apparel  manufacturers.  Changes in
fashion  trends,  coupled with  increased  imports have resulted in a decline in
demand for the  Company's  men's woolen  fabrics.  The decline in the backlog of
sales orders for women's  fabrics is twofold.  First,  an overcapacity of woolen
flannel  manufacturing  coupled with  excessive  women's  wool  flannel  apparel
inventory  at retail has lead to a decline in demand for the  Company's  women's
wool flannel  fabrics.  Second,  the reduction in the Company's  worsted  fabric
manufacturing  capacity  has caused the  Company to limit  somewhat  its women's
worsted produt offerings. The increase in specialty sales orders is attributable
to an increase in orders for fabrics used in baseball caps.  Management  expects
the apparel fabric business to remain very competitive.

         The  Company's  business is seasonal,  with the vast majority of orders
for woolen fabrics placed from December through April for apparel  manufacturers
to produce  apparel  for retail  sale  during the fall and winter  months.  This
results  in a  seasonal  sales  order and  billing  pattern  which  historically
generates  higher sales during the  Company's  second and third fiscal  quarters
compared to the Company's first and fourth  quarters.  This sales pattern places
seasonal constraints on the Company's manufacturing  operations which results in
increased  working  capital  requirements  in the Company's first fiscal quarter
relating to the manufacture of certain components of inventory which are sold in
the Company's  second and third fiscal  quarters.  The seasonal  sales and order
pattern  also  results in  increased  levels of accounts  receivable  due to the
larger sales volume and "dated" sales to coating fabric  customers  which allows
for payment sixty (60) days from July 1 for invoices  billed in January  through
June.

         Due to the  seasonal  nature of the  Company's  core woolen and worsted
business,  the Company's  borrowings under the Revolving Loan Facility will tend
to increase during the first three fiscal quarters of the Company's  fiscal year
until the fourth  quarter,  when at year-end,  borrowings tend to be the lowest.
However, for the reasons indicated above, borrowings during various times within
Fiscal Year 1999 may be higher than comparable periods within Fiscal Year 1998.

Currency Risks

         The Company  purchases a significant  amount of its wool inventory from
Australia.  Since all of the Company's forward purchase commitments for raw wool
are  denominated  in U.S.  dollars,  there is no  actual  currency  exposure  on
outstanding  contracts.  However,  future changes in the relative exchange rates
between  the United  States and  Australian  dollars can  materially  affect the
Company's results of operations for financial  reporting  purposes.  The Company
expects wool costs during Fiscal Year 1999 to be approximately 20% lower than in
Fiscal Year 1998.  Throughout  Fiscal Year 1998, the cost of wool declined.  The
Company commits to the purchase of its expected wool needs on a forward purchase
order  basis.  The Company was able to defer the  delivery of such wool used for
the  manufacture  of  worsted  fabrics.  However,  as a  result  of the  Company
significantly reducing its worsted manufacturing capacity, its forward purchases
exceeded  the  Company's  needs at November 1, 1998 and the  Company's  on order
purchase price committed under its forward  purchase orders for wool consumed on
the worsted system exceeded the then current market price by approximately  $1.5
million. Such market price loss was accrued in the fourth quarter of Fiscal Year
1998 and  resulted  in a reduction  in gross  profit.  Substantially  all of the
Company's  inventories  are  carried  at the lower of LIFO cost or  market.  The
decline in wool costs  during  Fiscal Year 1998  resulted  in the LIFO  carrying
value of the Company's  inventory  exceeding  replacement  cost by approximately
$3.0  million as of November 1, 1998.  Accordingly,  the Company  wrote its LIFO
inventory  value down to  replacement  cost during the fourth  quarter of Fiscal
Year 1998.  Such write off was charged to cost of goods sold which resulted in a
decrease in gross profit in Fiscal Year 1998.

Recent Accounting Pronouncements

         In June 1997, the Financial  Accounting Standards Board ("FASB") issued
Statement  of  Financial   Accounting   Standards   ("SFAS")   130,   "Reporting
Comprehensive  Income." SFAS 130 is designed to improve the reporting of changes
in equity  from period to period.  The Company  will adopt SFAS 130 in the first
quarter of Fiscal  Year  1999.  Management  does not  expect  SFAS 130 to have a
significant impact on disclosures in the Company's financial statements.

         In June 1997, the FASB issued SFAS 131,  "Employers'  Disclosures About
Segments of an Enterprise and Related  Information." The Company will adopt SFAS
131 in the first  quarter  of  Fiscal  Year  1999.  This  statement  establishes
standards for the way enterprises  report selected  information  about operating
segments in annual  financial  statements and requires that  enterprises  report
selected  information  about operating  segments in interim  financial  reports.
Management has not  determined  what effect,  if any,  adoption of SFAS 131 will
have on disclosures in the Company's financial statements.

         In February  1998,  the FASB issued SFAS 132,  "Employer's  Disclosures
about  Pensions  and Other  Postretirement  Benefits."  SFAS 132 is  designed to
revise  disclosures  about pensions and other  postretirement  benefit plans. It
does not change the  measurement or recognition of these plans.  It standardizes
the disclosure  requirements for pensions and other  postretirement  benefits to
the extent practicable. The Company will adopt SFAS 132 during Fiscal Year 1999.

         In June 1998,  the FASB issued  SFAS 133,  "Accounting  for  Derivative
Financial  Instruments and Hedging  Activities." SFAS 133 establishes  standards
for derivative  instruments  and hedging  activities and requires that an entity
recognize all  derivatives  as either assets or  liabilities in the statement of
financial  position and measure  those  instruments  at fair value.  SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company has not determined  what effect,  if any,  adoption of SFAS 133 will
have on the Company's financial statements.

Year 2000 Matters

        Many computer systems experience problems handling dates beyond the year
1999.  Therefore,  some computer  hardware and software will need to be modified
prior to the year 2000 in order to remain  functional.  During 1997 - 1998,  the
Company completed an assessment of its internal readiness to implement Year 2000
compliant  systems on a timely basis.  The Company is in the process of updating
or  replacing  its  computerized  systems to ensure its  systems are "Year 2000"
compliant  and to improve the  Company's  overall  manufacturing,  planning  and
inventory  related systems.  The Company is utilizing both internal and external
resources to upgrade or replace its existing  computerized  systems.  Currently,
the Company estimates that the total cost of upgrading or replacing its existing
systems is approximately $2.6 million.  Costs associated with upgrading existing
systems to address the Year 2000 matter will be expensed in the period incurred,
whereas  costs  associated  with the  replacement  of existing  systems  will be
capitalized in the period incurred. During Fiscal Year 1999, the Company expects
to expense $0.2 million in costs  associated with upgrading its existing systems
to make them Year 2000 compliant and capitalize $1.3 million in costs associated
with the replacement of existing  systems.  During Fiscal Year 1998, the Company
expensed   approximately  $0.2  million  associated  with  system  upgrades  and
capitalized $0.9 million associated with the replacement of certain computerized
systems.

        The Company expects its Year 2000 upgrade project and the replacement of
its manufacturing, planning and inventory related systems to be completed during
the second  quarter of calendar year 1999.  There can be no assurance,  however,
that there  will not be a delay in, or  increased  costs  associated  with,  the
implementation  of such  changes,  and any  inability to implement  such changes
could have a material adverse effect on the Company.

        The Company has not completed its assessment of the Year 2000 compliance
of its vendors and customers, nor of the possible consequences to the Company of
the  failure of one or more of its  vendors  and  customers  to become Year 2000
compliant on a timely basis.  The Company  expects to complete  such  assessment
before the end of the third  quarter of calendar  year 1999. It is possible that
if a substantial number of the Company's customers failed to implement Year 2000
compliant billing or payment systems, for example, their payments to the Company
might be disrupted,  which might  adversely  affect the Company's cash flow. The
Company will discuss  these  matters with its key vendors and  customers  during
1999 to attempt to ascertain whether and to what extent such problems are likely
to occur. It is not clear, however, what, if any measures the Company could take
to deal with such  eventualities  while still  maintaining  customer  and vendor
relationships. The Company does not believe that it has other relationships with
vendors and suppliers which, if disrupted due to the failure of such vendors and
suppliers to deal adequately with their own Year 2000 compliance  issues,  would
have a material adverse effect on the Company.

        The Company has completed an assessment of its  manufacturing  processes
and identified  which processes are dependent on third-party  provided  software
that may need to be  modified  in order to be Year 2000  compliant.  The Company
intends  to notify  such  third-party  providers  before  the end of the  second
quarter of calendar  year 1999 to determine  whether such  software  needs to be
modified in order to be Year 2000 compliant.  Where software  modifications  are
required, the Company will engage the appropriate third-party software providers
to make such Year 2000 compliant modifications.  Should the Company be unable to
obtain the appropriate software modifications, the Company believes it can alter
its manufacturing  processes to supplement any processes idled by non compliance
with the Year 2000.

<PAGE>
Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Market Risks
-----------------------
                                                    November 1, 1998
                                          -------------------------------------
                                          Commitment                    Fair
                                            Amount                      Value
(in thousands)                            ----------                    -----
Off Balance Sheet Commodity Position        $17,003                   $15,466


         The foregoing  data relates to committed and open purchase  order value
in aggregate to suppliers for wool to be delivered to the Company in Fiscal Year
1999. The difference  between commitment amount and fair value has been recorded
on the Company's  balance  sheet as a current  liability as of November 1, 1998.
See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations -- Currency Risk" contained in Item 7 of this Annual Report.
<PAGE>
Item 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                    CONSOLIDATED FINANCIAL STATEMENT SCHEDULE


Independent Auditors' Report..................................................43

Consolidated Balance Sheets for the Reorganized Company as of November 1, 1998
and November 2, 1997..........................................................45

Consolidated  Statements of Operations  for the  Reorganized  Company  Fifty-Two
Weeks Ended November 1, 1998 and the  Reorganized  Company  103-Day Period Ended
November 2, 1997, the Predecessor Company 261-Day Period Ended July 22, 1997
and the Predecessor Company Fifty-Three Weeks Ended November 3, 1996..........47

Consolidated  Statements  of Cash Flows for the  Reorganized  Company  Fifty-Two
Weeks Ended November 1, 1998 and the  Reorganized  Company  103-Day Period Ended
November 2, 1997, the Predecessor Company 261-Day Period Ended July 22, 1997
and the Predecessor Company Fifty-Three Weeks Ended November 3, 1996..........49

Consolidated Statements of Shareholders' Equity (Deficit) for the Predecessor 
Company Fifty-Three Weeks Ended November 3, 1996 and the Predecessor Company 
261-Day Period Ended July 22, 1997 and the Reorganized Company 103-Day Period 
Ended November 2, 1997 and the Reorganized Company Fifty-Two
Weeks Ended November 1, 1998..................................................52

Notes to Consolidated Financial Statements for the Reorganized Company Fifty-Two
Weeks Ended November 1, 1998 and the  Reorganized  Company  103-Day Period Ended
November 2, 1997 and the Predecessor Company 261-Day Period Ended July 22, 1997
and the Predecessor Company Fifty-Three Weeks Ended November 3, 1996..........54

Schedule II
Supplemental Consolidated Financial Statement Schedule for the Fifty-Three
Weeks Ended November 3, 1996, the Fifty-Two Weeks Ended November 2, 1997
and the Fifty-Two Weeks Ended November 1, 1998................................93
<PAGE>
INDEPENDENT AUDITOR'S REPORT


Board of Directors and Shareholders
Forstmann & Company, Inc.:


We have audited the accompanying  consolidated financial statements of Forstmann
& Company, Inc. (the "Company") for the following periods:

                                        Period(s) Covered
                          ------------------------------------------------------
Financial Statements      Reorganized Company       Predecessor Company
-----------------------   ------------------------- ----------------------------
Consolidated Balance      November 1, 1998
Sheets                    November 2, 1997

Consolidated Statements   Fifty-two weeks ended     Period from November 4, 1996
of Operations             November 1, 1998          to July 22, 1997

                          Period from July 23, 1997 Fifty-three weeks ended
                          to November 2, 1997       November 3, 1996

Consolidated Statements   Fifty-two weeks ended     Period from November 4, 1996
of Cash Flows             November 1, 1998          to July 22, 1997

                          Period from July 23, 1997 Fifty-three weeks ended
                          to November 2, 1997       November 3, 1996

Consolidated Statements   Fifty-two weeks ended     Period from November 4, 1996
of Changes in             November 1, 1998          to July 22, 1997 
Shareholders' Equity 
(Deficit)                 Period from July 23, 1997 Fifty-three weeks ended
                          to November 2, 1997       November 3, 1996

Our audits also include the consolidated  financial statement schedule listed in
the  Index to  Consolidated  Financial  Statements  and  Consolidated  Financial
Statement Schedule.  These financial statements and financial statement schedule
are the  responsibility of the Company's  management.  Our  responsibility is to
express  an  opinion  on these  financial  statements  and  financial  statement
schedule based on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects, the financial position of the Company at November 1, 1998 and
November 2, 1997,  and the results of its  operations and its cash flows for the
fifty-two  weeks ended November 1, 1998, the period July 23, 1997 to November 2,
1997,  the period  November 4, 1996 to July 22, 1997 and the  fifty-three  weeks
ended  November  3, 1996,  in  conformity  with  generally  accepted  accounting
principles.  Also,  in our opinion,  such  financial  statement  schedule,  when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements for the fifty-two weeks ended
November 1, 1998 have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 1 to the financial statements, the Company's
recurring losses and related matters raise  substantial  doubt about its ability
to continue as a going concern.  Management's plans concerning these matters are
also  discussed  in  Note  1.  The  financial  statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.

As  discussed  in  Note 2 to the  financial  statements,  on July  9,  1997  the
Bankruptcy   Court  entered  an  order   confirming   the   Company's   plan  of
reorganization  which became  effective  after the close of business on July 22,
1997.  Accordingly,  the accompanying financial statements have been prepared in
conformity  with AICPA  Statement of Position  90-7,  "Financial  Reporting  for
Entities  in  Reorganization  Under the  Bankruptcy  Code," for the  Reorganized
Company as a new entity with assets, liabilities, and a capital structure having
carrying values not comparable with prior periods as described in Note 2.




DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 8, 1999
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 1, 1998 AND NOVEMBER 2, 1997
<TABLE>

                                                                         Reorganized              Reorganized
                                                                           Company                  Company
                                                                          November 1,              November 2,
                                                     NOTES                  1998                      1997
                                                     -----                  ----                      ----
ASSETS

CURRENT ASSETS:
  <S>                                                 <C>              <C>                       <C>
   Cash                                                                 $   143,000               $    493,000
   Cash restricted for settlement of unpaid claims                          327,000                    558,000
   Accounts receivable, net of allowance of
      $1,309,000 and $458,000                                            31,434,000                 42,005,000
   Inventories                                           5               38,818,000                 43,210,000
   Current deferred tax assets                          10                  -                          -
   Other current assets                                                     281,000                    926,000
                                                                        -----------               ------------

      Total current assets                                               71,003,000                 87,192,000

Property, plant and equipment, net                       6               22,235,000                 24,779,000
Other assets                                             7                2,005,000                  1,670,000
                                                                        -----------               ------------

      Total                                                             $95,243,000               $113,641,000
                                                                        ===========               ============

</TABLE>
See notes to consolidated financial statements.




                            (continued on next page)
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 1, 1998 AND NOVEMBER 2, 1997 (CONTINUED)
<TABLE>

                                                                         Reorganized                Reorganized
                                                                           Company                    Company
                                                                          November 1,                November 2,
                                                     NOTES                  1998                        1997
                                                     -----                  ----                        ----

LIABILITIES AND SHAREHOLDERS'
   EQUITY

CURRENT LIABILITIES:
<S>                                                    <C>            <C>                        <C> 

   Current maturities of long-term debt                  9             $  7,619,000               $  5,756,000
   Accounts payable                                                       3,151,000                  3,335,000
   Accrued liabilities                                   8                9,238,000                 11,371,000
                                                                       ------------               ------------
      Total current liabilities                                          20,008,000                 20,462,000

Long-term debt                                           9               43,565,000                 42,548,000
Deferred tax liabilities                                10                  -                           -
                                                                       ------------               ------------

    Total liabilities                                                    63,573,000                 63,010,000

Commitments and contingencies                           13

SHAREHOLDERS' EQUITY:                                   11

   Preferred Stock, $0.01 par value, 1,000,000
      shares authorized, nil outstanding                                       -                          -
   Common stock, $.01 par value, 35,000,000
      shares authorized, 4,387,819 and 4,384,436 
      shares issued and outstanding                                          43,878                     43,844
   Additional paid-in capital                                            50,323,122                 50,297,156
   Retained earnings (deficit) since July 23, 1997                      (18,697,000)                   290,000
                                                                       ------------               ------------
      Total shareholders' equity                                         31,670,000                 50,631,000
                                                                       ------------               ------------

      Total                                                            $ 95,243,000               $113,641,000
                                                                       ============               ============


</TABLE>
See notes to consolidated financial statements.
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>

                                                          Reorganized Company                   Predecessor Company
                                                    --------------------------------     ------------------------------
                                                                         Period From      Period From
                                                     Fifty-Two            July 23,        November 4,       Fifty-Three
                                                    Weeks Ended            1997 to          1996 to         Weeks Ended
                                                     November 1,         November 2,        July 22,        November 3,
                                        NOTES           1998                 1997             1997             1996
                                        -----           ----                 ----             ----             ----
<S>                                       <C>     <C>                   <C>              <C>              <C> 

Net sales                                          $ 149,597,000         $57,126,000      $141,884,000     $195,028,000

Cost of goods sold                                   141,760,000          49,400,000       123,217,000      172,273,000
                                                   -------------         -----------      ------------     ------------

Gross profit                                           7,837,000           7,726,000        18,667,000       22,755,000

Selling, general and administrative
   expenses                                           14,935,000           4,296,000        11,576,000       18,129,000

Provision for uncollectible accounts
   receivable                                            851,000             458,000           252,000        1,397,000

Restructuring items                        15          3,495,000              -                -                -

Loss (gain) from abandonment, disposal
   and impairment of machinery and
   equipment and other assets               6            955,000               7,000           (90,000)         (45,000)
                                                   -------------         -----------      ------------     ------------

Operating income (loss)                              (12,399,000)          2,965,000         6,929,000        3,274,000

Interest expense (contractual interest
   of $11,192,000 for the Predecessor
   Company 1997 261-Day Period
   and $17,683,000 for 1996)                9          6,489,000           1,723,000         4,958,000        9,063,000
                                                   -------------         -----------      ------------     ------------

Income (loss) before reorganization
   items, income taxes and
   extraordinary gain (loss)                         (18,888,000)          1,242,000         1,971,000       (5,789,000)

Reorganization items                       16             99,000             395,000        33,401,000       12,055,000
                                                   -------------         -----------      ------------     ------------

Income (loss) before income taxes
   and extraordinary item                            (18,987,000)            847,000       (31,430,000)     (17,844,000)


See notes to consolidated financial statements.
</TABLE>

                                                 (continued on next page)
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>

                                                          Reorganized Company                   Predecessor Company
                                                    --------------------------------     ------------------------------
                                                                         Period From      Period From
                                                     Fifty-Two            July 23,        November 4,       Fifty-Three
                                                    Weeks Ended            1997 to          1996 to         Weeks Ended
                                                     November 1,         November 2,        July 22,        November 3,
                                        NOTES           1998                 1997             1997             1996
                                        -----           ----                 ----             ----             ----
<S>                                       <C>      <C>                 <C>                <C>             <C> 
Income tax provision (benefit)             10              -                 461,000             -                -
                                                    ------------        ------------       ------------    ------------

Income (loss) before extraordinary item              (18,987,000)            386,000       (31,430,000)     (17,844,000)

Extraordinary item - gain (loss) on
   debt discharge                                          -                 (96,000)       24,135,000            -
                                                    ------------        ------------       ------------    ------------

Net income (loss)                                   $(18,987,000)       $    290,000       $(7,295,000)    $(17,844,000)
                                                    ============        ============       ===========     ============

Per share and share information:
   Income (loss) before extraordinary item
      per common share - basic and diluted          $      (4.33)       $        .09       $    (5.59)     $      (3.18)

   Extraordinary (loss) gain per common
      share - basic and diluted                            -                    (.02)            4.29            -
                                                    ------------        ------------       ------------    ------------

   Income (loss) per common share
      - basic and diluted                           $      (4.33)       $        .07       $     (1.30)    $      (3.18)
                                                    ============        ============       ===========     ============

   Weighted average common shares
      outstanding - basic and diluted                  4,385,955           4,384,436         5,618,799        5,618,799
                                                    ============        ============       ===========     ============

See notes to consolidated financial statements.
</TABLE>

<PAGE>


FORSTMANN & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>


                                                                            Reorganized Company             Predecessor Company
                                                                      ------------------------------- ------------------------------
                                                                                         Period From   Period From
                                                                         Fifty-Two         July 23,     November 4,      Fifty-Three
                                                                        Weeks Ended        1997 to        1996 to        Weeks Ended
                                                                         November 1,     November 2,      July 22,       November 3,
                                                                           1998             1997            1997            1996
                                                                           ----             ----            ----            ----
<S>                                                                   <C>             <C>             <C>             <C>
Net income (loss)                                                      $(18,987,000)   $    290,000    $ (7,295,000)   $(17,844,000)
                                                                       ------------    ------------    ------------    ------------
Adjustments to reconcile net income (loss) to net
   cash provided (used) by operating activities:
      Depreciation and amortization                                       5,502,000       1,519,000      10,600,000      13,113,000
      Write-off of deferred financing costs                                    --              --           211,000            --
      Income tax not payable in cash                                           --           461,000            --              --
      Income tax refunds (payments), net                                    218,000        (250,000)       (108,000)      2,531,000
      Provision for uncollectible accounts                                  851,000         458,000         252,000       1,397,000
      Increase (decrease) in market reserves                              4,416,000         721,000      (6,362,000)     (2,249,000)
      Loss from abandonment, disposal and
         impairment of machinery and equipment
         and other assets                                                 2,378,000           7,000       3,305,000       1,782,000
      Loss associated with restructuring
         equipment lease liability                                        1,578,000            --              --              --
      Gain associated with N.Y. office lease surrender(987,000)                --              --              --
      Loss on wool purchase commitments                                   1,537,000            --              --              --
      Non-cash item-beginning profit inventory
         write-down                                                         569,000         686,000            --              --
      Adjustment of accounts to fair value                                     --              --        22,076,000            --
      Extraordinary loss (gain) on debt discharge-                           96,000     (24,135,000)           --
      Non-cash compensation expense                                          32,000            --              --              --
   Change in current assets and current liabilities:
      Accounts receivable                                                 9,720,000      10,301,000     (17,592,000)      6,594,000
      Inventories                                                            (3,000)      3,854,000       9,047,000      27,073,000
      Other current assets                                                  483,000         182,000        (996,000)        456,000
      Accounts payable                                                     (323,000)       (676,000)      2,028,000         446,000
      Accrued liabilities                                                (2,321,000)     (2,292,000)        795,000       4,190,000
Operating liabilities subject to compromise                                    --           (96,000)       (514,000)     (1,257,000)
                                                                       ------------    ------------    ------------    ------------

Total adjustments                                                        23,650,000      14,971,000      (1,393,000)     54,076,000
                                                                       ------------    ------------    ------------    ------------

   Net cash provided (used) by operating activities                       4,663,000      15,261,000      (8,688,000)     36,232,000
                                                                       ------------    ------------    ------------    ------------


See notes to consolidated financial statements.
</TABLE>

                            (continued on next page)
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>

                                                                            Reorganized Company             Predecessor Company
                                                                      ------------------------------- ------------------------------
                                                                                         Period From   Period From
                                                                         Fifty-Two         July 23,     November 4,      Fifty-Three
                                                                        Weeks Ended        1997 to        1996 to        Weeks Ended
                                                                         November 1,     November 2,      July 22,       November 3,
                                                                           1998             1997            1997            1996
                                                                           ----             ----            ----            ----
<S>                                                                  <C>            <C>              <C>              <C>
Cash flows provided (used) by investing activities:
   Investment in property, plant and equipment                        (4,244,000)        (857,000)      (1,036,000)        (972,000)
   Purchase price paid for Arenzano Trading
      Company, Inc.                                                   (2,000,000)            --               --               --
   Investment in other assets                                         (1,047,000)        (125,000)        (289,000)        (921,000)
   Proceeds from disposal of property,
      plant and equipment                                                159,000            8,000        2,612,000          150,000
                                                                    ------------     ------------     ------------     ------------

   Net cash provided (used) by investing activities                   (7,132,000)        (974,000)       1,287,000       (1,743,000)
                                                                    ------------     ------------     ------------     ------------

Cash flows provided (used) by financing activities:
   Net borrowings (repayments) under the
      Revolving Loan Facility                                         14,519,000      (12,855,000)      26,244,000             --
   Borrowings under the Term Loan Facility                                  --               --         31,450,000             --
   Repayment of the Term Loan Facility                                (9,984,000)      (1,123,000)            --               --
   Net borrowings (repayments) under DIP Facility -                         --        (16,017,000)       6,582,000
   Net borrowings (repayments) under GE Capital
      Facility                                                              --               --               --
                                                                                                                        (38,626,000)
   Repayment of  Senior Secured Notes                                       --               --        (26,909,000)         (91,000)
   Repayment of Deferred Interest Rate Notes                          (1,571,000)            --               --               --
   Borrowing under financing arrangements                                 69,000             --          1,691,000             --
   Repayment of CIT Equipment Facility and other
      financing arrangements                                            (967,000)         (99,000)      (6,368,000)      (1,770,000)
   Deferred financing costs                                             (178,000)         109,000       (2,006,000)        (588,000)
                                                                    ------------     ------------     ------------     ------------

      Net cash provided (used) by financing activities                 1,888,000      (13,968,000)       8,085,000      (34,493,000)
                                                                    ------------     ------------     ------------     ------------

Net increase (decrease) in cash                                         (581,000)         319,000          684,000           (4,000)
Cash and restricted cash at beginning of period                        1,051,000          732,000           48,000           52,000
                                                                    ------------     ------------     ------------     ------------

Cash and restricted cash at end of period $                              470,000     $  1,051,000     $    732,000     $     48,000
                                                                    ============     ============     ============     ============

See notes to consolidated financial statements.
</TABLE>
                            (continued on next page)
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
                                                                            Reorganized Company             Predecessor Company
                                                                      ------------------------------- ------------------------------
                                                                                         Period From   Period From
                                                                         Fifty-Two         July 23,     November 4,      Fifty-Three
                                                                        Weeks Ended        1997 to        1996 to        Weeks Ended
                                                                         November 1,     November 2,      July 22,       November 3,
                                                                           1998             1997            1997            1996
                                                                           ----             ----            ----            ----
<S>                                                                <C>              <C>              <C>              <C> 
Supplemental schedule of cash flow information:
   Cash paid during the period for interest $                          5,827,000     $  1,520,000     $  5,093,000     $  6,187,000
                                                                    ============     ============     ============     ============
   Cash (received) paid during the period for
      income taxes , net                                            $   (218,000)    $    250,000     $    108,000     $ (2,531,000)
                                                                    ============     ============     ============     ============
   Cash paid during the period for professional fees
      relating to services rendered in connection with
      the Chapter 11 proceeding and other
      reorganization items paid                                     $    678,000     $  2,392,000     $  4,019,000     $  4,778,000
                                                                    ============     ============     ============     ============
   Cash paid during the period for restructuring items$                1,263,000     $       --       $       --       $       --
                                                                    ============     ============     ============     ============

Cash paid during the period for Arenzano Trading
   Company, Inc. as assigned to identifiable assets
   and liabilities:
      Increase in inventories                                       $    590,000     $       --       $       --       $       --
      Increase in other current assets                                    56,000             --               --               --
      Increase in accounts payable                                      (139,000)            --               --               --
      Increase in property, plant and equipment                          269,000             --               --               --
      Increase in other assets                                         1,224,000             --               --               --
                                                                    ------------     ------------     ------------     ------------
Total cash paid                                                     $  2,000,000     $       --       $       --       $       --
                                                                    ============     ============     ============     ============

Supplemental schedule of changes in current assets
   and current liabilities:
      Accounts receivable trade, net:
         Decrease (increase) from operations $ 9,720,000            $ 10,301,000     $(17,592,000)    $  6,594,000
         Loss on asset impairment                                           --               --            466,000             --
         Provision for uncollectible accounts                            851,000          458,000          252,000        1,397,000
                                                                    ------------     ------------     ------------     ------------
            Net decrease (increase)                                 $ 10,571,000     $ 10,759,000     $(16,874,000)    $  7,991,000
                                                                    ============     ============     ============     ============

      Inventories:
         Decrease (increase) from operations$                             (3,000)    $  3,854,000     $  9,047,000     $ 27,073,000
         Increase from purchase of Arenzano Trading
            Company, Inc.                                               (590,000)            --               --               --
         Decrease from non-cash beginning profit
            inventory write-down                                         569,000          686,000             --               --
         Increase from fair market valuation                                --               --         (6,510,000)            --
         Increase (decrease) in market reserves                        4,416,000          721,000       (6,362,000)      (2,249,000)
                                                                    ------------     ------------     ------------     ------------
            Net decrease (increase)                                 $  4,392,000     $  5,261,000     $ (3,825,000)    $ 24,824,000
                                                                    ============     ============     ============     ============

See notes to consolidated financial statements
</TABLE>
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>

                                            Shares                                       Pension                          Total
                                              Of                        Additional      Liability         Retained     Shareholders'
                                            Common          Common        Paid-In       Over Prior        Earnings        Equity
                                            Stock            Stock        Capital      Service Cost       (Deficit)      (Deficit)
                                       ------------         -------    ------------    ------------    ------------    ------------
PREDECESSOR COMPANY:

<S>                                     <C>                 <C>       <C>             <C>             <C>             <C>
Balance, October 29, 1995                 5,618,799          $5,619    $ 26,564,381    $ (1,956,000)   $(16,947,000)   $  7,667,000

Adjustments to pension
   liability over prior
   service cost                                --              --              --           849,000            --           849,000

Loss applicable to
   common shareholders                         --              --              --              --       (17,844,000)    (17,844,000)
                                       ------------         -------    ------------    ------------    ------------    ------------

Balance, November 3, 1996                 5,618,799           5,619      26,564,381      (1,107,000)    (34,791,000)     (9,328,000)

Loss for period before debt
   discharge and refinancing
   and fresh start accounting                  --              --              --              --        (8,760,000)     (8,760,000)

Adjustments for:

   Cancellation of old
      common stock and
      old preferred stock                (5,618,799)         (5,619)      2,660,619            --              --         2,655,000

   Discharge of debt                      4,384,436          43,844      62,697,156            --        24,135,000      86,876,000

   Debt refinancing expense                    --              --              --              --          (594,000)       (594,000)

Fresh start accounting adjustments:

   Fair market valuation of assets
      and liabilities                          --              --              --              --       (22,076,000)    (22,076,000)

   Eliminate retained earnings
      deficit and pension liability
      over prior service cost                  --              --       (43,193,000)      1,107,000      42,086,000            --
                                       ------------         -------    ------------    ------------    ------------    ------------

Balance, July 22, 1997                    4,384,436          43,844      48,729,156            --              --        48,773,000

</TABLE>
See notes to consolidated financial statements.

                            (continued on next page)
<PAGE>
FORSTMANN & COMPANY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<TABLE>

                                             Shares                                       Pension                          Total
                                              Of                        Additional      Liability         Retained     Shareholders'
                                            Common          Common        Paid-In       Over Prior        Earnings        Equity
                                            Stock            Stock        Capital      Service Cost       (Deficit)      (Deficit)
                                       ------------         -------    ------------    ------------    ------------    ------------
REORGANIZED COMPANY:
<S>                                      <C>                <C>        <C>             <C>            <C>             <C>
Adjustments to pension liability
   over prior service cost                      --              --         1,107,000            --             --         1,107,000

Income for period                               --              --              --              --          290,000         290,000

Income taxes not payable
   in cash                                      --              --           461,000                           --           461,000
                                        ------------         -------    ------------    ------------    ------------    ------------
                                                                                                                            

Balance, November 2, 1997                  4,384,436          43,844      50,297,156            --          290,000      50,631,000

Director shares awarded                        3,997              40          31,960            --             --            32,000

Shares acquired
(constructively retired)                        (614)             (6)         (5,994)           --             --            (6,000)

Loss for period                                 --              --              --                             --       (18,987,000)
                                        ------------         -------    ------------    ------------    ------------    ------------

Balance November 1, 1998                   4,387,819         $43,878    $ 50,323,122    $       --     $(18,697,000)   $ 31,670,000
                                        ============         =======    ============    ============   ============    ============

See notes to consolidated financial statements.
</TABLE>
<PAGE>
FORSTMANN & COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE REORGANIZED
COMPANY  FIFTY-TWO  WEEKS ENDED  NOVEMBER 1, 1998 AND 1997 103-DAY  PERIOD ENDED
NOVEMBER 2, 1997 AND THE PREDECESSOR  COMPANY 1997 261-DAY PERIOD ENDED JULY 22,
1997 AND FIFTY-THREE WEEKS ENDED NOVEMBER 3, 1996

1.      NATURE OF BUSINESS, FINANCIAL RESULTS AND LIQUIDITY

        Forstmann  &  Company,  Inc.  ("the  Company")  is a  leading  designer,
marketer and manufacturer of innovative,  high quality woolen, worsted and other
fabrics which are used  primarily in the  production  of brand-name  and private
label  apparel  for men and  women,  as well  as  specialty  fabrics  for use in
billiard  and gaming  tables,  sports  caps and  school  uniforms.  The  apparel
industry  represents  the majority of the  Company's  customers for its fabrics.
Additionally,  through the Company's wholly owned subsidiary  Forstmann Apparel,
Inc.  ("FAI") the Company  designs and markets women's suits primarily under the
"Oleg Cassini" label. The Company  contracts the  manufacturing of women's suits
through  manufacturers  based in the  Caribbean  and  sources  complete  apparel
packages  internationally.  See  Note  4 to  these  Financial  Statements  for a
discussion  of FAI and it's  purchase  of  certain  assets of  Arenzano  Trading
Company, Inc. and B&B Corporation, collectively ("Arenzano").

        The Company has incurred net losses of $19.0  million,  $7.0 million and
$17.8  million in Fiscal Years 1998,  1997 and 1996,  respectively.  Such losses
were, in part, due to the development and  implementation  of the Company's Plan
of Reorganization  (hereinafter defined), unstable wool commodity price and most
recently  increased  international  competition  which  has been  compounded  by
consumer  fashion  trends moving away from the Company's core woolen and worsted
fabrics.  Net sales  declined from $199.0  million in Fiscal Year 1997 to $149.6
million in Fiscal Year 1998 and  management  expects a similar  reduction in net
sales during fiscal year 1999. The Company has responded to these  challenges by
deleveraging  its financial  position  through the  consummation  of the Plan of
Reorganization  and  has  more  recently  implemented  numerous  cost  reduction
programs  to more  closely  align its  manufacturing  and  overhead  costs  with
expected revenues.

         On March 6, 1998, the Company  announced that, as part of its long term
strategy,  it will discontinue the production of top dye worsted fabrics used to
manufacture men's suits and government uniforms (the "1998 Restructuring") after
completing  orders for its fall season.  In Fiscal Year 1998,  top dyed worsteds
accounted for  approximately  $14 million in men's suiting fabric and $4 million
in  government  uniform  fabric  sales.  In Fiscal Year 1997,  top dye  worsteds
accounted for  approximately $18 million in men's suiting fabric and $10 million
in  government  uniform  fabric sales.  This decision  resulted in the Company's
previous  overall  workforce of  approximately  2,500  people  being  reduced by
approximately 730 people.

         In October 1998, the Company's Board of Directors  approved the closing
of its Louisville plant,  realignment of the Company's manufacturing  facilities
located  in  Georgia  and  further  reductions  of  its  selling,   styling  and
administrative  costs (the "1999  Realignment").  The Company  expects that this
move will align its overhead  with the current  market  demand for its products.
The Louisville plant was closed as of January 31, 1999. The Company is currently
evaluating  alternative  solutions  for  its  Louisville  facility  including  a
possible  sale.  Implementation  of the 1999  Realignment  has  resulted  in the
Company's workforce being further reduced by approximately 410 people.

         Implementation  of the  1998  Restructuring  and 1999  Realignment  has
resulted in the Company incurring certain costs,  including,  among other costs,
salaried  severance,  special  one-time  hourly "stay put" bonuses and equipment
relocation  costs.  Additionally,  certain  of  the  Company's  inventories  and
machinery and equipment  have been  impaired or rendered  obsolete,  and certain
equipment  covered under operating lease  agreements will no longer be required.
Accordingly, during Fiscal Year 1998, the Company recognized severance and "stay
put"  bonus  expense  of  approximately  $0.8  million,  recognized  a  loss  on
impairment of $1.4 million  relating to the impairment of certain  machinery and
equipment based on appraised values, increased inventory market reserves by $2.6
million,  and recognized a loss  associated  with operating  lease  cancellation
liability of $1.6 million.  Severance expense,  expense associated with the stay
put bonuses,  loss on impairment of certain machinery and equipment and the loss
associated  with  operating  lease  cancellation  liability  were  recognized as
restructuring  items  during  Fiscal  Year 1998.  The  Company  expects to incur
approximately  $1.2 million of severance expense as a restructuring  item during
its first quarter of fiscal year 1999 in connection  with the 1999  Realignment.
Inventory market reserves  associated with the 1998  Restructuring were included
in cost of goods sold during  Fiscal Year 1998.  Any  additional  impairment  of
inventories,  if any,  will be  included in cost of goods sold in the periods in
which  the  impairment  is  indicated  and  can  be  reasonably  estimated.  Any
additional impairment in property, plant and equipment will be recognized in the
periods in which the  impairment is indicated  and can be reasonably  estimated.
The Company incurred costs of approximately $0.2 million during Fiscal Year 1998
related to the relocation of certain  machinery and equipment which was included
in cost of goods sold during Fiscal Year 1998. Any additional  costs incurred to
relocate  certain  machinery and equipment will be charged to cost of goods sold
in  the  periods  incurred.  See  Note  15 to  the  Financial  Statements  for a
description of restructuring items recognized during Fiscal Year 1998.

         Although the consummation of the Plan of  Reorganization  significantly
reduced the Company's leverage,  the operating results for Fiscal Year 1998, the
effect of the 1998 Restructuring,  and the 1999 Realignment and the formation of
FAI, including the purchase of substantially all of the assets of Arenzano, have
negatively  impacted the Company's  borrowing  availability  under its Revolving
Loan  Facility  (hereinafter  defined).  The  Company's  availability  under its
Revolving  Loan Facility was  approximately  $5.8 million at November 1, 1998 as
compared to $36.0 million at November 2, 1997. As of January 31, 1999, borrowing
availability  under the Revolving Loan Facility was $1.6 million.  The Company's
ability to maintain  adequate  availability  to meet its operating  needs and to
fund the 1999 Realignment is dependent on achieving future sales consistent with
management's  expectations for Fiscal Year 1999 and successful implementation of
its cost reductions. The majority of the Company's customers are in the domestic
apparel  industry which has continued to suffer an economic  decline as a result
of higher levels of imports and changing fashion trends. Expected cash flow from
operations is dependent upon  achieving  sales  expectations  during Fiscal Year
1999,  which are  influenced by market  conditions,  including  apparel sales at
retail, that are beyond the control of the Company.  Further, the collectibility
of  accounts  receivable  is  dependent  upon the state of the  economy  and, in
particular,  the financial condition of the apparel industry.  Also,  continuing
refinement  of the Company's  strategies  in response to evolving  circumstances
could materially change the Company's  working capital and capital  expenditures
requirements. There can be no assurance that the Company will be able to achieve
an adequate level of sales consistent with management's  expectations for Fiscal
Year  1999 to  enable  the  Company  to  generate  sufficient  funds to meet its
operating  needs or to fund  its  1999  Realignment.  Further,  there  can be no
assurance that the 1999  Realignment  will be  successfully  implemented.  These
factors raise  substantial  doubt about the  Company's  ability to continue as a
going  concern.  The financial  statements do not include any  adjustments  that
might result from the outcome of these uncertainties.

        As described more thoroughly in Note 9 to the Financial  Statements,  as
of February 8, 1999,  the Company and its lenders  amended the Loan and Security
Agreement, waived certain financial covenant defaults arising from the Company's
financial  results  for  Fiscal  Year  1998 and,  among  other  things,  set new
financial  covenants  for Fiscal Year 1999.  However,  there can be no assurance
that the Company will be able to achieve the amended financial  covenants during
Fiscal Year 1999.

        The  Company  will  continue to make  significant  efforts to reduce its
costs,  rationalize its product lines and maintain and increase its sales in the
increasingly  difficult  market  conditions it  confronts.  The Company may also
consider seeking  additional  financing from  alternative  sources and strategic
alliances  or  combinations  with other  companies.  Management  believes  that,
despite the financial hurdles and uncertainties in the apparel industry,  it has
developed a business plan that if successfully  implemented should significantly
improve operating results.  However, the Company will still be likely to realize
a loss in Fiscal  Year  1999.  Continued  support  of the  Company's  employees,
stockholders,  lenders,  vendors and  customers  will be important to the future
success of the Company.

2.      PRIOR REORGANIZATION AND "FRESH START" ACCOUNTING

        In September 1995, as a result of a decline in the Company's  results of
operations during Fiscal Year 1995 reflecting,  among other factors, rising wool
costs, sluggish retail apparel sales, and high debt leverage,  the Company filed
a petition for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy  Code").  In July  1997,  the  Bankruptcy  Court  entered  an  order
confirming  the Plan of  Reorganization  and on July 23,  1997  (the  "Effective
Date"), the Plan of Reorganization was consummated by the Company.

         Pursuant to the Plan of  Reorganization,  all general  unsecured claims
against  the  Company  were  converted  into  100% of the  common  stock  of the
reorganized  Company  based on a ratio of 50 shares  per each  $1,000 of allowed
unsecured claim.  Secured claims against the Company  aggregating  approximately
$60.1 million were either  refinanced,  reinstated or restructured as more fully
described in Note 9 to the Financial  Statements.  In addition,  pursuant to the
Plan of Reorganization, as of the Effective Date:

         (i)      holders of the Company's  redeemable  preferred stock received
                  in the aggregate  warrants  entitling them to purchase  43,878
                  shares of the new common stock of the Company within two years
                  of the Effective  Date at an exercise  price of $23 per share,
                  and the preferred stock was canceled;

         (ii)     holders of the  Company's  old common  stock  received  in the
                  aggregate warrants entitling them to purchase 43,878 shares of
                  the new common  stock of the  Company  within two years of the
                  Effective Date at an exercise price of $23 per share,  and the
                  old common stock was canceled;

         (iii)    holders of options to  purchase  common  stock of the  Company
                  received no distributions under the Plan, and the options were
                  canceled;

         (iv)     an  aggregate  of  487,528  shares  of  common  stock  of  the
                  reorganized  Company were  reserved for issuance upon exercise
                  of options granted or to be granted  pursuant to the Company's
                  Management  Stock Option Plan and, as of the  Effective  Date,
                  146,258  options  were  granted  to certain  employees  of the
                  Company at an exercise price of $12.88 per share;

         (v)      the Company  entered into a Loan and Security  Agreement dated
                  as of July 23, 1997 (the "Loan and Security  Agreement")  with
                  BankAmerica Business Credit, Inc. ("BABC"),  as agent, and the
                  financial  institutions  named therein,  the proceeds of which
                  were used to repay all amounts outstanding under the Company's
                  GE  Capital  DIP  Facility   (hereinafter   defined)  and  CIT
                  Equipment Facility (hereinafter defined),  repay the principal
                  and a portion of the accrued and unpaid interest due under the
                  Senior  Secured  Notes  (hereinafter  defined)  and fund other
                  amounts  due  pursuant to the Plan of  Reorganization  and the
                  Loan and Security Agreement.

         In  accordance  with  the  American   Institute  of  Certified   Public
Accountants'  Statement of Position  90-7,  "Financial  Reporting by Entities in
Reorganization  Under the Bankruptcy Code" ("SOP 90-7"), the Company established
its  reorganization  value and adopted  "fresh start"  accounting as of July 22,
1997.

         Pursuant to SOP 90-7, the total reorganization value of the reorganized
Company's assets was determined using several factors and by reliance on various
valuation  methods,  including  discounting  cash flow,  as well as by analyzing
market cash flow multiples  applied to the Company's pro forma adjusted 12-month
trailing cash flows.

The factors considered by the Company included:

         (i)      Forecasted  operating  and cash flow results which gave effect
                  to   the   estimated   impact   of   the   restructuring   and
                  implementation   of  the  Company's   strategic   initiatives;
                  limitations  on  the  use  of  available  net  operating  loss
                  carryovers   and   other   tax   attributes   resulting   from
                  consummation of the Plan of Reorganization and other events;

         (ii)     the discounted residual value at the end of the forecast 
                  period;

         (iii)    market share and position;

         (iv)     competition and general economic considerations;

         (v)      future potential profitability, and;

         (vi)     the Company's seasonality and working capital requirements.

         Based  on this  analysis,  the  Company,  after  consultation  with the
Company's  creditors'  committee  established  by the  Bankruptcy  Court  and an
independent  firm  specializing  in  reorganizations  retained by the creditors'
committee,  established the Company's reorganization value. Under the principles
of "fresh start"  accounting,  the  Company's  total net assets were recorded at
this assumed  reorganization  value,  which was then  allocated to  identifiable
tangible and intangible  assets on the basis of their  estimated fair value.  In
accordance  with "fresh start"  accounting,  the difference  between the assumed
reorganization  value and the aggregate fair value of the identifiable  tangible
and intangible assets resulted in a reduction in the value assigned to property,
plant  and  equipment.  In  addition,  the  Company's  accumulated  deficit  was
eliminated.






                                              (continued on next page)

<PAGE>
         The effect of the Plan of Reorganization  and the application of "fresh
start"  accounting to the Company's  condensed balance sheet as of July 22, 1997
was as follows (in thousands):
<TABLE>
                                                                     Pre-Fresh
                                                                       Start           Plan of                           Fresh Start
                                                                      Balance       Reorganization      Fair Value         Balance
                                                                       Sheet         Adjustments        Adjustment          Sheet
                                                                   July 22, 1997          (A)               (B)        July 22, 1997
                                                                   -------------      ----------        ----------     -------------
<S>                                                                 <C>               <C>               <C>               <C>

Cash and cash equivalents                                            $      48         $     684         $    --           $     732
Accounts receivable                                                     52,764              --                --              52,764
Inventory                                                               41,961              --               6,510            48,471
Other current assets                                                     1,220              (360)             --                 860
                                                                     ---------         ---------         ---------         ---------
   Total current assets                                                 95,993               324             6,510           102,827

Property, plant and equipment, net                                      53,879              --             (28,586)           25,293
Deferred financing costs                                                   794               995              --               1,789
Other assets                                                                91              --                --                  91
                                                                     ---------         ---------         ---------         ---------
   Total assets                                                      $ 150,757         $   1,319         $ (22,076)        $ 130,000
                                                                     =========         =========         =========         =========

Current maturities of long-term debt                                 $  53,906         $(48,282)         $    --           $   5,624
Accounts payable                                                         3,964              --                --               3,964
Accrued liabilities                                                     17,043            (3,378)             --
                                                                                       ---------         ---------         ---------
                                                                                                                              13,665
   Total current liabilities                                            74,913           (51,660)             --
                                                                                                                              23,253

Long-term debt                                                           2,690            54,114              --              56,804
Other long-term obligations                                              1,170              --                --               1,170
Liabilities subject to compromise                                       87,417           (87,417)             --                --
Redeemable preferred stock 2,655                                        (2,655)             --                --
Stockholders' equity (deficit)                                         (18,088)           88,937           (22,076)           48,773
                                                                     ---------         ---------         ---------         ---------
   Total liabilities and stockholders' equity                        $ 150,757         $   1,319         $ (22,076)        $ 130,000
                                                                     =========         =========         =========         =========
</TABLE>

     (A)      To record the  transactions  consummated  pursuant  to the Plan of
              Reorganization   and   eliminate   the   deficit  in   accumulated
              stockholders' deficit.

     (B)      To record the  adjustments to state assets and liabilities at fair
              value  and  adjust  for  the   difference   between   the  assumed
              reorganization  value  and  the  fair  value  of the  identifiable
              tangible and  intangible  assets by reducing the value assigned to
              property, plant and equipment.
<PAGE>
3.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Reorganization  Value  and  "Fresh  Start"  Accounting  - The  Company's
financial  statements  for  Fiscal  Year  1997 and  Fiscal  Year  1996 have been
prepared in accordance with SOP 90-7.

        Principles of  Consolidation  - The  consolidated  financial  statements
include  the  accounts of  Forstmann  Apparel,  Inc.  ("FAI").  All  significant
intercompany accounts and transactions have been eliminated.

        Fiscal Year - The Company has adopted a fiscal year ending on the Sunday
nearest to October 31.

        As a result of the  consummation of the Plan of  Reorganization  and the
application of "fresh start" accounting in accordance with SOP 90-7, the Company
was  required  to report  its  financial  results  for  Fiscal  Year 1997 in two
separate  periods.  The following table  describes the periods  presented in the
financial statements and the notes thereto:

  Period                                    Referred to as
  -----------------------------------       ------------------------------------
  Results for the Reorganized Company       "Fiscal Year 1998"
     Fifty-Two Weeks Ended
     November 1, 1998

  Results of the  Reorganized  Company      "Reorganized  Company  1997  103-Day
     From July 23, 1997 to                   Period"
     November 2, 1997

  Results for the  Reorganized  Company     "Reorganized  Company  1997  Fourth
     From August 4, 1997 to                  Quarter"
     November 2, 1997

  Results for the  Predecessor  Company     "Predecessor  Company  1997 261-Day
     From November 4, 1996 to                Period"
     July 22, 1997

  Combined Reorganized Company              "Fiscal Year 1997"
     1997 103-Day Period and
     Predecessor Company 1997
     261-Day Period (Results for the
     Fifty-Two Weeks Ended
     November 2, 1997)

  Results for the Predecessor Company       "Fiscal Year 1996"
     Fifty-Three Weeks Ended
     November 3, 1996

        Due to the effects of the consummation of the Plan of Reorganization and
application of "fresh start" accounting, results for Fiscal Year 1998 and Fiscal
Year 1997 are not necessarily  fully  comparable to each other or to the results
for Fiscal Year 1996. Due to the seasonal nature of the Company's business,  the
results  of  each  of the  Reorganized  Company  1997  103-Day  Period  and  the
Predecessor  Company  1997  261-Day  Period  can not be  annualized  so as to be
indicative of the results for a full fiscal year.

        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.

        Revenue  Recognition - Generally,  sales are  recognized  when goods are
sold and then  shipped to the  Company's  customers.  A portion of such sales is
made on extended  terms of up to 240 days. At November 1, 1998,  $1.4 million of
sales made on extended terms were included in accounts receivable under terms of
specific sales.

        When  customers,  under the terms of specific  orders,  request that the
Company  manufacture,  invoice  and ship  goods on a bill  and hold  basis,  the
Company  recognizes  revenue based on the completion  date required in the order
and actual completion of the manufacturing  process.  At the time such goods are
ready for delivery,  title and risk of ownership pass to the customer.  Accounts
receivable  included bill and hold  receivables  of $14.0 million at November 1,
1998 and $20.2 million at November 2, 1997.

        One of the Company's  customers accounted for approximately 20%, 17% and
13% of  the  Company's  revenues  during  Fiscal  Years  1998,  1997  and  1996,
respectively.  No other customer of the Company accounted for 10% or more of the
Company's revenues in these Fiscal Years 1998, 1997 and 1996.

        Allowance for Uncollectible  Accounts - Based on a review and assessment
of the  collectibility  of aged balances  included in accounts  receivable,  the
Company   establishes   a  specific   allowance  for   uncollectible   accounts.
Additionally,  the Company  establishes a general  allowance  for  uncollectible
accounts based,  in part, on historical  trends and the state of the economy and
its effect on the Company's customers.  The Company also establishes  allowances
for estimated  sales returns.  The Company  grants credit to certain  customers,
most of which are companies in apparel  industries.  One  individual  customer's
accounts  receivable  balance  represented  approximately  24% of gross accounts
receivable  at  November  1, 1998 and no other  individual  customer's  accounts
receivable balance exceeded 7% of gross accounts receivable at November 1, 1998.

        Inventories  - Inventories  are stated at the lower of cost,  determined
principally by the last-in,  first-out  ("LIFO") method, or market  (principally
net realizable value or replacement cost).

        Property,  Plant  and  Equipment  -  Property,  plant and  equipment  is
recorded at adjusted cost, net of accumulated depreciation and amortization.  In
conjunction with adoption of "fresh start" accounting,  all property,  plant and
equipment  was  adjusted  to  reflect  reorganization  value.  Depreciation  and
amortization  is computed  using the  straight-line  method  over the  estimated
useful lives of the assets or the lease terms of certain  capital leased assets.
For  income  tax  purposes,   accelerated  methods  of  depreciation  are  used.
Maintenance and repairs are expensed when incurred,  and renewals or betterments
are capitalized. Property, plant and equipment is evaluated on a quarterly basis
and written  down to net  realizable  value when  management  believes  that the
undepreciated cost can not be recovered through future cash flow.

        Deferred  Financing  Costs - Costs  incurred  to  obtain  financing  are
included as other assets and amortized using the  straight-line  method over the
expected maturities of the related debt.

        Computer  Information  Systems  - Costs  directly  associated  with  the
initial purchase, development and implementation of computer information systems
are  deferred  and  included  as other  assets.  Such costs are  amortized  on a
straight-line  basis over the expected  useful life of the systems,  principally
three  years.  Ongoing  maintenance  costs of computer  information  systems are
expensed.

        Environmental   Remediation   Liabilities   -  The  Company   recognizes
environmental  remediation  liabilities  when  a loss  is  probable  and  can be
reasonably estimated. Estimates are developed in consultation with environmental
consultants and legal counsel and are periodically revised based on expenditures
against  established  reserves and the  availability of additional  information.
Such  liabilities  are included on the balance sheet as accrued  liabilities and
include estimates for legal and other consultation costs.

        Income (Loss) Per Share - Statements of Financial  Accounting  Standards
No. 128,  "Earnings  Per Share,"  became  effective  during Fiscal Year 1998 and
requires two  presentations of earnings per share - "basic" and "diluted." Basic
earnings  per  share  is  computed  by  dividing  income   available  to  common
stockholders  (the  numerator) by the  weighted-average  number of common shares
(the denominator) for the period.  The computation of diluted earnings per share
is similar to basic earnings per share, except that the denominator is increased
to  include  the  number  of  additional  common  shares  that  would  have been
outstanding if the potentially dilutive common shares had been issued.

        The numerator in calculating  both basic and diluted  earnings per share
for each period is the reported net income.  The denominator used in calculating
both basic and diluted is the weighted  average  common  shares  outstanding  as
there were no potentially dilutive shares for any period.

         Recent  Accounting   Pronouncements  -  In  June  1997,  the  Financial
Accounting  Standards  Board ("FASB") issued  Statement of Financial  Accounting
Standards ("SFAS") 130, "Reporting  Comprehensive  Income." SFAS 130 is designed
to improve the reporting of changes in equity from period to period. The Company
will adopt SFAS 130 in the first  quarter of fiscal year 1999.  Management  does
not expect SFAS 130 to have a significant impact on disclosures in the Company's
financial statements.

         In June 1997, the FASB issued SFAS 131,  "Employers'  Disclosures About
Segments of an Enterprise and Related  Information." The Company will adopt SFAS
131 during the Company's fiscal year 1999 financial  statements.  This statement
establishes standards for the way enterprises report information about operating
segments in annual  financial  statements and requires that  enterprises  report
selected  information  about operating  segments in interim  financial  reports.
Management has not  determined  what effect,  if any,  adoption of SFAS 131 will
have on the disclosures in the Company's financial statements.

         In February  1998,  the FASB issued SFAS 132,  "Employer's  Disclosures
about  Pensions  and Other  Postretirement  Benefits."  SFAS 132 is  designed to
revise  disclosures  about pensions and other  postretirement  benefit plans. It
does not change the  measurement or recognition of these plans.  It standardizes
the disclosure  requirements for pensions and other  postretirement  benefits to
the extent practicable. The Company will adopt SFAS 132 during fiscal year 1999.

         In June 1998,  the FASB issued  SFAS 133,  "Accounting  for  Derivative
Financial  Instruments and Hedging  Activities." SFAS 133 establishes  standards
for derivative  instruments  and hedging  activities and requires that an entity
recognize all  derivatives  as either assets or  liabilities in the statement of
financial  position and measure  those  instruments  at fair value.  SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company has not determined  what effect,  if any,  adoption of SFAS 133 will
have on the Company's financial statements.

 4.      FORMATION OF FORSTMANN APPAREL, INC.

         On May 11, 1998,  the Company  announced  that it had agreed to acquire
the business and  substantially  all of the assets of Arenzano Trading Co., Inc.
("Arenzano").  Arenzano had instituted voluntary bankruptcy proceedings in April
1998.  The  Company's  purchase  was made  pursuant to an order signed by United
States  Bankruptcy  Judge  Burton R.  Lifland,  dated May 8, 1998,  in the cases
entitled, In re Arenzano Trading Company,  Inc. and In re B&B Corporation,  Case
Nos. 98 B 42508 and 98 B 42520 (BRL).  The  transaction was completed on May 13,
1998 at a purchase price of $2.0 million.  Additionally, the Company assumed the
obligation to pay future minimum royalties related to a licensing agreement. The
purpose  of the  acquisition  was to permit the  Company  to expand its  fabrics
business  into the apparel  business.  The Company is operating  the new apparel
venture as a wholly-owned subsidiary under the name Forstmann Apparel, Inc.
Arenzano had sales of  approximately  $17 million  during its most recent fiscal
year.

         The  acquisition of Arenzano by the Company was accounted for using the
purchase  method  of  accounting.  Accordingly,  the  accompanying  consolidated
statements of operations do not include any revenues or expenses  related to the
acquisition prior to closing.  The purchase price paid for Arenzano was assigned
$0.9 million to tangible assets and the remainder to intangible assets. Based on
operating projections for FAI, the Company subsequently wrote-off the intangible
assets  of FAI as such  assets  are  not  expected  to be  recovered  by  future
operations and expensed the remaining future minimum royalty obligation assumed.

         The  following  are the  Company's  unaudited pro forma results for the
fiscal  years  ended  November  1,  1998  and  November  2,  1997  assuming  the
acquisitions occurred at the beginning of each fiscal period:
                                              1998                     1997
                                              ----                     ----
                                        (in thousands, except per share amounts)
         Revenues                           $157,039               $215,487
         Loss before extraordinary items     (20,920)               (37,555)
         Net loss                            (20,920)               (13,516)
         Loss per share
            Basic and diluted                 ($4.77)                ($3.08)

         This unaudited pro forma  information has been prepared for comparative
purposes only and is not necessarily indicative of results of operations had the
acquisition  occurred at the beginning of the periods presented nor should it be
used to project the Company's results of operations for any future periods.

5.      INVENTORIES

        Inventories consist of the following at November 1, 1998 and 
November 2, 1997 (in thousands):
                                                   1998                1997
                                                   ----                ----
   Raw materials and supplies................    $10,218            $  8,303
   Work-in-process...........................     19,390              27,459
   Finished products.........................     12,331               8,169
   Less market reserves......................     (3,121)               (721)
                                                 --------            --------
        Total................................     38,818              43,210
   Difference between LIFO carrying
     value and current replacement cost......        -                   -
                                                 -------             -------
   Current replacement cost..................    $38,818             $43,210
                                                 =======             =======

         Market  reserves  are  estimated  by the  Company  based,  in part,  on
inventory age as well as estimated usage.

         The Company  increased  market  reserves by $2.6 million for  inventory
related to the top dye worsted  fabrics  product line which was  discontinued as
part of the 1998 Restructuring (see Note 1 to these Financial Statements).  This
expense was charged to cost of goods sold during  Fiscal Year 1998.  The Company
recognized a $3.0 million  charge to cost of goods sold in the fourth quarter of
Fiscal Year 1998  relating to the write down of inventory on hand as of November
1, 1998 to market value,  generally net realizable  value or replacement  costs.
Inventory  value  declined  as a result of  substantially  lower wool  prices in
effect at the end of Fiscal Year 1998.  The write down was made in  anticipation
of a  proportionate  decline in the Company's  selling prices during Fiscal Year
1999.

         During the Predecessor  Company 1997 261-Day  Period,  the Company sold
certain  yarn  inventory  which had been  previously  identified  as  surplus or
obsolete  for its net  carrying  value  which was $3.0  million  below its gross
inventory value. This transaction resulted in a release of yarn inventory market
reserves  of  $3.0  million  and did  not  give  rise  to any  loss  during  the
Predecessor  Company 1997 261-Day Period.  Additionally,  the Company  increased
market reserves by $0.9 million for inventory related to the converting  fabrics
product line which had been discontinued as part of the product  rationalization
effort undertaken in Fiscal Year 1996. Such reserve was necessary as a result of
selling price markdowns anticipated to sell off the remaining converting fabrics
inventory on hand. This expense was charged to  reorganization  items during the
Predecessor Company 1997 261-Day Period.

         At the Effective Date, the Company  adjusted its inventory  balances to
fair value  resulting in the  elimination  of the LIFO reserve of  approximately
$2.7 million and a write-up of approximately  $3.8 million above the predecessor
Company's FIFO cost.  Such write-up was credited  against  reorganization  items
during the Predecessor Company 1997 261-Day Period and will be allocated to cost
of  goods  sold  as the  inventory  on  hand  at the  Effective  Date  is  sold.
Approximately  $0.6  million and $0.7  million was charged to cost of goods sold
during  the  Reorganized  Company  Fiscal  Year  1998 and 1997  Fourth  Quarter,
respectively.

         The reduction of inventory  quantities has resulted in the  liquidation
of LIFO inventory  layers carried at lower costs  prevailing in prior years. The
effect of this  liquidation  increased  gross profit by $0.5 million  during the
Predecessor Company 1997 261-Day Period and $2.2 million in Fiscal Year 1996.

6.      PROPERTY, PLANT AND EQUIPMENT

        Property, plant and equipment consist of the following at 
November 1, 1998 and November 2, 1997 (in thousands):

                                                 1998                1997
                                                 ----                ----
  Land....................................    $   172              $  243
  Buildings...............................      5,511               4,062
  Machinery and equipment.................     17,407              21,003
  Construction in progress................      1,430                 826
  Idle assets.............................      5,960                 -
                                              -------              ------
     Total................................     30,480              26,134
  Less accumulated depreciation and
    amortization..........................     (8,245)             (1,355)
                                              -------             -------
          Net.............................    $22,235             $24,779
                                              =======             =======

        Capital lease assets  (principally  machinery and equipment) at November
1,  1998  and  November  2,  1997  were  $847,000  and  $808,000,  respectively.
Accumulated  amortization  related to such  capital  lease assets at November 1,
1998 and November 2, 1997 was $96,000 and $23,000, respectively.

        Depreciation and amortization  expense of property,  plant and equipment
was  $4,377,000  for Fiscal  Year  1998,  $9,792,000  for  Fiscal  Year 1997 and
$11,417,000 for Fiscal Year 1996.

        In connection with the 1998 Restructuring and 1999 Realignment (see Note
1 to these Financial  Statements),  the Company has evaluated its carrying value
of property,  plant and  equipment  and  determined  that the carrying  value of
certain property will not be fully recovered by future operations.  Accordingly,
the Company has written down the carrying value of property, plant and equipment
by $1.4 million during Fiscal Year 1998 based on appraised values. This resulted
in a $1.4  million  charge to  restructuring  items  during  Fiscal  Year  1998.
Additionally,  the Company had idle assets which are stated at fair value, based
on appraised values of  approximately  $6.0 million as of November 1, 1998 which
will not be depreciated in future periods.

        In connection with entering into the lease surrender agreement (see Note
13 to these Financial  Statements),  the Company wrote-down property,  plant and
equipment by approximately  $1.1 million  associated with the future abandonment
of leasehold improvements and furniture and fixtures.

        During  Fiscal Year 1996,  the Company  announced its intention to close
its Tifton facility.  The closing  commenced in late July 1996 and was completed
in November 1996. The Company  incurred $0.4 million during Fiscal Year 1996 and
$0.1 million in expenses during the  Predecessor  Company 1997 261-Day Period in
connection  with the  relocation of certain of its wool  blending  machinery and
equipment from the Tifton facility to the Dublin  facility.  These expenses were
reflected as reorganization items in the period incurred.

        In November 1996,  the Company  entered into a Contract of Sale with the
Tift County  Development  Authority (the "TCDA"),  providing for the sale of the
Tifton  facility for $1.25 million.  On July 18, 1997, the sale was  consummated
and the net  proceeds of $1.25  million were applied to a portion of the accrued
but unpaid  interest due to the holders of the Company's  Senior  Secured Notes.
The selling  price for the Tifton  facility was $1.1 million  below the net book
value for the facility and such loss was accrued during Fiscal Year 1996.

        In accordance with "fresh start" accounting,  the difference between the
assumed reorganization value and the fair value of the identifiable tangible and
intangible  assets  resulted in a write-down in the value  assigned to property,
plant and  equipment  of $28.6  million.  During the  Predecessor  Company  1997
261-Day  Period,  the Company  adjusted  certain  impaired  property,  plant and
equipment to its net realizable  value. This resulted in a $0.4 million increase
in cost of goods  sold and a $0.1  million  increase  in  selling,  general  and
administrative expenses during the Predecessor Company 1997 261-Day Period.

        As of November 3, 1996,  $4.2  million was included in  construction  in
progress relating to certain unerected equipment located at the Tifton facility.
Such equipment was not sold in connection with the sale of the Tifton  facility.
During the Predecessor  Company 1997 261-Day Period,  the Company negotiated the
return  of such  equipment  to its  manufacturer  or  sold  such  equipment  and
recognized a loss of $2.9 million.  Such loss is reflected as an  reorganization
item in the Predecessor Company 1997 261-Day Period.

7.      OTHER ASSETS

        Other assets consist of the following at November 1, 1998 and 
November 2, 1997 (in thousands):
                                                 1998             1997
                                                 ----             ----
   Computer information systems,
     net of accumulated amortization of
     $93 and $0............................    $  909             $   94

   Deferred financing costs, net of
     accumulated amortization of
     $744 and $164.........................     1,086              1,520

   Other, net..............................        10                 56
                                               ------             ------
   Total...................................    $2,005             $1,670
                                               ======             ======

        During  the  Predecessor   Company  1997  261-Day  Period,  the  Company
evaluated its computer  information systems that were being internally developed
and concluded that the majority of such previously capitalized costs will not be
recovered  through future operations and,  accordingly,  wrote off approximately
$1.2 million of such deferred software development costs.

        Also,  during the Predecessor  Company 1997 261-Day Period,  the Company
wrote off approximately $0.2 million of deferred financing costs associated with
debt agreements that were fully paid in connection with the  consummation of the
Plan of Reorganization.

        Based upon analysis of planned barter credit use, the Company wrote down
its barter credits by $0.2 million during the  Predecessor  Company 1997 261-Day
Period.

8.      ACCRUED LIABILITIES

        Accrued liabilities consist of the following at November 1, 1998 
and November 2, 1997 (in thousands):
                                                        1998            1997
                                                        ----            ----
   Salaries and wages
      (including related payroll taxes)...........    $  606         $   978
   Incentive compensation.........................       290           2,082
   Vacation.......................................     1,243           1,729
   Interest on long-term debt.....................       143              62
   Medical insurance claims.......................     1,416           1,327
   Professional fees..............................       105             355
   Environmental remediation......................       292             361
   Deferred rental and other lease obligations....       -             2,186
   Loss on open wool purchases commitments........     1,537             -
   Restructuring items............................     1,796             -
   Other..........................................     1,810           2,291
                                                      ------         -------
       Total......................................    $9,238         $11,371
                                                      ======         =======

         The Company  reduced its deferred rent liability by $2.1 million during
Fiscal Year 1998 in connection with entering into the lease surrender  agreement
as more fully described in Note 13 to these Financial Statements.  During Fiscal
Year 1998,  the Company also increased  liabilities by $1.6 million  relating to
operating  leases  (see Note 15 to these  Financial  Statements)  and  increased
liabilities by $1.5 million relating to loss on open wool purchase commitments.

9.      LONG-TERM DEBT AND OTHER FINANCING AGREEMENTS

        Long-term debt consists of the following at November 1, 1998 and 
November 2, 1997 (in thousands):
                                               1998                 1997
                                               ----                 ----
   Revolving Loan Facility                   $27,908             $13,389
   Term Loan Facility                         20,343              30,327
   Deferred Interest Rate Notes                  -                 1,571
   Other note                                    374                 603
   Capital lease obligations                   1,890               2,414
   License agreement (see Note 13)               669                 -
                                             -------             -------
         Total debt                           51,184              48,304
   Current portion of long-term debt          (7,619)             (5,756)
                                             -------             -------
         Total long-term debt                $43,565             $42,548
                                             =======             =======

         Revolving Loan and Term Loan Facilities - On July 23, 1997, the Company
entered  into the Loan and  Security  Agreement  with a syndicate  of  financial
institutions  led by BABC.  The  Loan  and  Security  Agreement  provided  for a
revolving line of credit  (including a $10.0 million letter of credit facility),
subject to a borrowing base formula,  of up to $85 million (the  "Revolving Loan
Facility")  and term  loans of  approximately  $31.5  million  (the  "Term  Loan
Facility").

         Borrowings on July 23, 1997 of $28.0  million under the Revolving  Loan
Facility,  plus the proceeds from the Term Loan Facility, were used to repay all
borrowings  outstanding under the Company's GE Capital DIP Facility (hereinafter
defined) and CIT Equipment Facility (hereinafter  defined),  repay the principal
and a portion of the accrued and unpaid  interest  due under the Senior  Secured
Notes  (hereinafter  defined) and fund other amounts due pursuant to the Plan of
Reorganization and the Loan and Security Agreement.

         The Revolving  Loan Facility and the Term Loan Facility  mature on July
22, 2000. If the Company  elects to terminate the Revolving  Loan Facility prior
to  April  23,  2000,  the  Company  must  pay a  termination  fee.  The  fee as
subsequently  amended will be equal to one half of one percent (.50%) of the sum
of the  Maximum  Revolver  ($70  million)  plus the then  outstanding  principal
balance of the Term Loan if the Loan and Security  Agreement is terminated prior
to April 23,  2000.  The Term Loan  Facility  can be prepaid,  at the  Company's
election, without a termination fee at any time prior to maturity. The Company's
obligations  under  the Loan and  Security  Agreement  are  secured  by liens on
substantially all of the Company's assets.

         Outstanding  borrowings (including outstanding letters of credit) under
the  Revolving  Loan  Facility  cannot  exceed  the sum of (1)  85% of  eligible
accounts  receivable  (including  eligible bill and hold receivables up to $17.6
million),  plus (2) the  lesser of $30.0  million or 65% of  eligible  inventory
excluding  work-in-process  inventory which is 50% eligible,  less (3) a reserve
that is  initially  $6.5  million and declines by $47,500 each month as payments
under the Term Loan Facility are made. Further,  the Company's borrowing base is
subject to other reserves which may be established from time to time by BABC. At
November 1, 1998,  the Company's  loan  availability  as defined in the Loan and
Security Agreement, in excess of outstanding advances and letters of credit, was
approximately $5.8 million.

         Borrowings under the Revolving Loan Facility and the Term Loan Facility
bear interest,  at the Company's option, at a floating rate (which is based on a
Bank of America  reference  rate  ("Prime"))  or a fixed rate (which is based on
LIBOR), payable monthly. Under the Revolving Loan Facility, the floating rate is
0.25% per annum above  Prime and the fixed rate is 2.50% per annum above  LIBOR.
Under the Term Loan  Facility,  the floating rate is 0.75% per annum above Prime
and the fixed rate is 3.00% per annum above LIBOR.

         At  November  1, 1998,  there was one fixed rate loan of  approximately
$18.0 million outstanding under the Revolving Loan Facility, which bore interest
at 8.125% per annum,  through November 5, 1998. There was one fixed rate loan of
approximately $19.0 million outstanding under the Term Loan Facility, which bore
interest at 8.50% per annum,  through November 30, 1998. Further, at November 1,
1998,  approximately  $1.3 million of the Term Loan  Facility bore floating rate
interest at 9.0% per annum, and approximately $9.9 million of the Revolving Loan
Facility bore floating rate interest at 8.5% per annum.

         The  Term  Loan  Facility  required  monthly   principal   payments  of
approximately  $374,000  commencing  August 31, 1997 through  February 28, 1999.
Further,  the Company was required to pay 50% of excess cash flow (as defined in
the Loan and Security Agreement) for each fiscal year as long as the outstanding
principal  balance under the Term Loan Facility was greater than $23.3  million.
Such excess cash flow  payments are due on April 30 of each year  following  the
fiscal year for which an "excess cash flow" payment is due. Such payments are to
be applied against the unamortized  principal  portion of the Term Loan Facility
in the  inverse  order of  maturity.  Excess  Cash Flow for Fiscal Year 1997 was
approximately  $2.7 million,  and on April 27, 1998, the Company repaid the Term
Loan  Facility  by  approximately  $1.4  million  through  borrowings  under the
Revolving Loan Facility. The Company anticipates no excess cash flow payment for
Fiscal Year 1998 because the outstanding  principal  balance under the Term Loan
Facility at November 1, 1998 was $20.3 million.

         In connection with entering into the Loan and Security  Agreement,  the
Company paid BABC  approximately  $728,000 as an underwriting  fee and agreed to
pay the  financial  institutions  party to the Loan and  Security  Agreement  an
unused  line fee of  0.50%  per  annum  on the  average  unused  portion  of the
Revolving Loan Facility.  The Company paid approximately  $582,000 as a facility
fee to  participants  in the  syndicate to the Loan and Security  Agreement.  In
addition,  the Company  pays BABC an agency fee of $125,000  per annum,  payable
monthly  commencing  August 1, 1997,  and pays certain fees in  connection  with
letters of credit.  Further,  the Company pays BABC a loan administration fee of
0.25% per annum on the principal  amount  outstanding  under the Revolving  Loan
Facility and Term Loan Facility.

         The Loan and Security Agreement contains certain restrictive covenants,
including limitations on the incurrence of indebtedness, the sale of assets, the
incurrence of liens, the making of certain  restricted  payments,  the making of
specified  investments,  the payment of cash dividends and the making of certain
fundamental   corporate  changes  and  amendments  to  the  Company's  corporate
organizational and governance instruments.  In addition, the Company is required
to  satisfy,   among  other  things,  certain  financial  performance  criteria,
including  minimum interest and fixed charge coverage  ratios,  minimum adjusted
tangible net worth  requirements  and maximum  capital  expenditure and software
development costs.

         The  Company  and its  lenders  as of March 24,  1998  entered  into an
amendment to the Loan and Security Agreement modifying,  among other things, the
definition of earnings before interest, income taxes, depreciation, amortization
and  reorganization  items  ("EBITDAR")  and Adjusted  Tangible  Net Worth,  and
modifying   certain  loan  covenants  so  as  to  increase   permitted   capital
expenditures   and  lower  the  minimum  fixed  charge  coverage   ratio.   Such
modifications  were made in  anticipation  of the effects of the Company's  1998
Restructuring  as more fully described in Note 1 to these Financial  Statements.
In accordance  with the amendment,  the Company prepaid $3.0 million of the Term
Loan Facility through  borrowings under the Revolving Loan Facility on April 29,
1998.

         The Company and its lenders as of September  14, 1998  further  amended
and restated the Loan and Security  Agreement to incorporate FAI into the Credit
Facility,  fund the on-going  working  capital needs of FAI, and modify  certain
existing  financial  covenants  to  incorporate  FAI and reflect  the  Company's
financial  results to date as well as  expected  results  for all of Fiscal Year
1998 and fiscal year 1999.  Additionally,  the letter of credit  facility within
the Revolving  Loan Facility was increased  from $10.0 million to $15.0 million.
In accordance  with the amendment,  the Company prepaid $1.5 million of the Term
Loan Facility  through  borrowings under the Revolving Loan Facility and fees of
$0.1 million on October 28, 1998.

         Subsequently,  as of  February  8,  1999 the  Company  and its  lenders
amended the Loan and  Security  Agreement,  waived  certain  financial  covenant
defaults arising from the Company's  financial results for Fiscal Year 1998 and,
among other things, set new financial  covenants for Fiscal Year 1999.  However,
there can be no  assurance  that the Company will be able to achieve the amended
financial  covenants  during Fiscal Year 1999. In connection with the amendment,
the Company  agreed to prepay  $5.6  million of the Term Loan  Facility  through
borrowings under the Revolving Loan Facility.  Additionally,  the Company agreed
to increase its monthly Term Loan  Facility  principal  payment from $374,000 to
$450,000  beginning  March 1, 1999.  Further  based on the  Company's  declining
working  capital  needs in light of  declining  revenues,  the  Company  and its
lenders agreed to reduce the Revolving Loan Facility commitment from $85 million
to $70 million.  This reduction is expected to reduce the Company's  unused line
fee by  approximately  $75,000 per annum.  The Company further agreed to repay a
portion  of its Term  Loan  Facility  in the  future  if  subsequently  obtained
appraised  orderly  liquidation  values for the  Company's  property,  plant and
equipment  securing the Term Loan  Facility  fall below 83.1% in relation to the
outstanding  amount  owed  under  the Term Loan  Facility.  In  connection  with
entering  into the  amendment  to the Loan and  Security  Agreement  the Company
agreed to pay BABC for the benefit of the lenders  $200,000  which is payable in
four equal monthly installments commencing March 31, 1999. Additionally, BABC as
Agent, retains the right to withhold up to approximately $1,694,000 in aggregate
availability  which  arose  from the  expiration  of  certain  letters of credit
previously  outstanding as a security  deposit for the Company's former New York
headquarters lease.

         Deferred  Interest  Rate Notes and Senior  Secured  Notes - On April 5,
1993,  the Company  issued an  aggregate  of $20  million of its Senior  Secured
Floating  Rate Notes and on March 30, 1994,  the Company  issued an aggregate of
$10 million of its Senior  Secured  Floating  Rate Notes,  all of which were due
October 30, 1997  (collectively the "Senior Secured Notes").  The Senior Secured
Notes were  issued  pursuant  to an  indenture  dated  April 5, 1993,  which was
amended and  restated as of March 30, 1994  between the Company and Shawmut Bank
Connecticut,  National  Association,  as  trustee  (the  "Senior  Secured  Notes
Indenture").

         On the Effective Date, the outstanding  principal  amount of the Senior
Secured Notes was repaid in full and the Company  issued  subordinated  floating
rate notes (the "Deferred Interest Rate Notes") in respect of accrued but unpaid
interest  (approximately  $1.6  million)  due the holders of the Senior  Secured
Notes. In connection with the issuance of the Deferred  Interest Rate Notes, the
Company paid a closing fee of approximately $31,000. Further, in accordance with
the Plan of Reorganization,  the Company paid $157,000 in trustee fees and legal
fees and expenses.  The Deferred  Interest Rate Notes were due July 23, 2001 and
bore interest at 4.5% per annum above LIBOR, payable monthly. Subject to certain
exceptions, the Deferred Interest Rate Notes restricted, among other things, the
incurrence of  indebtedness  and liens. On December 22, 1997, the Company repaid
the  Deferred  Interest  Rate Notes and accrued  interest  due  thereon  through
borrowings under the Revolving Loan Facility.

         Other Note and  Capital  Lease  Obligations  - Prior to the  Bankruptcy
Filing, the Company was a party to certain capital lease financing  arrangements
which provided  financing for the acquisition of various  textile  machinery and
equipment.  In connection with the  consummation of the Plan of  Reorganization,
the Company issued a secured note in satisfaction  of its obligations  under one
of the capital leases and  restructured the remaining  capital leases,  with the
exception  of the ABB  Credit,  Inc.  equipment  lease as  described  below,  in
settlement of the lessors'  secured claims.  The principal amount due under such
note and capital  lease  obligations  are  included in the schedule of aggregate
long-term debt maturities below and in Note 13 to these Financial Statements.

         ABB Credit,  Inc.  ("ABB") and the Company are parties to an  equipment
lease,  dated  December  3, 1993 (the  "Lease"),  pursuant  to which ABB  leases
certain  equipment  to the  Company.  The Lease is a  financing  lease,  and ABB
perfected its security  interest in the  equipment.  As of November 1, 1998, the
aggregate  amount that was due to ABB under the Lease was $664,164.  Based on an
independent  appraisal performed at the Company's request,  the Company believes
that the value of the equipment is substantially less than the amount due to ABB
under the Lease and that the  secured  portion of ABB's  claim in the  Company's
bankruptcy should be reduced to the appraised value of the equipment pursuant to
Section   506(a)  of  the   Bankruptcy   Code.   Since  the  Company's  Plan  of
Reorganization  was  confirmed,  the Company and ABB have engaged in  settlement
negotiations.  After numerous  discussions,  the Company and ABB have reached an
agreement to settle ABB's claim subject to the approval of the Bankruptcy Court.
The  settlement  provides that ABB shall have a secured claim of $350,000 and an
unsecured claim of $314,164. In respect of ABB's secured claim, the Company will
pay ABB $60,000 in cash and issue a note to ABB in the amount of $290,000, which
will  bear  interest  at the rate of 9% per  annum  and will be paid in 60 equal
monthly installments. In respect of its unsecured claim, ABB shall receive a pro
rata  distribution of the Company's  common stock based on the formula set forth
in the Company's Plan of Reorganization.

         GE Capital DIP Facility - In connection with the Bankruptcy Filing, the
Company obtained  debtor-in-possession  ("DIP")  financing from General Electric
Capital Corporation ("GE Capital") under a revolving facility which was approved
by the Bankruptcy  Court (the "DIP Facility").  The DIP Facility  provided up to
$85 million in financing  (including a $10.0 million letter of credit  facility)
under  a  borrowing  base  formula.   In  connection  with  its  emergence  from
bankruptcy,  the Company repaid all amounts outstanding under the GE Capital DIP
Facility and paid approximately $103,000 in unpaid amendment fees and legal fees
and expenses.

         CIT Equipment Facility - The Company was a party to a loan and security
agreement (the "CIT Equipment Facility") with the CIT Group/Equipment Financing,
Inc.  ("CIT") which provided  financing for the acquisition of, and to refinance
borrowings incurred to acquire,  various textile machinery and equipment. At the
Bankruptcy  Filing  date the  Company  owed CIT  approximately  $7.7  million in
principal and accrued interest. On the Effective Date, the outstanding principal
and accrued but unpaid interest due under the CIT Equipment  Facility was repaid
in full.  Further,  in accordance with the Plan of  Reorganization,  the Company
paid approximately $36,000 in legal fees and expenses.

         Subordinated Notes - On April 20, 1989, through an underwritten  public
offering, the Company sold $100 million of 14-3/4% Senior Subordinated Notes due
April 15, 1999 (the  "Subordinated  Notes").  In fiscal  year 1992,  the Company
acquired, and did not retire or cancel, $46,240,100 aggregate face amount of the
Subordinated  Notes. The Company used $2,875,000 of such  Subordinated  Notes to
satisfy a January 31, 1993  mandatory  redemption  required in the  Subordinated
Notes Indenture.

         In accordance with the Plan of  Reorganization,  the Subordinated Notes
were settled  through the  issuance of  3,013,744  shares of common stock of the
reorganized Company. Further, in accordance with the Plan of Reorganization, the
Company paid $80,000 in trustee fees associated with the Subordinated Notes.

         Aggregate  Maturities - Aggregate  long-term debt maturities  excluding
capital  lease  obligations  (see Note 13 to the Financial  Statements),  are as
follows (in thousands):

         Fiscal Year                                    Amount
         -----------                                   -------
            1999 ..................................... $ 6,361
            2000 .....................................  42,904
            2001 .....................................      29
                                                       -------
         Total   ..................................... $49,294
                                                       =======

10.      INCOME TAXES

         The provision for income taxes is as follows (in thousands):

                                         Reorganized    Predecessor
                                        Company 1997   Company 1997
                                          103-Day        261-Day
                              1998         Period        Period          1996
                              ----         ------        ------          ----
         Current             $ -            $ -         $   -            $ -
         Deferred              -             461            -              -
                             -----          ----        ------           -----
         Total               $ -            $461        $   -            $ -
                             =====          ====        ======           =====

         A reconciliation between federal income taxes at the statutory rate and
the Company's income tax provision is as follows:

                                           Reorganized  Predecessor
                                           Company 1997 Company 1997
                                             103-Day      261-Day
                                 1998         Period      Period          1996
                                 ----         ------      ------          ----
Federal statutory tax rate     (35.00)%      35.00%      (35.00)%       (35.00)%
State income taxes, net
   of federal benefit           (4.50)        4.50        (4.50)         (4.50)
Valuation allowance             39.50          --         29.09          32.94
Non-deductible expenses          --          14.93        10.41           6.56
                                -----        -----        -----          -----
Income tax provision             --   %      54.43%         --  %          --  %
                                =====        =====        =====          =====

         Deferred  income  taxes  reflect the net tax  effects of (a)  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting  purposes  and the  amounts  used for  income  tax  purposes,  and (b)
operating  loss and tax credit  carryforwards.  The tax  effects of  significant
items comprising the Company's net deferred tax accounts at November 1, 1998 and
November 2, 1997 are as follows (in thousands):

                                                         1998              1997
                                                         ----              ----
   Deferred tax liabilities:

   Inventories....................................   $    -             $   968
                                                     --------           -------

   Deferred tax assets:

   Operating loss carryforwards...................    (11,139)           (7,773)
   Alternative minimum tax carryforwards..........       (923)             (923)
   Differences between book and tax basis of 
      property, plant and equipment...............     (2,855)           (2,797)
   Difference between book and tax basis of
      intangible assets...........................       (706)              -
   Accrued liabilities............................     (4,235)           (2,954)
   Barter credits reserve.........................                         (963)
   Allowance for uncollectible accounts...........     (1,419)           (2,068)
   Inventories....................................     (1,369)               -
   Other  ........................................       (111)              (30)
                                                     --------           -------
      Total.......................................    (22,757)          (17,508)

   Valuation allowance............................     22,757            16,540
                                                     --------           -------
   Net deferred tax accounts......................   $    -             $   -
                                                     ========           =======

         The  valuation   allowance  has  been  provided  due  to  uncertainties
regarding the realization of net deferred tax assets, and increased $6.2 million
during  Fiscal Year 1998  primarily  due to the increase in the  operating  loss
carryforwards.  At November 1, 1998,  the Company had  cumulative  net operating
loss  carryforwards  for  federal  income tax  purposes of  approximately  $31.8
million. For federal income tax purposes, net operating loss carryforwards begin
to  expire in the year  2010.  Under the Plan of  Reorganization,  certain  debt
instruments  were canceled in exchanged for shares in the reorganized  Company's
common stock as described in Note 2 to the  Financial  Statements.  As a result,
the Company  recognized a gain on extinguishment of debt of approximately  $24.1
million  in the  Predecessor  Company  1997  261-Day  Period.  The  Company  had
sufficient net operating loss  carryforwards  to offset this gain and therefore,
no income tax expense was recorded.

         Distribution  of the new common  stock of the Company to the  Company's
unsecured  creditors  pursuant to the Plan of Reorganization is believed to have
resulted  in an  ownership  change as  defined in  Section  382 of the  Internal
Revenue Code. This ownership change limits the Company's  ability to utilize its
net operating  loss  carryforwards.  Such  ownership  change  further limits the
Company's ability to utilize certain of its other carryforward tax attributes.

         Certain future events may result in such benefits being utilized in the
Company's  future  income  tax  returns,  which  the  Company  will  record as a
reduction in the valuation  allowance and, in accordance  with the principles of
"fresh start" accounting, a credit to additional paid-in capital.

         During Fiscal Year 1995,  the Company fully  utilized its net operating
loss  carrybacks as permitted by the Internal  Revenue Code. For the Predecessor
Company's  1997 261-Day  Period and Fiscal Year 1996,  no income tax benefit has
been recognized from the realization of net operating losses. In accordance with
SOP 90-7,  an income tax provision  not payable in cash was  recognized  for the
Reorganized  Company  1997  103-Day  Period at an  effective  income tax rate of
54.43%.  Such provision was credited against  additional  paid-in capital as net
operating losses  generated  during the Predecessor  Company 1997 261-Day Period
can be used to offset  net  taxable  income  generated  during  the  Reorganized
Company's 1997 103-Day Period.

11.      SHAREHOLDERS' EQUITY AND STOCK OPTION PLANS

         Shareholders' Equity - The Company had 4,387,819 shares of common stock
outstanding at November 1, 1998 (including 48,127 shares of common stock held by
the  Company as the  Distribution  Agent under the Plan of  Reorganization  in a
Disputed Claims Equity Reserve pending  determination of the entitlement thereto
of holders of certain disputed claims against the Company) having a par value of
$.01 per share.  Authorized  shares were  35,000,000  at  November  1, 1998.  In
accordance with "fresh start" accounting, as more thoroughly described in Note 2
to the Financial  Statements,  the balance of the shareholders'  deficit on July
22,  1997 was  reclassified  to  additional  paid-in  capital.  Accordingly,  at
November 1, 1998 and November 2, 1997,  retained earnings (deficit) is comprised
of the net income (loss) of the Company since its emergence  from  bankruptcy on
July 23, 1997.
         Also on the Effective  Date, the Company issued  warrants to holders of
record as of July 9, 1997 of its old common stock and its old  preferred  stock.
Eligible  stockholders  received  warrants to purchase  an  aggregate  of 87,756
shares of the Company's new common stock at an exercise  price of $23 per share.
The warrants may be exercised at any time prior to the second anniversary of the
Effective Date.

         Registration  Rights Agreement - On the Effective Date, pursuant to the
Plan of Reorganization, the Company entered into a Registration Rights Agreement
(the "Registration  Rights Agreement") with certain holders of its common stock.
The Registration  Rights  Agreement  required the Company to file a registration
statement  covering the shares of common stock held by such holders on or before
March 31,  1998.  The Company has been unable to file a  registration  statement
covering the shares of common stock held by such holders that are a party to the
Registration  Rights  Agreement.  On November 25, 1998, the Registration  Rights
Agreement  was amended to delete the  requirement  that a holder of common stock
covered under the  Registration  Rights  Agreement hold at least 1% of the total
number  of shares of common  stock  outstanding  in order to enjoy  registration
rights with respect to its shares. The Registration Rights Agreement was further
amended to be binding upon and inure to the benefit of the holders of the common
stock  covered under the  Registration  Rights  Agreement  and their  respective
heirs, successors and permitted assigns..

         Rights Plan - On October 9, 1997, the Company  adopted a  shareholders'
rights plan (the "Rights  Plan") whereby  shareholders  of record on October 29,
1997 received one right (the  "Right(s)")  to purchase one share of common stock
at an exercise  price of $60 for each common share held on the record date.  The
Rights will become  exercisable  in the event that any person or group  acquires
25% or more of the Company's common shares,  or announces a tender offer for 25%
or more of the Company's common stock.  However,  the Rights Plan "grandfathers"
positions in the Company's  common stock in existence on October 9, 1997 and the
ownership by a person or group of 25% or more of the Company's  common shares on
such date will not  trigger  the  exercisablility  of the Rights so long as such
person or group  does not  acquire  an  additional  1% or more of the  Company's
common shares.  Should any  "non-grand-fathered"  person or group acquire 25% or
more of the common shares of the Company,  all Rights not held by such person or
group will entitle the holders  thereof to purchase common shares of the Company
at a 50%  discount  from the then current  market  price for such common  stock.
Alternatively, after a person or group crosses the 25% threshold and before such
person or group owns 50% or more of the Company's  common shares,  the Company's
Board of Directors alternatively may issue one common share in exchange for each
Right (other than those held by the  acquiring  person) in lieu of the Rights to
be exercised.  In the event of a merger of the Company, the Rights Plan requires
that  provision be made for the conversion of the Rights into rights to purchase
shares of the acquiring person at a 50% discount.  The Rights,  which have a ten
year term,  may be redeemed for $0.01 per Right by the Company at any time prior
to the time the Rights become exercisable.

         Stock  Option Plans - On September  18, 1992,  the Company  adopted the
Forstmann & Company,  Inc. Common Stock Incentive Plan, as subsequently  amended
(the "Option Plan"), for key employees of the Company.  Through November 3, 1996
the  Company's  shareholders  had  reserved  950,000  shares for issuance by the
Company  under the Option  Plan.  Options  granted  under the Option Plan may be
either  incentive stock options,  which are intended to meet the requirements of
Section 422 of the Internal Revenue Code, or non-qualified stock options.

         Pursuant to the Plan of  Reorganization  options  outstanding under the
Option   Plan  were   terminated.   The   Company,   pursuant  to  the  Plan  of
Reorganization,  adopted the Forstmann & Company,  Inc.  Executive  Stock Option
Plan (the "Executive Option Plan") for key employees and reserved 487,528 shares
of its new common stock for future  issuance  upon the exercise of stock options
granted or to be granted pursuant to the Executive Option Plan. On the Effective
Date, the Company  granted options to purchase an aggregate of 146,258 shares of
common  stock at an  exercise  price of $12.88 per share to  certain  employees.
One-quarter  of these  options  vested on the  Effective  Date and an additional
quarter  will vest on each of the first  three  anniversaries  of the  Effective
Date. No options under the Executive  Option Plan were  exercised  during Fiscal
Year 1998.

         Directors Plan - In October 1997, the Board of Directors of the Company
adopted  the 1997  Directors  Compensation  Plan  (the  "Directors  Plan").  The
Directors  Plan  became  effective  on  December  19,  1997 was  approved by the
shareholders  of the Company on August 14, 1998 and will  terminate  on December
31,  2007,  unless  earlier  terminated  by the  shareholders  of  the  Company.
Directors  of the Company who are not also  officers or employees of the Company
or its  subsidiaries  are eligible to  participate in the Directors Plan (each a
"Participant").

         A total of 450,000  shares of the Common Stock will be  available,  and
have been  reserved,  for issuance  under the  Directors  Plan pursuant to stock
options granted or to be granted, and share awards made or to be made, under the
Directors  Plan. The Directors Plan provides for the automatic  grant of a fixed
number of stock options and the automatic  making of share awards having a fixed
fair market value to each  Participant.  If any stock option or share award made
under the  Directors  Plan is canceled or forfeited,  the shares  subject to the
stock  option or share  award will again be  available  for  issuance  under the
Directors Plan.

         The Directors Plan authorizes the Company to grant  non-qualified stock
options,  but not incentive  stock options (within the meaning of Section 422 of
the Code). On the date that an individual becomes a Participant,  he or she will
automatically be granted an option to purchase 12,000 shares of the Common Stock
(an "Initial  Option").  On the third  anniversary  of such initial grant and on
each  anniversary  date  thereafter,  provided  that a  Participant  is  still a
director,  he or she will  automatically  be  granted an option to  purchase  an
additional 2,500 shares.  Each option will become exercisable as to one-third of
the shares  subject to such option on the date of grant and on each of the first
two  anniversary  dates of the date of grant.  Options will be exercisable for a
term of 10 years or until earlier terminated.

         The exercise  price of an option  granted under the Directors Plan will
be the Fair Market Value (as defined in the Directors  Plan) of the Common Stock
on the date of grant,  except that the exercise price of any Initial Option will
in no event be less than  $12.88 per  share.  The  exercise  price of an option,
together with any required  taxes,  must be paid in full at the time of exercise
in cash,  by the  delivery  of shares of the Common  Stock  (subject  to certain
conditions) or a combination of cash and shares.

         Each  Participant  will  receive for  services as a director,  for each
fiscal quarter during each fiscal year of the Company from 1998 through 2007, an
award of that number of shares of the Common Stock (rounded to the nearest whole
number)  as equals  $3,000  divided by the Fair  Market  Value of a share of the
Common Stock as of the last  business day of such fiscal  quarter,  subject to a
prorated  adjustment if the  Participant  was not a director at the time of each
meeting of the Board of Directors held during such fiscal  quarter.  Pursuant to
the Directors  Plan,  3,997 shares of the Common Stock were awarded to directors
during Fiscal Year 1998.

         In October 1995,  Statement of Financial  Accounting Standards ("SFAS")
No. 123,  "Accounting for Stock-Based  Compensation" was issued. The adoption of
the new recognition provisions for stock-based  compensation expense included in
SFAS No.123 is  optional.  As permitted by SFAS No. 123, the Company has elected
to follow the measurement  provisions of Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees," in its accounting for employee stock
options and does not recognize  compensation  expense for its stock-based plans;
therefore,  no  impact  on the  Company's  financial  position  and  results  of
operations is expected. Had compensation cost for the Executive Option Plan been
determined  consistent  with the  methodology  prescribed  by SFAS  No.123,  the
Company's  net income and  earnings per share for the  Reorganized  Company 1997
103-Day Period and Fiscal Year 1998 would have been as follows:

                                                                   Reorganized
                                       Fiscal Year                   Company
                                         1998                    103-Day Period
                                         ----                    --------------
     Net income (loss)
        As reported                  $(18,987,000)                  $290,000
        Pro forma                     (19,384,000)                   113,000

     Income (loss) per share
        - basic and diluted
        As reported                        $(4.33)                      $.07
        Pro forma                           (4.42)                       .03


            The following  summarizes the stock option  activity for Fiscal Year
1998, 1997 and 1996:

                                            1998         1997        1996
                                            ----         ----        ----
Shares under option at
   beginning of fiscal year                146,258     145,667     421,301
Granted                                     72,000     146,258        --
Exercised                                     --          --          --
Terminated                                 (36,377)   (145,667)   (275,634)
                                          --------    --------    --------
Shares under option at end            
   of fiscal year                          181,881     146,258     145,667
                                          ========    ========    ========
Options exercisable at end of
   of fiscal year                           88,941      36,564      95,667
                                          ========    ========    ========
Options/shares available for          
   future grant/award                      751,595     341,270     800,536
                                          ========    ========    ========
                                      
Option prices per share:              
Granted                                   $  12.88    $  12.88        --
Exercised                                     --          --          --
Outstanding at end of fiscal          
   year                                   $  12.88    $  12.88  $6.75-$8.50
                            
         The Company used the  Black-Scholes  option  pricing model to determine
the fair  value of grants  made in Fiscal  Year 1998 and Fiscal  Year 1997.  The
following variables were applied in determining the pro forma compensation cost:

                                           Fiscal Year           Fiscal Year
                                              1998                  1997
                                              ----                  ----
   Risk free interest rate                   5.20%                 6.06%
   Expected dividend yield                   0.00%                 0.00%
   Expected option life                      10.0 years             5.0 years
   Expected stock price volatility          44.20%                44.20%
   Weighted average fair value of
      options granted                       $6.89                 $4.30

         The  outstanding  stock  options  at  November  1, 1998 have a weighted
average contractual life of 8 years eleven months.

12.      EMPLOYEE BENEFIT PLANS

         The  Company  has   established  and  presently   maintains   qualified
noncontributory  pension  plans and qualified  profit  sharing and savings plans
covering substantially all hourly and salaried employees.


         Pension  plan assets  consist  primarily  of common  stocks,  bonds and
United States government securities. The plans provide pension benefits that are
determined by years of service.  Pension benefits for salaried plan participants
are based on the plan participants' average compensation for the last five years
of service and pension  benefits for hourly plan  participants  are based on the
plan's applicable hourly rate for each specific  participant's  year of service.
The  Company's  funding  policy is to make the annual  contribution  required by
applicable regulations and recommended by its actuary.

         Net  periodic  pension  cost  for the  periods  indicated  include  the
following  components  at  November  1,  1998 and  November  2,  1997  (Combined
Reorganized  Company 1997 103-Day  Period and  Predecessor  Company 1997 261-Day
Period) and November 3, 1996 (in thousands, except assumption percentages):
<TABLE>

                                                  1998                    1997                    1996
                                          --------------------   ----------------------   ---------------------
                                           Hourly     Salaried     Hourly      Salaried     Hourly     Salaried
                                          Pension     Pension     Pension      Pension     Pension     Pension
                                            Plan        Plan        Plan         Plan        Plan        Plan
<S>                                       <C>         <C>         <C>         <C>         <C>         <C>    
Service cost                              $   632     $   627     $   633     $   695     $   659     $   798
Interest cost                                 839         744         750         676         681         577
Return on plan assets                      (1,078)       (856)       (853)       (730)       (537)       (503)
                                          -------     -------     -------     -------     -------     -------
Net periodic pension cost                 $   393     $   515     $   530     $   641     $   803     $   872
                                          =======     =======     =======     =======     =======     =======

Assumptions used in the accounting are:

Discount rates                               6.75%       6.75%       7.25%       7.25%       7.50%       7.50%
Rate of increase in
  compensation levels                        --          4.00%       --          4.00%       --          4.00%
Expected long-term rate
  of return on assets                        8.75%       8.75%       8.75%       8.75%       8.00%       8.00%
</TABLE>

         The  following  schedule sets forth the funded status of the hourly and
salaried  pension plans and the plan assets (accrued  pension costs) included in
the  Company's  balance  sheets  at  November  1,  1998 and  November  2,  1997,
respectively (in thousands):
<TABLE>

                                                         1998                    1997
                                                 --------------------    --------------------
                                                   Hourly    Salaried      Hourly    Salaried
                                                  Pension    Pension      Pension    Pension
                                                    Plan       Plan         Plan       Plan
Actuarial present value of pension obligation:
<S>                                              <C>         <C>         <C>         <C>      
   Vested                                        $(11,867)   $(10,106)   $(10,293)   $ (8,613)
   Nonvested                                       (1,251)       (316)     (1,125)       (408)
                                                 --------    --------    --------    --------
Accumulated benefit obligation                    (13,118)    (10,422)    (11,418)     (9,021)
Effects of projected future
  compensation levels                                --        (1,330)       --        (1,434)
                                                 --------    --------    --------    --------
Projected benefit obligation                      (13,118)    (11,752)    (11,418)    (10,455)
Plan assets at fair value                          13,510      11,088      12,121       9,831
Unrecognized net loss (gain)                        1,766        (786)        719        (814)
                                                 --------    --------    --------    --------
Plan assets (accrued pension
  costs) included in balance sheet               $  2,158    $ (1,450)   $  1,422    $ (1,438)
                                                 ========    ========    ========    ========
</TABLE>
         The Company's  assumed discount rate ("discount  rate") used to measure
the accumulated  benefit obligation for its hourly and salaried pension plans as
of the end of Fiscal  Year 1998 was  decreased  from 7.25% to 6.75% based on the
composition  of  the  accumulated   benefit   obligation  and  current  economic
conditions.

         In accordance  with "fresh start"  accounting the hourly pension plan's
excess of additional  pension liability over unrecognized prior service cost was
eliminated  and  charged  to  paid-in  capital  at July  22,  1997.  During  the
Reorganized  Company  1997 103-Day  Period,  the Company  decreased  its accrued
additional  pension liability in excess of accumulated  benefit  obligation from
$1,170,000 to zero and, in accordance  with "fresh start"  accounting,  credited
additional paid-in capital $1,107,000 and credited other assets $63,000.

         The Company's  assumed  discount  rate used to measure the  accumulated
benefit  obligation  for its hourly and salaried  pension plans as of the end of
Fiscal Year 1997 was decreased  from 7.50% to 7.25% based on the  composition of
the accumulated benefit obligation and current economic conditions.  Also, as of
the beginning of Fiscal Year 1997,  the Company  increased its assumed  expected
long-term  rate of return on assets  from 8.00% to 8.75% for both the hourly and
salaried pension plans.  This increase in the expected  long-term rate of return
on assets was based on the historical actual returns on plan assets.

         The Company has a qualified  employees' savings,  investment and profit
sharing plan under Section 401(k) of the Internal  Revenue Code (the  "Qualified
401(k) Plan"). During Fiscal Year 1997, the Qualified 401(k) Plan was amended to
include  eligible hourly  employees  participation  in the Qualified 401(k) Plan
effective  January 1, 1998.  The Company also adopted a  non-qualified  salaried
employees' savings, investment and profit sharing plan covering certain salaried
employees  not  covered  under the  Qualified  401(k)  Plan (the  "Non-Qualified
Plan").  During Fiscal Year 1998, the Company terminated the Non-Qualified Plan.
The  Company  contributed  approximately  $37,000 to the  Qualified  401(k) Plan
during   Fiscal  Year  1998.  No  matching   contributions   were  made  to  the
Non-Qualified  plan during  Fiscal Year 1998. No matching  contributions  to the
Qualified 401(k) Plan or  Non-Qualified  Plan were made by the Company in Fiscal
Year 1997 or Fiscal Year 1996.

         Effective as of November 14, 1996,  the  Bankruptcy  Court approved the
Company's  Incentive  Compensation  and Retention  Program (the "Program") which
provided certain eligible employees with a pre-determined confirmation bonus and
provided for a discretionary  bonus to certain employees of the Company selected
by the  Company's  Chief  Executive  Officer in  consultation  with the Board of
Directors.  The aggregate  amounts  payable under the program as a  confirmation
bonus  could not  exceed  $990,000  and the total of the  discretionary  bonuses
awarded could not exceed  $510,000 (plus any portion of the  confirmation  bonus
pool not paid to a participant as a result of  ineligibility  of any one or more
confirmation  bonus  participants).  The confirmation and discretionary  bonuses
payable  to  a  participant  under  the  Program  were  to  be  payable  in  two
installments,  50% one month after the Company's Plan of  Reorganization  became
effective  with  the  remaining  50%  payable  six  months  after  the  Plan  of
Reorganization became effective.  The Plan of Reorganization became effective on
July 23, 1997. Accordingly, on August 26, 1997 and January 20, 1998, the Company
paid  approximately  $0.8 million on each date in  connection  with the Program.
Further,  the Program  provides a termination  award to certain key employees if
the eligible  employee is terminated  without "cause" within two years following
the  confirmation  of the Plan of  Reorganization.  A termination  award will be
equal to one and one-half times the terminated  participant's base salary and is
payable  to the  terminated  participant  no  later  than  three  business  days
following the date of the participant's termination with the Company.

13.      COMMITMENTS AND CONTINGENCIES

         Lease  Commitments - Aggregate future minimum lease  commitments  under
operating leases and capital leases with an initial or remaining  non-cancelable
term in excess of one  year,  together  with the  present  value of the  minimum
capital lease payments at November 1, 1998, are as follows (in thousands):

                                                 Operating         Capital
  Fiscal Year                                      Leases           Leases
  -----------                                      ------           ------
     1999.....................................     $1,985           $1,516
     2000.....................................      1,742              624
     2001.....................................      1,502               20
     2002.....................................        912                8
     2003.....................................        511                8
     Thereafter...............................      3,033              -
                                                   ------           ------
     Total minimum lease payments.............     $9,685           $2,176
                                                   ======

     Less amount representing interest........                         286
                                                                    ------
     Present value of minimum lease
        payments..............................                       1,890
     Less current portion of capital
        lease obligations.....................                       1,258
                                                                    ------
     Long-term portion of capital
        lease obligations.....................                      $  632
                                                                    ======

         Rental expense under operating  leases was $2.8 million for Fiscal Year
1998, $2.8 million for Fiscal Year 1997 and $3.1 million for Fiscal Year 1996.

         The Company and the landlord of its  corporate  and  marketing  offices
have entered into a lease  surrender  agreement  whereby the Company vacated its
former New York  office on January 25,  1999.  Pursuant  to the  agreement,  the
Company  waived any and all  existing  and future  claims  against the  landlord
arising out of, or in connection with the takeover  agreement,  effective August
1, 1995,  whereby the landlord had previously  agreed to take over the Company's
remaining obligations under the Company's previous lease. The Company waived the
right to collect  contributions  due the Company from the landlord for leasehold
improvements and related fees and expenses the Company had incurred. The Company
had fully reserved such claims against the landlord  during Fiscal Year 1997. In
connection with entering into the lease surrender  agreement,  the Company wrote
down property, plant and equipment by approximately $1.1 million associated with
the abandonment of leasehold improvements and furniture and fixtures, wrote-down
the estimated  deferred rent liability at January 1, 1999 by approximately  $2.1
million,  accrued $0.5 million for broker's commission and accrued approximately
$0.1 million for lease  cancellation  liability.  These items resulted in a $0.4
million gain which was recorded as a restructuring item during Fiscal Year 1998.
The  Company has  entered  into a ten-year  lease for  corporate  and  marketing
offices at a new location in New York,  New York,  pursuant to which the Company
will reduce the amount of space it occupies and lower the associated annual rent
expense by  approximately  $0.7 million.  In connection with the new lease,  the
Company expects to incur approximately $1.0 million in build-out cost, furniture
and moving related costs. Such costs will be funded through borrowings under the
Company's Revolving Loan Facility.

         License & Royalty  Agreements  - FAI is a party to a license  agreement
with Oleg  Cassini,  Inc.  which  permits  the  Company to use the Oleg  Cassini
trademark in  connection  with the  manufacturing,  advertising,  merchandising,
selling and  distribution of women's  tailored suits through  December 31, 2000.
The agreement  requires the Company to pay Oleg Cassini,  Inc. a minimum royalty
of  $350,000  annually  payable in equal  consecutive  monthly  installments  of
$29,167.  Further, the Company is required to pay Oleg Cassini,  Inc. percentage
royalties  in an  amount  equal to 2% of net  sales  for FAI in  excess of $30.0
million during any annual period.

         Purchase Commitments - In the ordinary course of business,  the Company
has significant  purchase orders for wool  outstanding,  which generally require
the placement of an order six-to-nine months prior to delivery.

         Letters of Credit - At  November 1, 1998,  the Company had  outstanding
letters of credit aggregating $3.1 million.

         Litigation - The Company is a party to legal actions arising out of the
ordinary course of business.  In the opinion of management,  after  consultation
with counsel,  other than environmental  matters, the resolution of these claims
will not have a material adverse effect on the financial  position or results of
operations of the Company.

         Employment  Agreements - The Company has  employment  and  compensation
agreements  with two key officers.  The agreements  provide for a minimum annual
salary of $265,000 each through  January 26, 2000. Each of the officers was also
granted  12,000 options under the Executive  Option Plan.  The  agreements  also
provide for  subsequent  option grants of 2,500 options each on an annual basis,
beginning on the third anniversary of the agreements.

         Environmental  -  By  the  nature  of  its  operations,  the  Company's
manufacturing  facilities  are  subject  to  various  federal,  state  and local
environmental  laws and  regulations  and  occasionally  have  been  subject  to
proceedings and orders pertaining to emissions into the environment.

         Dublin,  Georgia.  On December  29,  1995,  the  Georgia  Environmental
Protection   Division  ("EPD")  issued  separate   administrative   orders  (the
"Administrative  Orders")  to  the  Company  and to  J.P.  Stevens  & Co.,  Inc.
("Stevens")  which relate to three sites on the Georgia Hazardous Site Inventory
- the "TCE site", the "1,1-DCA site" and another site known as the "Burn Area" -
at the Company's Dublin,  Georgia facility.  The Administrative  Orders required
the Company and Stevens to submit a compliance  status report  ("CSR") for these
sites that would  include,  among other things,  a  description  of the release,
including its nature and extent,  and suspected or known source, the quantity of
the  release and the date of the  release.  The CSR would also have to include a
determination of cleanup standards  (called "risk reduction  standards") for the
sites  and a  certification  that  the  sites  were  in  compliance  with  those
standards;  alternatively,  the party submitting the CSR could  acknowledge that
the site is not in compliance  with risk  reduction  standards.  Pursuant to the
Administrative  Orders,  if a site is not in compliance  with the risk reduction
standards,  then a  Corrective  Action  Plan (a  "Corrective  Action  Plan") for
remediating the release would have to be submitted to EPD.

         Since both the Company  and  Stevens  had been  required to perform the
same  work at all  three of these  sites,  the  Company  and  Stevens  agreed to
allocate responsibilities between themselves pursuant to an Agreement Concerning
Performance of Work ("Agreement") dated January 24, 1997. The Agreement required
the Company to prepare and submit to EPD the CSR for the TCE and 1,1-DCA  sites,
while  requiring  Stevens to  prepare  and submit to EPD a CSR for the Burn Area
site. The Agreement does not commit either party to perform corrective action at
these  sites.  On January 27, 1998 EPD provided  comments to the CSR  previously
submitted by Stevens and requested  clarification  of the Stevens CSR. By letter
dated March 5, 1998,  Stevens  submitted a "draft" response to EPD and by letter
of April 6, 1998,  a final  response.  It is the  Company's  understanding  that
Stevens is waiting for a response to this letter from EPD.

         The  Company  submitted  a CSR for the TCE  and  1,1-DCA  sites,  which
certified compliance with risk reduction standards for both sites. EPD indicated
that it did not agree to the  certification  with respect to the TCE site. After
extensive  discussions  with EPD concerning the issue,  the Company  submitted a
Corrective  Action Plan for the TCE site by letter dated May 15, 1997. By letter
dated  September  29, 1997,  EPD  responded to the  Corrective  Action Plan with
notice of deficiency.  The Company  submitted a revised  Corrective  Action Plan
("CAP") on October 31, 1997.  The revised CAP calls for  continued  operation of
the Company's  existing  groundwater  recovery system, as well as one additional
groundwater  recovery well and a groundwater  collection  trench near the former
dry cleaning  basement.  On July 28, 1998 EPD approved  the  Company's  CAP. The
Company  has  begun  installation  of  the  recovery  well  and  design  of  the
groundwater  collection  trench.  In addition to the  installation  of these two
systems,  the CAP requires the submission of an Annual  Corrective Action Status
Report to EPD.

         Tifton,  Georgia.  In January  1997,  the  Company  was  notified  by a
potential  buyer of the  Company's  Tifton  facility  that soil and  groundwater
samples had been obtained from that facility and that certain  contaminants  had
been identified.  Subsequently,  through  sampling and testing  performed by the
Company's  environmental  consultants,  the Company  confirmed  the  presence of
contaminants in groundwater samples taken at the site. On February 28, 1997, the
Company  notified EPD of such  findings,  and the site was placed on the Georgia
Hazardous Site Inventory.

         The Company  subsequently  consummated its sale of the Tifton facility.
As part of that transaction,  the Company, the Tift County Development Authority
as purchaser ("TCDA") and Burlen Corporation as operator ("Burlen") entered into
an   Environmental   Cost  Sharing  and  Indemnity   Agreement   ("Cost  Sharing
Agreement").   Under  the  Cost   Sharing   Agreement,   the  Company   retained
responsibility for remediating certain contamination,  to the extent required by
law, that originated prior to Burlen's occupancy of the premises.  Likewise, the
Company  assumed the  obligation to indemnify  TCDA and Burlen in regard to such
contamination to the extent that a claim is made by an unaffiliated  third party
or  governmental  agency.  In exchange,  Burlen agreed to pay to the Company the
lesser of (1) $150,000 minus any payments  already made to the Company  (certain
expenses  had  already  been  shared)  to respond  to the  contamination  or (2)
one-half of the costs incurred by the Company in response to such contamination.

         By letter  dated  December  21, 1998,  EPD  requested  that the Company
submit a CSR for the  site by June  21,  1999.  EPD  indicated  that it had sent
Burlen a similar request.  The Company intends to submit the CSR for the site by
the requested deadline.

         At November 1, 1998, the Company had $0.3 million  accrued for costs to
be  incurred  in  connection   with  the  TCE,   1,1-DCA  and  Tifton   facility
environmental  matters.  The Company,  subject to EPD's response to J.P. Stevens
revised CSR and compliance status certification and EPD's response to the Tifton
site,  believes  the  accrual  for  environmental  costs at  November 1, 1998 is
adequate.

 14.  FAIR VALUE OF FINANCIAL INSTRUMENTS

         Statement of Financial  Accounting  Standards  No. 107,  "Fair Value of
Financial   Instruments",   requires  that  the  fair  value  of  all  financial
instruments  be estimated and compared to the carrying  amount of such financial
instruments as of the balance sheet date.

         Judgement  is  required  in  developing  the  estimates  of fair  value
presented herein. Accordingly, these estimates are not necessarily indicative of
the amounts the Company could realize in a current market  exchange.  The use of
different market assumptions and/or estimation methodologies may have a material
effect  on  the  estimated  fair  value  amounts.   The  following  methods  and
assumptions  were used to  estimate  the fair value of each  class of  financial
instruments:

         Cash, accounts receivable and accounts payable - The carrying amount of
these items is a reasonable estimate of their fair value.

         Long-term  debt (other than capital lease  obligations) - The Company's
borrowings under the Revolving Loan Facility and Term Loan Facility  approximate
fair value  because the interest  rates are  floating  rates and  identified  by
reference to market rates.

         Accordingly,  the Company  believes that the carrying  amount for cash,
accounts  receivable,  accounts  payable and long-term  debt (other than capital
lease  obligations)  approximates fair value at November 1, 1998 and November 2,
1997.

 15.      RESTRUCTURING ITEMS

         Restructuring  items related to the Company's 1998  Restructuring  have
been  segregated and included in normal  operations  during Fiscal Year 1998 and
consists of (in thousands):
                                                                       1998
                                                                       ----
  Severance and "stay-put" bonus expense                               
     and related employee benefits                                   $  803
  Loss on impairment of machinery and equipment                       1,423
  Loss associated with operating lease cancellation liability         1,585
  Gain associated with N.Y. office
     lease surrender                                                   (368)
  Other                                                                  52
                                                                     ------
  Total                                                              $3,495
                                                                     ======

         During  Fiscal  Year  1998,  certain  of the  Company's  machinery  and
equipment  was  rendered  impaired.  The Company  currently  estimates  based on
appraised  values,  that the fair value of such  equipment is $1.4 million below
its current  net book  value.  Accordingly,  the  Company  recognized  a loss on
impairment of $1.4 million as a restructuring item during Fiscal Year 1998.

         As a result of the company's 1998  Restructuring  and 1999  Realignment
(see Note 1 to these Financial Statements),  the Company evaluated its equipment
needs and determined  that it no longer  required  certain  equipment  which was
covered under  operating  lease  agreements.  The future  minimum lease payments
associated with such equipment was approximately $1.6 million.  Accordingly, the
Company  recognized a loss of $1.6 million as a restructuring item during Fiscal
Year 1998.

         In connection  with entering into the lease  surrender  agreement  (see
Note 13 to these Financial Statements),  the Company wrote-down property,  plant
and  equipment  by  approximately   $1.1  million  associated  with  the  future
abandonment of leasehold improvements and furniture and fixtures, wrote-down the
estimated  deferred  rent  liability  at January 1, 1999 by  approximately  $2.1
million,  accrued $0.5 million for broker's commission and accrued approximately
$0.1 million for lease  cancellation  liability.  These items resulted in a $0.4
million gain which was recorded as a restructuring item during Fiscal Year 1998.

         The cash and  non-cash  elements  of the  1998  Restructuring  and 1999
Realignment approximate $3.1 million and $0.4 million, respectively.  Details of
the restructuring charge for Fiscal Year 1998 are as follows:

                         Original             Utilized             Balance at
                          Accrual         Cash       Non-Cash   November 1, 1998
                          -------         ----       --------   ----------------
 Impairment of
    long-lived assets     $1,423         $   -        $1,423          $  -
 Employee severance          803            592          -               211
 Operating lease           1,585              7          -             1,578
 Other                      (316)           664         (987)              7
                          ------         ------       ------          ------
 Total                    $3,495         $1,263       $  436          $1,796
                          ======         ======       ======          ======

16.      REORGANIZATION ITEMS

         In accordance with SOP 90-7,  professional  fees, asset impairments and
restructuring  charges  directly  related to the  Bankruptcy  Filing and related
reorganization  proceedings have been segregated from normal  operations  during
Fiscal Year 1998, the Reorganized  Company 1997 103-Day Period,  the Predecessor
Company 1997 261-Day Period and Fiscal Year 1996 and consists of (in thousands):
<TABLE>

                                                              Reorganized                   Predecessor
                                                                Company                       Company
                                                        ------------------------      ----------------------
                                                                    1997 103-Day      1997 261-Day
                                                           Fiscal   Period Ended      Period Ended    Fiscal
                                                            Year     November 2,        July 22,       Year
                                                            1998       1997               1997         1996
                                                            ----       ----               ----         ----
<S>                                                     <C>          <C>                 <C>         <C>    
Professional fees ...................................   $    75      $   288             $ 3,102     $ 4,084
Write off of deferred financing cost and                                                            
  expense and other financing fees incurred .........      --           --                   403        --
Impairment of assets (See Notes 5, 6 and 7) .........      --           --                 4,199       5,076
Expense (gain) incurred due to the rejection                                                        
   and amendment of executory contracts .............       (40)        --                 3,314         925
Default interest expense and professional                                                           
   fees associated with the Senior Secured                                                          
   Notes ...........................................       --           --                  (388)      1,101
Severance expenses ..................................      --             51                 105         279
Adjustment of accounts to fair value                                                                
   (see Note 2) .....................................      --           --                22,076        --
Other ...............................................        64           56                 590         590
                                                        -------      -------             -------     -------
  Total .............................................   $    99      $   395             $33,401     $12,055
                                                        =======      =======             =======     =======
</TABLE>
         
         During  the  Predecessor  Company  1997  261-Day  Period,  the  Company
recognized  a $2.9  million  loss for certain  equipment  not  installed  at the
Company's  Tifton  facility which was sold during the  Predecessor  Company 1997
261-Day Period.

         During  the  Predecessor  Company  1997  261-Day  Period,  pre-petition
unsecured  liabilities  were increased by $3.3 million  associated with contract
rejection  damages relating to the Company's  former  headquarters and marketing
office leases ($1.7 million),  the termination of a contract to purchase certain
equipment ($0.9 million) and two rejected contracts relating to the former joint
venture with an Italian  fabric  designer  ($0.7  million).  These  charges were
recognized as reorganization  items during the Predecessor  Company 1997 261-Day
Period.  Such charges were partially offset by the recognition of a $0.9 million
net receivable from the Company's  current landlord related to its assumption of
a portion of the Company's obligations under its former headquarters lease.

         During the Predecessor  Company 1997 261-Day Period,  the Company fully
reserved  against   accounts   receivable  from  its  current  landlord  of  its
headquarters and marketing offices lease relating to its assumption of a portion
of the  Company's  former  headquarters  lease  as  well as the  remaining  work
allowance  receivable  under the lease.  This charge was  partially  offset by a
reduction  in the  deferred  rent  liability  account  for the  lease due to the
adjustment of the work allowance receivable. Expense of $0.9 million was charged
to reorganization  expense during the Predecessor Company 1997 261-Day Period as
a result of these items.

17.      QUARTERLY FINANCIAL DATA (UNAUDITED)

         Quarterly  financial  data for  Fiscal  Year  1998 and the  Reorganized
Company  12-Day Period Ended August 3, 1997 and 91-Day Period Ended  November 2,
1997,  the  Predecessor  Company 1997 first and second  fiscal  quarters and the
Predecessor  Company 1997 79-Day  Period Ended July 22, 1997 are  summarized  as
follows (in thousands, except per share information):

<TABLE>

 Reorganized Company:                                                  Fiscal Quarter
 --------------------------------------      ------------------------------------------------------------------
                                                First            Second           Third            Fourth
                                                -----            ------           -----            ------
 Fiscal Year 1998
 ----------------
<S>                                           <C>               <C>             <C>               <C>    
 Net sales . . .........................      $29,017           $49,625         $38,996           $31,959
 Gross profit (loss)....................        3,312             7,907           1,975            (5,357)
 Restructuring items....................          -                 312           1,254             1,929
 Reorganization items...................           20                35              25                19
 Net income (loss)......................       (1,258)            1,480          (4,160)          (15,049)
 Income (loss) per common 
    share - basic and diluted...........         (.29)              .34            (.95)            (3.43)
</TABLE>
<TABLE>


 Reorganized Company:                                                  Fiscal Period
 ---------------------------------------     -------------------------------------------------------------------
                                                                                12-Day            91-Day
                                                                                Period            Period
                                                                                 Ended             Ended
                                                                                August 3,        November 2,
                                                                                  1997              1997
                                                                                  ----              ----
  Fiscal Period 1997
  ------------------
<S>                                                                              <C>             <C>    
  Net sales . . ........................                                         $8,016          $49,110
  Gross profit..........................                                          2,163            5,563
  Reorganization items..................                                          -                  395
  Income (loss) before
     extraordinary item.................                                            893             (567)
  Income (loss) applicable to
     common shareholders................                                            893             (603)
  Income (loss) before
     extraordinary item per share
     applicable to common
     shareholders - basic
     and diluted........................                                            .20             (.11)
  Extraordinary loss on debt
     discharge - basic and diluted......                                             -                 -
  Income (loss) per share applicable
     to common shareholders
     - basic and diluted................                                            .20             (.13)

</TABLE>
<TABLE>

  Predecessor Company:                                                      Fiscal Period
----------------------------------------     -------------------------------------------------------------------
                                                                                 79-Day
                                                                                 Period
                                                                                 Ended
                                                                                July 22,
                                                First            Second           1997
                                                -----            ------           ---- 
  Fiscal Period 1997
  ------------------
<S>                                           <C>               <C>            <C>     
  Net sales.............................      $31,218           $64,786        $ 45,880
  Gross profit..........................        2,843            11,926           3,898
  Reorganization items..................        4,151             4,174          25,076
  Income (loss) before
     extraordinary item.................       (7,318)            2,040         (26,152)
  Income (loss) applicable to
     common shareholders................       (7,318)            2,040          (2,017)
  Income (loss) before extraordinary
     item per share applicable to
     common shareholders
     - basic and diluted................        (1.30)              .36           (4.65)
  Extraordinary gain on debt
     discharge - basic and diluted......           -                  -          24,135
  Income (loss) per share applicable
     to common shareholders
     - basic and diluted................        (1.30)              .36            (.36)
</TABLE>
 
           During the second quarter of Fiscal Year 1998, the Company recognized
    $1.0 million of severance and stay-put bonus expense in connection  with the
    1998 Restructuring (see Note 1 to these Financial Statements). Additionally,
    the Company  recognized a $0.7 million gain in anticipation of entering into
    the lease surrender  agreement (see Note 13 to these Financial  Statements).
    These items resulted in a $0.3 million charge to restructuring  items during
    the second  quarter of Fiscal  Year 1998.  The Company  increased  inventory
    market  reserves by $1.1 million  relating to the 1998  Restructuring.  This
    expense  was  charged  to cost of goods sold  during  the second  quarter of
    Fiscal Year 1998.

           During the third quarter of Fiscal Year 1998, the Company  recognized
    a loss of $0.7 million as a restructuring item relating to the impairment of
    certain  machinery  and  equipment.  Additionally,  the  Company  recognized
    severance and stay-put bonus expense of $0.2 million and a $0.3 million loss
    related to the lease  surrender  agreement.  These items  resulted in a $1.2
    million  charge to  restructuring  items during the third  quarter of Fiscal
    Year 1998. The Company  increased  inventory market reserves by $1.5 million
    relating  to the 1998  Restructuring.  This  expense  was charged to cost of
    goods sold during the third quarter of Fiscal Year 1998.

           During the fourth quarter of Fiscal Year 1998, the Company recognized
    a $0.4 million gain associated with severance and stay-put  bonuses,  a $0.7
    million loss on  impairment  of certain  machinery  and equipment and a $1.6
    million loss associated with operating lease cancellation  liability.  These
    items  resulted in a $1.9 million charge to  restructuring  items during the
    fourth  quarter  of  Fiscal  Year  1998.  Additionally,  the  Company  wrote
    inventory  down by $3.0 million (see Note 5 to these  Financial  Statements)
    and increased  accrued  liabilities by $1.5 million relating to loss on open
    wool purchase commitments.  These items resulted in a $4.5 million charge to
    cost of goods sold during the fourth quarter of Fiscal Year 1998. During the
    fourth  quarter of Fiscal Year 1998, the Company also  recognized  severance
    expense of $0.4 million in connection with the termination agreement entered
    into with the former owners of Arenzano and a $1.0 million  charge  relating
    to the write off of certain  intangible assets of FAI. Further,  the Company
    expensed  approximately  $0.8 million for the remaining royalty payments due
    under a licensing  agreement assumed in connection with FAI's acquisition of
    Arenzano.  These items  resulted  in an  increase  to  selling,  general and
    administrative  expenses of $1.2 million and a $1.0  million  charge to loss
    from  abandonment,  disposal and  impairment  of machinery and equipment and
    other assets during the fourth quarter of Fiscal Year 1998.

           During the  Predecessor  Company 79-Day Period Ended July 22, 1997 in
    connection  with the  adoption  of "fresh  start"  accounting,  the  Company
    adjusted its inventory  balances to fair value  resulting in the elimination
    of the  LIFO  reserve  of  approximately  $2.7  million  and a  write-up  of
    approximately  $3.8 million above the  predecessor  Company's FIFO cost (See
    Note 5 to these  Financial  Statements)  and decreased the value assigned to
    property,  plant,  and  equipment  by  $28.6  million  (See  Note 6 to these
    Financial  Statements).  These items  resulted in a $22.1 million  charge to
    reorganization items during the Predecessor Company 1997 79-Day Period Ended
    July 22, 1997.

           As a result of the consummation of the Plan of  Reorganization  which
    resulted in the exchange of the general unsecured claims against the Company
    for  equity  in  the  reorganized   Company,   the  Company   recognized  an
    extraordinary gain on debt discharge of $24.1 million during the Predecessor
    Company  79-Day  Period  Ended July 22,  1997.  Also during the  Predecessor
    Company   79-Day  Period  Ended  July  22,  1997,   the  Company  wrote  off
    approximately $1.2 million of deferred software  development costs (See Note
    7 to these Financial Statements) and wrote off approximately $0.9 million of
    certain assets and liabilities  associated  with the Company's  headquarters
    lease (See Note 16 to these Financial Statements),  accelerated depreciation
    associated with impaired property,  plant and equipment by $0.5 million (See
    Note 6 to these  Financial  Statements)  and  wrote off  approximately  $0.2
    million  of  deferred  financing  costs  (See  Note  9  to  these  financial
    statements).

           During the first quarter of Fiscal Year 1997,  the Company  accrued a
    $3.0 million loss for certain  unerected  equipment at the Company's  Tifton
    facility  which was held for sale.  During the  Predecessor  Company's  1997
    79-Day  Period Ended July 22, 1997,  such  equipment  was sold and a gain of
    $0.1 million was realized (See Note 6 to these Financial Statements). During
    the second quarter of Fiscal Year 1997, the Company  increased  pre-petition
    unsecured  liabilities  by $3.3  million  (See  Note 16 to  these  Financial
    Statements),  increased  inventory market reserves related to the converting
    fabrics  product  line  by  $0.9  million  (See  Note 5 to  these  Financial
    Statements) and wrote down its barter credits by $0.2 million (See Note 7 to
    these  Financial  Statements).  Also,  due to  the  seasonal  nature  of the
    Company's  business,  during the first  quarter of Fiscal  Year 1997 and the
    Reorganized  Company 1997 Fourth Quarter,  the Company incurred  significant
    unfavorable  manufacturing variances resulting from a slowdown of production
    at its manufacturing facilities.
<PAGE>
<TABLE>
                                                                     SCHEDULE II




                            FORSTMANN & COMPANY, INC.

                 CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
              THE FIFTY-THREE WEEKS ENDED NOVEMBER 3, 1996 AND THE
           FIFTY-TWO WEEKS ENDED NOVEMBER 2, 1997 AND NOVEMBER 1, 1998


                                       Additions
                                       Balance at            Charged to                                       Balance
                                       Beginning             Costs and                                         at End
Description                            of Period              Expenses              Deductions               of Period
--------------------------------       ---------              --------              ----------               ---------
Allowance for Doubtful Accounts:

<S>                                   <C>                   <C>                <C>                          <C>
Fifty-Three Weeks Ended
  November 3, 1996                     $2,991,000            $1,397,000           $(183,000)  (1)            $4,205,000
Fifty-Two Weeks Ended
  November 2, 1997                     $4,205,000              $710,000         $(4,457,000)  (1)(2)           $458,000
Fifty-Two Weeks Ended
  November 1, 1998                       $458,000              $851,000               -                      $1,309,000

Inventory Market Reserves:

Fifty-Three Weeks Ended
  November 3, 1996                     $8,611,000           $10,678,000        $(12,927,000)                  $6,362,000
Fifty-Two Weeks Ended
  November 2, 1997                     $6,362,000            $3,334,000         $(8,975,000)  (2)               $721,000
Fifty-Two Weeks Ended
  November 1, 1998                       $721,000            $5,648,000         $(3,248,000)                  $3,121,000
</TABLE>

(1)      Accounts written off net of recoveries of accounts  previously  written
         off.

(2)      Includes  amounts netted against the gross accounts as of July 23, 1997
         in connection with "fresh start" accounting.

<PAGE>
Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE

           None

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Directors of the Company

         Each of Bruce W. Gregory,  James  Kjorlien and David Matlin is a member
of the Board of  Directors  (the  "Board")  of  Forstmann & Company,  Inc.  (the
"Company") and is not an officer or employee of the Company.

         The following table provides information regarding the directors:


Name                        Age                 Date Appointed Director
-----------------          ----                 -----------------------
Bruce W. Gregory            34                  September 1997
James E. Kjorlien           47                  July 1997
David T. Matlin             37                  October 1998

         Bruce W. Gregory is a Managing  Director of Daystar L.L.C.,  a Rye, New
York-based  investment  management  firm  that  specializes  in  investments  in
companies that are in the midst of restructurings. Before joining Daystar L.L.C.
in 1996,  Mr.  Gregory  was  employed by  Progressive  Partners,  an  investment
management firm, as an equity portfolio  manager from 1990 to 1996.  Previously,
Mr. Gregory was employed by Chase Manhattan Bank in the North American Corporate
Finance Group and Investment Management Group of US Private Banking. Mr. Gregory
serves on the Board of Trustees of Trinity  Presbyterian  Church and Here's Life
Inner City New York. Mr. Gregory is a Chartered  Financial  Analyst and a member
of the  Association  of  Investment  Management  and  Research  and the New York
Society of Security Analysts.

         James E. Kjorlien is a Managing  Member of Credit  Research and Trading
LLC, a Greenwich,  Connecticut-based  broker-dealer.  Mr. Kjorlien joined Credit
Research in June 1990.

         David T. Matlin is a Managing Director at Credit Suisse First Boston in
New York,  NY,  where he is head of the Global  Special  Situations  group.  Mr.
Matlin has been at Credit Suisse First Boston since 1994 where he is responsible
for the firm's long term proprietary investments in this area. Mr. Matlin serves
as a director of California Coastal  Committees,  Inc., a real estate investment
company.

         None of the  directors  has any  family  relationship  with  any  other
director or with any executive officer of the Company.

Executive Officers of the Company

         The  following  table  provides  information  regarding  the  Company's
executive officers:

Name                      Age              Title
------------------       ----              -----------------------------
Brian A. Moorstein        38               President (Principal Executive
                                           Officer)

Rodney J. Peckham         43               Executive Vice President Finance,
                                           Administration and Strategic
                                           Planning,
                                           Secretary and
                                           Treasurer (Principal Financial
                                           Officer)

Gary E. Schafer           47               Vice President and Corporate
                                           Controller (Principal Financial
                                           Accounting Officer)

         Brian A. Moorstein became President of the Company on January 26, 1998.
Mr.  Moorstein  started his career at the Company in 1984 working in styling and
then moved into sales.  In 1986, he founded the  Company's  Women's Wear Worsted
Department.  During 1990, his responsibilities  were expanded to include Women's
Wear Woolen, sportswear and coatings.

         Rodney  J.   Peckham   became   Executive   Vice   President   Finance,
Administration  and Strategic  Planning and  Secretary on January 26, 1998.  Mr.
Peckham also serves as Chief Financial Officer and Treasurer of the Company.  He
became Chief  Financial  Officer of the Company in March 1996. From October 1995
until he became Chief Financial Officer, Mr. Peckham was employed as Director of
Financial  Operations.  Mr. Peckham was previously  employed by the Company from
August 1986 through May 1995 during which time he served as Corporate Controller
from August 1986 until he became  Treasurer in March 1992, and he also served as
Secretary from December 1992 to September  1993.  From May 1995 through  October
1995, Mr. Peckham was self-employed  and provided various  financial  consulting
services to the Company.

         Gary E. Schafer became Vice  President and Corporate  Controller of the
Company in March  1992.  Mr.  Schafer  joined the Company in 1990 as Director of
Cost Accounting.

         Executive  officers are appointed by and serve at the discretion of the
Board of Directors for a term beginning  after the first regular  meeting of the
Board of Directors  following the Annual Meeting of Shareholders and until their
respective successors are duly appointed and qualified.

         None of the executive  officers has any family  relationships  with any
other executive officer.

Compliance with Section 16(a) of the Exchange Act

         Section  16(a) of the  Securities  Exchange Act of 1934 (the  "Exchange
Act") requires the Company's  directors,  executive officers and persons who own
beneficially  more  than 10% of the  outstanding  Common  Stock to file with the
Securities and Exchange  Commission initial reports of beneficial  ownership and
reports  of  changes  in  beneficial  ownership  of the  Common  Stock and other
securities  of the Company on Forms 3, 4 and 5, and to furnish the Company  with
copies of all such forms they file.  Based on a review of copies of such reports
furnished  to it, the Company  believes  that all the  Company's  directors  and
officers  timely filed all reports  required  during the  Company's  Fiscal Year
1998.

ITEM 11.  EXECUTIVE COMPENSATION.

Summary Compensation Table

         The following table sets forth information concerning  compensation for
services in all capacities  awarded to, earned by or paid to the three executive
officers of the Company during Fiscal Years 1998, 1997 and 1996 of the Company.
<TABLE>

                                                                          Other Annual       Securities           All Other
          Name and                Fiscal                       Bonus      Compensation       Underlying         Compensation
     Principal Position            Year           Salary($)    ($)1          ($)2          Options (#)3,4           ($)5
     ------------------            ----           ---------    -----       ----------      --------------       -------------
<S>                                <C>             <C>        <C>             <C>               <C>                  <C>   
     Brian A. Moorstein            1998            257,830          -            739             12,000               50,000
        President                  1997            193,000     53,446          8,479             19,501               50,000
       (Principal Executive        1996            174,667          -          7,234                  -                    -
        Officer)

     Rodney J. Peckham(6)          1998            257,830          -          3,369             12,000               50,616
        Executive                  1997            234,015     63,381          9,241             19,501               50,000
        Vice President             1996            238,013          -          2,486                  -                    -
        Finance,
        Administration and
        Strategic Planning
        (Principal Financial
         Officer)

     Gary E. Schafer               1998            125,000          -          1,046                  -               17,500
        Vice President             1997            125,000     32,715          4,750              4,875               17,500
        and Corporate              1996            119,708          -          4,900                  -                    -
        Controller
        (Principal
        Financial Accounting
        Officer)
</TABLE>

------------------------
1        The amount of any bonus earned for a fiscal year,  although included in
         the fiscal year earned,  is actually  determined and paid after the end
         of the fiscal year.  The amount in Fiscal Year 1997 reflects the actual
         amount earned under the Company's  Management Incentive Plan for Fiscal
         Year 1997,  of which 70% was paid in  December  1997 and the  remaining
         amount was paid in November 1998.

2        Represents  tax  liability  reimbursed  by  the  Company  arising  from
         contributions made by the executive officer and for investment earnings
         thereon  under a Company  employee  savings  plan,  auto  allowance and
         related tax liability  reimbursed by the Company for Messrs.  Moorstein
         and Peckham  and moving  costs for Mr.  Peckham  and  amounts  paid for
         health club dues for executives  participating  in the Company's health
         club program.

3        Pursuant to the  Company's  Plan of  Reorganization,  an  aggregate  of
         487,528  shares of the  Common  Stock were  reserved  for  issuance  on
         exercise of options granted or to be granted  pursuant to the Company's
         Executive  Stock Option Plan and, as of the effective  date of the Plan
         of Reorganization (the "Effective Date"),  146,258 options were granted
         to certain  employees of the Company at an exercise price of $12.88 per
         share.  Amounts  reflected  for Fiscal Year 1997  represent the options
         granted under the  Executive  Stock Option Plan, of which 25% vested on
         the Effective Date and an additional 25% will vest on each of the first
         three anniversaries of the Effective Date.

4       During  Fiscal Year 1998,  Messrs.  Moorstein  and Peckham  entered into
        employment  agreements,   hereinafter  more  thoroughly  described  (the
        "Executive Employment  Agreements") which among other things, granted an
        additional  12,000  shares  of the  Company's  Common  Stock  under  the
        Company's Option Plan at an exercise price of $12.88 per share.

        Additionally,   the  Executive  Employment  Agreements  provide  for  an
        automatic annual grant of options commencing on the third anniversary of
        the Executive  Employment  Agreements  to purchase an  additional  2,500
        shares of the Company's  Common Stock under the Option Plan. All options
        granted  pursuant  to  the  Executive   Employment   Agreements   become
        exercisable  as to one-third of the shares subject to such option on the
        date of grant and on each of the first two anniversary dates of the date
        of grant.

5.      Effective as of November 14, 1996, the court administering the Company's
        bankruptcy approved the Company's  Incentive  Compensation and Retention
        Program which provided certain  eligible  employees with a predetermined
        confirmation  bonus and  provided for a  discretionary  bonus to certain
        employees   selected  by  the  Company's  Chief  Executive   Officer  in
        consultation  with the Board of Directors.  During the 1997 fiscal year,
        Messrs. Moorstein and Peckham were paid $50,000 and Mr. Schafer was paid
        $17,500 under this program.  During Fiscal Year 1998, Messrs.  Moorstein
        and Peckham  were paid $50,000 and Mr.  Schafer was paid  $17,500  under
        this program.

Compensation Arrangements with Mr. Moorstein and Mr. Peckham

         On January 26,  1998,  Mr.  Moorstein  was  appointed  President of the
Company and Mr.  Peckham was  appointed  Executive  Vice  President  of Finance,
Administration and Strategic Planning and Chief Financial Officer.  Each of them
participates  in the Management  Incentive  Plan and the Executive  Stock Option
Plan.  Messrs.  Moorstein  and  Peckham  entered  into  the  Executive  Employee
Agreements  dated as of January 26, 1998.  The Executive  Employment  Agreements
provide  each of the  executives  an annual  salary  of not less  than  $265,000
through  January 26, 2000.  On such date and on each  following  January 26, the
term of each Executive  Employment Agreement shall automatically be extended for
an additional year, unless the Company notifies the executive not later than one
year  prior to  January  26,  2000 or to any  anniversary  date  thereof  of its
election not to so extend the term. Each Executive Employment Agreement provides
for the payment of a termination  award if the  executive is terminated  without
cause or, in the event of a change of control (as defined),  if the executive is
terminated  or his role is  diminished  within two years  following  a change of
control.  The termination  award due the affected  executive will be 200% of the
affected  executive's  base  salary  plus an amount  equal to the average of the
annual  incentive  bonuses paid to the execution over the three  completed years
preceding the date of termination. Further, pursuant to the Executive Employment
Agreement,  Messrs.  Moorstein  and Peckham  were granted  12,000  shares of the
Company's  Common Stock under the  Company's  Executive  Stock Option Plan at an
exercise  price of  $12.88  per  share.  Additionally,  the  Executive  Employee
Agreements  provide for an automatic  grant of options  commencing  on the third
anniversary  of the  Executive  Employment  Agreements to purchase an additional
2,500 shares of the  Company's  Common Stock under the Option Plan.  All options
granted pursuant to the Executive Employment Agreements become exercisable as to
one-third of the shares  subject to such option on the date of grant and on each
of the first two anniversary dates of the date of grant.

Stock Options Granted During the 1998 Fiscal Year

         The Company granted 24,000 stock options under the Company's  Executive
Stock  Option  Plan during  Fiscal Year 1998 at an exercise  price of $12.88 per
share.
<TABLE>

                                                          OPTION/SAR GRANTS IN LAST FISCAL YEAR
                                  Individual Grants
                                 Number of Securities           Percent of Total
                                      Underlying             Options/SARs Granted to        Exercise or
                               Options/SARs(1)             Employees in Fiscal Year(3)      Base Price           Expiration
              Name                Granted(#)                                                  ($/Sh)                Date
              ----                ----------               ---------------------------        ------                ----
  <S>                              <C>                              <C>                      <C>             <C> 
    Brian A. Moorstein              12,000(2)(3)                     50.0%                    $12.88          January 26, 2008
 
    Rodney J. Peckham               12,000(2)(3)                     50.0%                    $12.88          January 26, 2008
</TABLE>


(1)      To date, the Company has issued no SARs.
(2)      One-third  of  these  options  vested  on the  January  26,  1998,  the
         Effective Date of the Executive Employee Agreements,  and an additional
         one-third will vest on each of the first two  anniversaries of the date
         of grant.
(3)      Includes all options  granted to  executives  pursuant to the Company's
         Executive Stock Option Plan.

Stock Options Held at the End of the Fiscal Year 1998

         The  following  table sets forth the total  number of  exercisable  and
unexercisable   stock  options  granted  under  the  Company's  Executive  Stock
Incentive Plan held by each  executive  officer named below on November 1, 1998.
As of  October  30,  1998,  the  last  sales  price of the  Common  Stock in the
over-the-counter market was $3-7/8 per share.
<TABLE>

                                               Number of
                                         Securities Underlying                          Value of Unexercised
                                          Unexercised Options                         In-the-Money Options at
                                         at Fiscal Year End (#)                           Fiscal Year End
                               ------------------------------------------     ----------------------------------------
    Name                            Exercisable          Unexercisable            Exercisable         Unexercisable
  <S>                                  <C>                 <C>                       <C>                 <C>  
    Brian A. Moorstein                  13,750              17,750                    $0.00               $0.00
    Rodney J. Peckham                   13,750              17,750                     0.00                0.00
    Gary E. Schafer                      2,438               2,437                     0.00                0.00
</TABLE>

Retirement Pension Plan

         The Company  maintains a Retirement  Pension Plan (the "Pension  Plan")
for its salaried  employees.  The Pension Plan is a defined benefit pension plan
providing a formula benefit, on vesting,  for employees 21 years of age or older
who have  completed  one year of service  with the  Company.  The  Pension  Plan
generally takes into account  credited  service and annual  compensation  earned
under the pension plan of a predecessor of the Company (the "Predecessor Plan"),
but the benefit payable from the Pension Plan,  depending on the  circumstances,
may be reduced by any benefit payable under the Predecessor Plan.

         The following table shows the estimated annual benefits upon retirement
to participants in the Pension Plan in specified  annual  compensation and years
of  credited  service  classifications.  The  amounts  shown are  subject to the
maximum  benefit  limitations  set forth in Section 415 of the Internal  Revenue
Code of 1986 (the "Code") and are subject to reduction for amounts payable under
the  Predecessor  Plan. The pension  benefits shown are based upon retirement at
age 65 and the payment of a single-life annuity to the participants. The pension
benefits in the table reflect the  limitation  under  Section  401(a)(17) of the
Code on the maximum amount of annual  compensation  ($150,000 effective February
1, 1994 and $160,000 effective February 1, 1997 (the "Code  Limitation")),  that
can be utilized for determining benefits under the Pension Plan.
<TABLE>

                                           Years of Credited Service at Retirement
    --------------------------------------------------------------------------------------------------------------
    Highest Five Year       5            10           15             20            25          30             35
                        --------      --------     --------       --------      -------      -------       -------
    Average Annual
    Compensation*
    ------------------
<S>       <C>            <C>           <C>          <C>            <C>          <C>          <C>           <C>    
          $100,000       $ 6,674       $13,347      $20,021        $26,694      $33,368      $40,041       $46,715
           110,000         7,424        14,847       22,271         29,694       37,118       44,541        51,965
           120,000         8,174        16,347       24,521         32,694       40,868       49,041        57,215
           130,000         8,924        17,847       26,771         35,694       44,618       53,541        62,466
           140,000         9,674        19,347       29,021         38,694       48,368       58,041        67,715
           150,000        10,424        20,847       31,271         41,694       52,118       62,541        72,965
           160,000        10,724        21,447       32,171         42,694       53,618       64,341        75,065
</TABLE>
    -----------------------

*        Annual  compensation is the amount  reportable on a participant's  Form
         W-2 for  federal  income tax  purposes,  and  consists  of the  amounts
         reported in the table included under "Summary of Compensation in Fiscal
         Years 1998, 1997 and 1996 as salary,  bonus, other annual  compensation
         and all other compensation.

         Credited years of service for benefit  accruals under the Pension Plan,
as of December 31, 1998, for the following executive officers are:

            Brian A. Moorstein        15 years
            Rodney J. Peckham         13 years
            Gary E. Schafer           9 years
      
         A  participant's  annual  pension  payable  as of  his  or  her  normal
retirement  date  at  age  65  will  be  equal  to 1% of  that  portion  of  the
participant's  "final  average  compensation"  (as defined in the Pension  Plan)
which is equal to the  "social  security  integration  level" (as defined in the
Pension  Plan) in effect  for the year in which the  participant  retires,  plus
1-1/2% of that portion of the participant's final average compensation in excess
of the social security  integration level,  multiplied by the number of years of
credited  service not to exceed 35 years. A reduced  pension  benefit is payable
upon (i)  early  retirement  at or  after  age 55,  (ii)  death,  under  certain
circumstances,  and (iii)  disability if the  participant has completed at least
five years of vesting service. A reduced pension benefit is also payable, at the
election of a participant who terminates  employment  after  completing at least
five years of vesting service,  at any time at or after age 55.  Generally,  the
payment  of  benefits  will  be in the  form  of a  straight  life  annuity  for
participants  who are not married and a joint and survivor annuity for those who
are married.

Agreements Relating to a Change In Control

         Under the Company's  Incentive  Compensation and Retention Program (the
"Program"),  adopted in November  1996,  an  aggregate  of  $1,500,000  of bonus
compensation  became  payable to certain  employees of the  Company,  in part in
connection  with  the  Company's  emergence  from  bankruptcy  and in  part on a
discretionary basis during Fiscal Year 1997. One-half of this amount was paid in
August 1997 and the balance was paid in late  January  1998.  This  program also
provides that certain key employees,  including Mr. Schafer, will be entitled to
receive  termination  awards if  terminated  "without  cause" (as defined in the
Program)  after a "change in  control" of the Company and within two years after
the date of confirmation of the Company's Plan of Reorganization (July 9, 1997).
A  termination  award  would be equal to 150% of the  affected  employee's  base
salary at the time of the  termination.  Since a "change in control" was defined
under the  Program to include,  among  other  things,  the  confirmation  of the
Company's Plan of Reorganization, termination awards will be payable to such key
employees if their employment is terminated "without cause" at any time prior to
July 9, 1999. The Executive  Employment  Agreements  with Messrs.  Moorstein and
Peckham provide for the payment of a termination  award in the event of a change
of control (as defined) if the executive is terminated or his role is diminished
within two years following a change of control.  The  termination  award due the
affected executive will be 200% of the affected  executive's base salary plus an
amount  equal  to the  average  of the  annual  incentive  bonuses  paid  to the
executive over the three completed years preceding the date of termination.

Indemnity Agreements

         The  Company  is  party  to an  indemnity  agreement  with  each of its
directors  and  certain  of its  executive  officers  which  provides  that  the
indemnitee  will be  entitled  to  receive  indemnification,  which may  include
advancement of expenses,  to the full extent  permitted by law for all expenses,
judgements,  fines, penalties and settlement payments incurred by the indemnitee
in actions  brought  against the indemnitee in connection  with any act taken in
the indemnitee's capacity, and within the indemnitee's scope of authority,  as a
director or executive officer of the Company.  These agreements  provide for the
appointment  of  independent  legal  counsel to determine  whether a director or
executive  officer is entitled to indemnity  after a change in control.  It also
requires the Company to use reasonable  efforts to maintain  specified levels of
directors' and officers' liability insurance for so long as an indemnitee may be
subject to any possible,  threatened or pending action,  except that the Company
will not be obligated  to pay annual  premiums to do so in excess of 150% of the
annualized rate of premiums paid during Fiscal Year1997.

Compensation Committee Interlocks and Insider Participation

         The  Board of  Directors  established  the  Compensation  Committee  in
December  1997,  after the end of Fiscal  Year 1997,  to  oversee  all issues of
executive  compensation.  Mr. Robert N.  Dangremond,  former President and Chief
Executive  Officer of the Company,  participated  in  discussion of the Board of
Directors concerning executive compensation. No other officer or employee of the
Company  served as a member of the  Compensation  Committee  during  Fiscal Year
1998.

Directors' Fees and Benefits

         In October 1997, the Board of Directors of the Company adopted the 1997
Directors  Compensation Plan (the "Directors  Plan"),  which was approved by the
shareholders in August 1998 at the Annual Meeting of Shareholders. The Directors
Plan became  effective on December  19, 1997 and will  terminate on December 31,
2007, unless earlier terminated by the shareholders of the Company. Directors of
the  Company  who are not also  officers  or  employees  of the  Company  or its
subsidiaries  are  eligible  to  participate  in  the  Directors  Plan  (each  a
"Participant").

         Each  Participant  will receive for services as a director a payment of
$3,000 for each fiscal  quarter during each fiscal year of the Company from 1998
through  2007,  subject to a prorated  adjustment if the  Participant  was not a
director at the time of each meeting of the Board of Directors  held during such
fiscal quarter. Each Participant will also receive a $1,000 fee for each meeting
of the  Board of  Directors  he or she  attends  in each  fiscal  year from 1998
through 2007 in excess of six meetings during such fiscal year. Each Participant
who also serves as  Chairperson  of the Board of Directors  or of any  committee
thereof will also receive an additional  fee of $375 for each fiscal  quarter of
such fiscal years.

         A total of 450,000 shares of the Common Stock are  available,  and have
been  reserved,  for issuance under the Directors Plan pursuant to stock options
granted  or to be  granted,  and  share  awards  made or to be made,  under  the
Directors  Plan. The Directors Plan provides for the automatic  grant of a fixed
number of stock options and the automatic  making of share awards having a fixed
fair market value to each  Participant.  If any stock option or share award made
under the  Directors  Plan is canceled or forfeited,  the shares  subject to the
stock  option or share  award will again be  available  for  issuance  under the
Directors Plan.

         The Directors Plan authorizes the Company to grant  non-qualified stock
options,  but not incentive  stock options (within the meaning of Section 422 of
the Code). On the date that an individual becomes a Participant,  he or she will
automatically be granted an option to purchase 12,000 shares of the Common Stock
(an "Initial  Option").  On the third  anniversary  of such initial grant and on
each  anniversary  date  thereafter,  provided  that a  Participant  is  still a
director,  he or she will  automatically  be  granted an option to  purchase  an
additional 2,500 shares.  Each option will become exercisable as to one-third of
the shares  subject to such option on the date of grant and on each of the first
two  anniversary  dates of the date of grant.  Options will be exercisable for a
term of 10 years or until earlier terminated, as described below.

         The exercise  price of an option  granted under the Directors Plan will
be the Fair Market Value (as defined in the Directors  Plan) of the Common Stock
on the date of grant,  except that the exercise price of any Initial Option will
in no event be less than  $12.88 per  share.  The  exercise  price of an option,
together with any required  taxes,  must be paid in full at the time of exercise
in cash,  by the  delivery  of shares of the Common  Stock  (subject  to certain
conditions) or a combination of cash and shares.

         Each  Participant  will  receive for  services as a director,  for each
fiscal quarter during each fiscal year of the Company from 1998 through 2007, an
award of that number of shares of the Common Stock (rounded to the nearest whole
number)  as equals  $3,000  divided by the Fair  Market  Value of a share of the
Common Stock as of the last  business day of such fiscal  quarter,  subject to a
prorated  adjustment if the  Participant  was not a director at the time of each
meeting of the Board of Directors held during such fiscal quarter.  Although due
pursuant to the Directors  Plan, no shares of Common Stock were issued to any of
the Company's directors during Fiscal Year 1998.

         Pursuant to the  Directors  Plan,  as of February  11,  1999,  Margaret
Bertelsen Hampton (a former Director),  Mr. Gregory, Mr. Kjorlien and Mr. Matlin
are due 670,  2,758,  2,838 and 1,422 shares  respectively,  in respect of their
services as  directors  of the Company  during  Fiscal Year 1998 and Fiscal Year
1997 based on a Fair Market Value ranging from $4.77 to $14.00 per share.
<PAGE>
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         At the close of business on February  11,  1999,  there were issued and
outstanding  4,385,770 shares of the Common Stock, par value $0.01 per share, of
the Company (the "Common Stock").  Each share is entitled to one vote. There was
no other class of voting securities outstanding at that date.

         To the  knowledge  of the Company,  as of February 11, 1999,  no person
owned beneficially (for purposes of Rule 13d-3 under the Securities Act of 1934)
more than 5% of the  outstanding  shares of the Common Stock except as set forth
in the following table.  Except as noted below, each such person has sole voting
and investment power with respect to all shares.

              Name and Address of       Amount and Nature of       Percent of
             Beneficial Ownership        Beneficial Owner1           Class1
 -----------------------------------    ---------------------      ----------
 Daystar L.L.C.2                              1,381,070              31.04%
 411 Theodore Fremd Avenue                                        
 Rye, NY 10580                                                    
                                                                  
 Credit Suisse First Boston, Inc.3            1,011,714              22.74%
 11 Madison Avenue                                                
 New York, NY 10010                                               
                                                                  
 BankAmerica Corporation4                       759,129              17.06%
 555 California Street                                            
 San Francisco, CA 94104                                          
                                                                  
 Grace Brothers, Ltd.5                          412,124               9.26%
 1560 Sherman Avenue                                              
 Suite 900
 Evanston, Il 60201

-------------------------------
1        On July 23,  1997,  pursuant to a Plan of  Reorganization,  the Company
         emerged  from  bankruptcy  proceedings  commenced  by  the  Company  in
         September 1995 under Chapter 11 of the United States  Bankruptcy  Code.
         Pursuant to such Plan of Reorganization, which had been approved by the
         Company's  shareholders  and creditors and confirmed by the  bankruptcy
         court, all general  unsecured claims of the Company were converted into
         100% of the Common Stock, based on a ratio of 50 shares for each $1,000
         of allowed  unsecured  claim.  Holders of the Company's  pre-bankruptcy
         common stock and  preferred  stock were issued  warrants to purchase an
         aggregate  of  87,756  shares  of the  Common  Stock  exercisable  at a
         purchase  price of $23.00 per share  during the period  ending July 23,
         1999, and their prior holdings were canceled.

2        Based on Schedule 13D, dated February 13, 1998.  Daystar L.L.C.  serves
         as General  Partner of  Daystar  Special  Situations  Fund,  L.P.  (the
         "Fund),  a Delaware limited  partnership,  which owns 784,936 (17.9% of
         the  outstanding)  shares  of the  Common  Stock,  and as such has full
         discretionary  authority  to vote and dispose of such  shares.  Daystar
         L.L.C.  also acts,  with full  discretionary  authority,  as investment
         advisor  to  clients  who own in the  aggregate  585,376  (13.4% of the
         outstanding)  shares of the Common  Stock.  The  managing  directors of
         Daystar L.L.C.,  who are jointly  responsible for managing the Fund and
         such client advisory accounts,  are Bruce W. Gregory, a director of the
         Company,  Warren J. Malone,  Michael C. Murr and John C. Sites, Jr. Mr.
         Gregory also is due 2,758 shares of the Common Stock  awarded to him by
         the  Company  pursuant  to the  Directors  Plan and  holds  options  to
         purchase  12,000  shares of the Common Stock granted to him pursuant to
         the  Directors  Plan,  of which  options to purchase  8,000  shares are
         currently  exercisable  and  options to purchase  4,000  shares are not
         currently  exercisable.  He holds such shares and stock options for the
         benefit of Daystar L.L.C.,  which is deemed to be the beneficial  owner
         of such shares and stock options.

3        Based on Schedule  13D,  dated  October 16, 1997,  indicating  indirect
         ownership by Credit Suisse First Boston,  Inc. of 435,178  shares owned
         directly by Credit  Suisse  First  Boston  Management  Corporation  and
         571,167   shares   owned   directly  by  Credit   Suisse  First  Boston
         Corporation.  Mr.  Matlin,  a Managing  Director at Credit Suisse First
         Boston,  Inc. is due 1,369 shares of the Common Stock awarded to him by
         the  Company  pursuant  to the  Directors  Plan and  holds  options  to
         purchase  12,000  shares of the Common Stock granted to him pursuant to
         the  Directors  Plan,  of which  options to purchase  4,000  shares are
         currently  exercisable  and  options to purchase  8,000  shares are not
         currently  exercisable.  He holds such shares and stock options for the
         benefit of Credit Suisse First Boston, Inc.

4        Based  on  Schedule  13G,  dated  February  5,  1998   indicating  that
         BankAmerica  Corporation may be deemed to beneficially own shares which
         are  owned   directly  by  its   subsidiary,   BankAmerica   Investment
         Corporation.

5        Based on Schedule 13G, dated January 27, 1998.

         The following table sets forth information as of February 11, 1999 with
respect to the beneficial  ownership of the Common Stock by each director,  each
of the executive  officers named in the Summary  Compensation  Table (see above)
and all directors and executive officers as a group. Except as noted below, each
such person has sole voting and investment power with respect to all shares.

     Name and Address of            Amount and Nature          Percent of 
      Beneficial Owner           of Beneficial Ownership1        Class1
----------------------------     ------------------------      ----------
 Bruce W. Gregory                       1,381,0702                31.04%
 James E. Kjorlien                         27,6783                     *
 David Matlin                           1,011,7144                22.74%
 Brian A. Moorstein                        17,8505                     *
 Rodney J. Peckham                         18,2505                     *
 Gary E. Schafer                            2,4385                     *
 All directors and executive 
 officers as a                    
 group (6 persons)                      2,459,0006                55.26%
 -------------------------------
*Less than 1%.

1        See footnote 1 to the preceding table

2        See footnote 2 to the preceding table.  Includes 8,000 shares of Common
         Stock subject to stock options  granted to Mr. Gregory  pursuant to the
         Directors  Plan,  which are currently  exercisable and does not include
         4,000 shares subject to stock options  granted under the Directors Plan
         which are not currently exercisable.

3        Includes 11,519 shares of the Common Stock owned by Edison Capital LLC,
         a company  controlled by Mr. Kjorlien.  Includes 2,838 shares of Common
         Stock awarded to Mr. Kjorlien by the Company  pursuant to the Directors
         Plan.  Includes  8,000 shares of Common Stock  subject to stock options
         granted to Mr.  Kjorlien  pursuant  to the  Directors  Plan,  which are
         currently  exercisable  and does not include  4,000  shares  subject to
         stock options  granted under the Directors Plan which are not currently
         exercisable.

4.       See footnote 3 to the preceding table.  Includes 4,000 shares of Common
         Stock  subject to stock options  granted to Mr. Matlin  pursuant to the
         Directors  Plan,  which are currently  exercisable and does not include
         8,000 shares subject to stock options  granted under the Directors Plan
         which are not currently exercisable.

5        Includes  100 shares of Common  Stock  owned by Mr.  Moorstein  and 500
         shares of Common Stock owned by Mr. Peckham. Includes 17,500 shares for
         Messrs. Moorstein and Peckham and 2,438 shares for Mr. Schafer issuable
         on  exercise  of  currently  exercisable  options  under the  Company's
         Executive  Stock Option  Plan.  Does not include  17,750  shares of the
         Common Stock subject to stock options granted to each of Mr.  Moorstein
         and Mr.  Peckham and 2,437 shares  subject to stock options  granted to
         Mr. Schafer pursuant to the Company's Executive Stock Option Plan, none
         of which are currently exercisable.

6        Includes shares issuable on exercise of currently  exercisable  options
         under the Company's Executive Stock Option Plan and the Directors Plan.
         Does not  include an  aggregate  of 16,000  shares of the Common  Stock
         subject to stock  options  granted  to the  Company's  three  directors
         pursuant to the Directors Plan or an aggregate of 37,937 shares subject
         to stock options  granted to the  Company's  three  executive  officers
         pursuant  to the  Executive  Stock  Option  Plan,  none  of  which  are
         currently exercisable.

         For  purposes  of  the  preceding  table,  each  of the  directors  and
executive  officers is deemed to be the beneficial  owner of shares which may be
acquired by him or her within 60 days through the  exercise of options,  if any,
and such shares are deemed to be  outstanding  for the purpose of computing  the
percentage  of the  Common  Stock  beneficially  owned  by him or her and by the
directors  and  executive  officers as a group.  Such shares,  however,  are not
deemed to be  outstanding  for the purpose of computing  the  percentage  of the
Common Stock beneficially owned by any other person.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         None
<PAGE>
                                     PART IV

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

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

     1 and 2.

           Financial  statements and financial  statement  schedules - See Index
           Financial  Statements and Financial  Statement Schedules in Item 8 of
           this Annual Report.


     3. Listing of Exhibits:

       2.             First  Amended  Plan  of  Reorganization   (Exhibit  1  to
                      Company's Current Report on Form 8-K dated July 9, 1997).

       3.1(a)         Articles  of  Restatement  setting  forth the  Amended and
                      Restated  Articles of  Incorporation  of the  Company,  as
                      filed with the  Secretary  of State of Georgia on November
                      19, 1990 (Exhibit 3(i)1. to the Company's Quarterly Report
                      on Form 10-Q for the quarter ended July 31, 1994).

       3.1(b)         Articles of  Correction,  as filed with the  Secretary  of
                      State of Georgia on December 18, 1990 (Exhibit  3(i)2.  to
                      the  Company's  Quarterly  Report  on  Form  10-Q  for the
                      quarter ended July 31, 1994).

       3.1(c)         Articles of Amendment to the Articles of  Incorporation of
                      the  Company,  as  filed  with the  Secretary  of State of
                      Georgia on April 5, 1994 (Exhibit  3.1(d) to the Company's
                      Annual  Report on Form 10-K for the year ended October 30,
                      1994).

       3.1(d)         Amendment  Pursuant to  Reorganization  of the Articles of
                      Incorporation of Forstmann & Company, Inc., dated July 23,
                      1997 (Exhibit 3 to the Company's  Quarterly Report on Form
                      10-Q for the quarter ended August 3, 1997).

       3.1(e)*        Articles of Amendment of the Articles of  Incorporation of
                      the Company,  filed with the Secretary of State of Georgia
                      on September 8, 1998.

       3.2(a)         Amended and Restated  By-Laws of the Company as of October
                      9, 1997 (Exhibit 3.2(a) to the Company's Annual Report on
                      Form 10-K for the year ended November 2, 1997).

       4.1(a)         Registration Rights Agreement,  dated as of July 23, 1997,
                      between the Company and the holders of Common  Stock named
                      therein. (Exhibit 4.4 to the Company's Quarterly Report on
                      Form 10-Q for the quarter ended August 3, 1997).

       4.1(b)*        Amendment No.1 to Registration Rights Agreement,  dated as
                      of November 25, 1998,  between the Company and the holders
                      of the Common Stock named therein.

       4.2            Warrant Agreement,  dated as of July 23, 1997, between the
                      Company  and  Norwest  Bank  Minnesota,  N.A.,  as warrant
                      agent  (Exhibit 4.2 to the Company's  Quarterly Report on
                      Form 10-Q for the quarter ended August 3, 1997).

       4.4(a)***      Loan  Agreement,  dated as of July 23,  1997,  between the
                      Company and Schlaforst Inc.

       4.4(b)***      Promissory  Note,  dated as of July 23, 1997,  between the
                      Company and Schlaforst Inc.

       4.4(c)***      Security Agreement, dated as of July 23, 1997, between the
                      Company and Schlaforst Inc.

       10.1(a)(i)     Amended and Restated Loan and Security Agreement, dated as
                      of  September  14, 1998,  among the  Company,  the lenders
                      named therein,  and BankAmerica  Business Credit, Inc., as
                      agent (the "Agent") (Exhibit 4 to the Company's Quarterly
                      Report on Form 10-Q for the quarterly  period ended August
                      2, 1998).

       10.1(a)(ii)   Waiver and Amendment No. 1 to the Loan Agreement, dated as 
                     of February 8, 1999, among the  Company,  the lenders
                     named therein,  and BankAmerica  Business Credit, Inc., as
                     agent (the "Agent").

       10.1(b)(i)    Trademark  Security  Agreement,  dated as of July 23, 1997,
                     between the Company and the Agent  (Exhibit 10.1(b) to the
                     Company's  Quarterly  Report on Form 10-Q for the quarterly
                     period ended August 3, 1997).

       10.1(b)(ii)   Trademark  Security  Agreement,  dated as of September  14,
                     1998, between FAI and the Agent (Exhibit 4 to the Company's
                     Quarterly  Report on Form 10-Qfor the quarter  ended August
                     2, 1998).

       10.1(c)       Patent  Security  Agreement,  dated  as of July  23,  1997,
                     between the Company and the Agent  (Exhibit 10.1(c) to the
                     Company's  Quarterly  Report on Form 10-Q for the quarterly
                     period ended August 3, 1997).


       10.1(d)       Pledge  Agreement,  dated as of July 23, 1997,  between the
                     Company and the Agent  (Exhibit  10.1(d) to the  Company's
                     Quarterly  Report  on Form  10-Q for the  quarterly  period
                     ended August 3, 1997).

       10.1(e)       Deed to Secure Debt, dated as of July 23, 1997, between the
                     Company  and the  Agent,  with  respect  to the owned  real
                     property  located  in  Laurens  County,  Georgia  (Exhibit
                     10.1(e) to the Company's  Quarterly Report on Form 10-Q for
                     the quarterly period ended August 2, 1997).

       10.1(f)       Deed to Secure Debt, dated as of July 23, 1997, between the
                     Company  and the  Agent,  with  respect  to the owned  real
                     property  located  in  Baldwin  County,  Georgia  (Exhibit
                     10.1(f) to the Company's  Quarterly Report on Form 10-Q for
                     the quarterly period ended August 5, 1997).

       10.1(g)       Deed to Secure Debt, dated as of July 23, 1997, between the
                     Company  and the  Agent,  with  respect  to the owned  real
                     property  located in Jefferson  County,  Georgia  (Exhibit
                     10.1(g) to the Company's  Quarterly Report on Form 10-Q for
                     the quarterly period ended August 3, 1997).

       10.1(h)       Pledge Agreement, dated September 14, 1998, between FAI and
                     the Agent (Exhibit 4 to the Company's  Quarterly  Report on
                     Form 10-Q for the quarterly period ended August 2, 1998).

       10.1(i)       Pledge  Agreement  dated as of September 14, 1998,  between
                     the  Company  and the  Agent  (Exhibit  4 to the  Company's
                     Quarterly  Report  on Form  10-Q for the  quarterly  period
                     ended August 2, 1998).

       10.2**        Incentive  Plan for Senior  Managers,  effective as of July
                     23, 1997  (Exhibit 10.2 to the Company's  Quarterly Report
                     on Form  10-Q for the  quarterly  period  ended  August  3,
                     1997).

       10.3**        Incentive Plan for Key Employees,  effective as of July 23,
                     1997  (Exhibit 10.3 to the Company's  Quarterly  Report on
                     Form 10-Q for the quarterly period ended August 3,1 997).

       10.4**        Executive Stock Option Plan, effective as of July 23, 1997
                     (Exhibit  10.4 to the  Company's  Quarterly  Report on Form
                     10-Q for the quarterly period ended August 3, 1997).

       10.5           Environmental  Cost Sharing and Indemnity  Agreement dated
                      as of July  18,  1997,  among  the  Company,  Tift  County
                      Development  Authority  and Burlen  Corporation  (Exhibit
                      10.5 to the  Company's  Quarterly  Report on Form 10-Q for
                      the quarterly period ended August 3, 1997).

       10.6(a)       Lease dated  January 31, 1995  between  1155 Avamer  Realty
                     Corp.,  and the Company  (Exhibit  10.1(a) to the Company's
                     Quarterly Report on Form 10-Q for the quarter ended January
                     29, 1995).

       10.6(b)        Lease Takeover  Amendment,  dated January 31, 1995 between
                      1155 Avamer Realty Corp., and the Company (Exhibit 10.1(b)
                      to the  Company's  Quarterly  Report  on Form 10-Q for the
                      quarter ended January 29, 1995).


       10.6(c)        First  Amendment  to Lease,  dated as of December 27, 1995
                      between 1155 Avamer Realty Corp., and the Company (Exhibit
                      10.1(h) to the  Company's  Annual  Report on Form 10-K for
                      the year ended October 29, 1995).


       10.6(d)        Lease  Surrender  Agreement,  dated as of August 31,  1998
                      between 1155 Avamer Realty Corp., and the Company (Exhibit
                      10 to the Company's  Quarterly Report on Form 10-Q for the
                      quarterly period ended August 2, 1998).

       10.7(a)        Form of  Indemnity  Agreement,  effective as of October 9,
                      1997,  between the  Company  and certain of its  corporate
                      officers  (Exhibit  10.7(a) to the Company's Annual Report
                      on Form 10-K for the year ended November 2, 1997).

       10.7(b)        Form of  Indemnity  Agreement,  effective as of October 9,
                      1997,  between  the  Company  and its  directors  (Exhibit
                      10.7(b) to the  Company's  Annual  Report on Form 10-K for
                      the year ended November 2, 1997).

       10.8           Forstmann  &  Company,  Inc.  Incentive  Compensation  and
                      Retention  Program,  effective  as of  November  14,  1996
                      (Exhibit 10.8 to the Company's  Annual Report on Form 10-K
                      for the year ended November 3, 1996).

       10.9(a)        Agreement for Financial  Consulting  Services  between Jay
                      Alix &  Associates  and the  Company,  dated July 31, 1995
                      (Exhibit  10.10(k) to the Company's  Annual Report on Form
                      10-K for the year ended October 29, 1995).

       10.9(b)        Letter of  Acknowledgment  in  Agreement  dated August 18,
                      1995,  between  Jay  Alix &  Associates  and the  Company,
                      outlining  changes to "Agreement for Financial  Consulting
                      Services"  dated July 31,  1995  (Exhibit  10.10(l) to the
                      Company's  Annual  Report on Form 10-K for the year  ended
                      October 29, 1995).

       10.9(c)        Second  Amendment to Agreement  for  Financial  Consulting
                      Services, dated December 20, 1996 (Exhibit 10.10(m) to the
                      Company's  Annual  Report on Form 10-K for the year  ended
                      November 3, 1996).

       10.10(a)*     Agreement  of  Lease  between  498  Seventh,  LLC  and the
                     Company, dated as of September 15, 1998.

       10.10(b)*     First Amendment of Lease between 498 Seventh,  LLC and the
                     Company, dated December 30, 1998.

       10.11(*)(***) Employment  Agreement,  dated as of January  26,  1998
                     between Brian A. Moorstein and the Company.

       10.11(*)(***) Employment  Agreement,  dated as of January  26,  1998
                     between Rodney J. Peckham and the Company.

       10.13(*)(***) 1997  Director's  Compensation  Plan  as  approved  by  the
                     Company's  shareholders  during its Annual  Meeting held on
                     August 14, 1998.

       21*           Information Regarding Subsidiaries of the Registrant.

       27*           Financial Data Schedule.


(b)  The  Company  did not file a Current  Report on Form 8-K  during the fourth
     quarter of its fiscal year ended November 1, 1998.


     *   Filed herewith.

     **  Management or Compensatory Plan or Arrangements.

     *** Not filed herewith. Registrant has filed herewith an Undertaking 
         to Furnish Copy of Agreements Upon Request.
<PAGE>
September 18, 1997


                         Undertaking to Furnish Copy of
                             Agreements Upon Request

                   Loan Agreement, dated as of July 23, 1997,
                    Between the Company and Schlafhorst Inc.

                   Promissory Note, dated as of July 23, 1997,
                    Between the Company and Schlafhorst Inc.

                 Security Agreement, dated as of July 23, 1997,
                    Between the Company and Schlafhorst Inc.


The total amount of the debt securities to which the above-referenced agreements
relate  does  not  exceed  10% of  the  total  assets  of  the  registrant  and,
consequently,  the registrant is not filing the agreements pursuant to Paragraph
(b) (4) (iii) of Item 601 of  Regulation  S-K. The  registrant  will provide the
Securities and Exchange Commission with a copy of such agreements upon request.


                         Sincerely,

                         FORSTMANN & COMPANY, INC.

                         By /s/Rodney Peckham
                            ---------------------
                         Rodney Peckham
                         EVP & CFO
<PAGE>

                                   SIGNATURES

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

Date: February 11, 1999              By: /s/ Rodney J. Peckham
                                         ----------------------
                                         Rodney J. Peckham
                                         Executive Vice President Finance,
                                         Administration and Strategic Planning


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.

     Signature                     Title                              Date
---------------------------      --------------------------    -----------------

 /s/ Brian A. Moorstein           President                    February 11, 1999
------------------------           (Principal
Brian A. Moorstein                  Executive 
                                    Officer)

 /s/ Rodney J. Peckham            Executive Vice President     February 11, 1999
------------------------           Finance, Administration
Rodney J. Peckham                  and Strategic Planning
                                   (Principal Financial 
                                   Officer)
                     
/s/ Gary E. Schafer               Vice President               February 11, 1999
------------------------           and Corporate
Gary E. Schafer                    Controller Controller 
                                   (Principal Financial 
                                   Accounting Officer)

/s/ Bruce W. Gregory              Director                     February 11, 1999
------------------------
Bruce W. Gregory

 /s/ James E. Kjorlien            Director                     February 11, 1999
------------------------
    James E. Kjorlien

/s/ David T. Matlin               Director                     February 11, 1999
------------------------
David T. Matlin

<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549




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


                                    EXHIBITS


                                 Filed with the




                           ANNUAL REPORT ON FORM 10-K


                                       for


                   For the Fiscal Year ended November 1, 1998


                                       of


                            FORSTMANN & COMPANY, INC.



                         Commission File Number: 1-9474

<PAGE>
                                  EXHIBIT INDEX


                                                                      Sequential
Exhibit No.                     Description                             Page No.
-----------                     -----------                           ----------
2.       First Amended Plan of Reorganization (Exhibit 1 to
         Company's Current Report on Form 8-K dated  
         July 9, 1997).                                                       *
       
3.1(a)   Articles  of  Restatement  setting  forth the  Amended and
         Restated  Articles of  Incorporation  of the  Company,  as
         filed with the  Secretary  of State of Georgia on November
         19, 1990 (Exhibit 3(i)1. to the Company's Quarterly Report
         on Form 10-Q for the quarter
         ended July 31, 1994).                                                *
       
3.1(b)   Articles of Correction, as filed with the Secretary of
         State of Georgia on December 18, 1990 (Exhibit 3(i)2.
         to the Company's Quarterly Report on Form
         10-Q for the quarter ended July 31, 1994).                           *
       
3.1(c)   Articles of Amendment to the Articles of  Incorporation of
         the  Company,  as  filed  with the  Secretary  of State of
         Georgia on April 5, 1994 (Exhibit  3.1(d) to the Company's
         Annual Report on Form 10-K for the
         year ended October 30, 1994).                                        *
       
3.1(d)   Amendment  Pursuant to  Reorganization  of the Articles of
         Incorporation of Forstmann & Company, Inc., dated July 23,
         1997 (Exhibit 3 to the Company's  Quarterly Report on Form
         10-Q for the quarter
         ended August 3, 1997).                                               *
       
3.1(e)   Articles of Amendment of the Articles of  Incorporation of
         the Company,  as filed with the  Secretary of the State of
         Georgia on September 8, 1998.                                       122
      
3.2(a)   Amended and Restated By-Laws of the Company
         as of October  9, 1997  (Exhibit  3.2(a) to the  Company's
         Annual Report on Form 10-K for the year ended  November 2,
         1997).                                                               *
<PAGE>
                                  EXHIBIT INDEX
                                                                      Sequential
Exhibit No.                          Description                        Page No.
----------                           -----------                      ----------
4.1(a)      Registration Rights Agreement,  dated as of July 23, 1997,
            between the Company and the holders of Common  Stock named
            therein (Exhibit 4.4 to the Company's Quarterly Report on
            Form 10-Q for the quarter
            ended August 3, 1997).                                            *
          
4.1(b)      Amendment No. 1 to Registration Rights Agreement,
            dated as of November 25, 1998, between the Company
            and the holders of Common Stock named therein.                   125
          
4.2        Warrant Agreement, dated as of July 23, 1997,
           between the Company and Norwest Bank Minnesota,
           N.A., as warrant agent  (Exhibit 4.2 to the Company's
           Quarterly Report on Form 10-Q for the quarter
           ended August 3, 1997).                                             *
          
4.4(a)     Loan Agreement, dated as of July 23, 1997, between
           the Company and Schlaforst Inc.                                    *
          
4.4(b)     Promissory Note, dated as of July 23, 1997, between
           the Company and Schlaforst Inc.                                    *
          
4.4(c)     Security Agreement, dated as of July 23, 1997, between
           the Company and Schlaforst Inc.                                    *
          
10.1(a)(i) Amended and Restated Loan and Security Agreement,  dated as
           of September 14, 1998, among the Company, the lenders named
           therein,  and BankAmerica  Business Credit,  Inc., as agent
           (the "Agent") (Exhibit 4 to the Company's Quarterly Report
           on Form 10-Q for the quarterly
           period ended August 2, 1998).                                      *

10.1(a)(ii)Waiver and Amendment No. 1 to the Loan Agreement, dated as 
           of February 8, 1999, among the  Company,  the lenders
           named therein,  and BankAmerica  Business Credit, Inc., as
           agent (the "Agent").                                              129
        
10.1(b)(i) Trademark  Security  Agreement,  dated as of July 23, 1997,
           between the Company and the Agent  (Exhibit 10.1(b) to the
           Company's  Quarterly  Report on Form 10-Q for the quarterly
           period ended
           August 3, 1997).                                                   *

<PAGE>

                           EXHIBIT INDEX


                                                                      Sequential
Exhibit No.                          Description                        Page No.
-----------                          -----------                      ----------
10.1(b)(ii)Trademark  Security  Agreement,  dated as of September  14,
           1998, between FAI and the Agent (Exhibit 4 to the Company's
           Quarterly Report on Form 10-Q for the quarter 
           ended August 2, 1998).                                             *

10.1(c)    Patent  Security  Agreement,  dated  as of July  23,  1997,
           between the Company and the Agent  (Exhibit 10.1(c) to the
           Company's  Quarterly  Report on Form 10-Q for the quarterly
           period ended August 3, 1997).                                      *

10.1(d)    Pledge  Agreement,  dated as of July 23, 1997,  between the
           Company and the Agent  (Exhibit  10.1(d) to the  Company's
           Quarterly Report on Form 10-Q
           for the quarterly period ended August 3, 1997).                    *

10.1(e)    Deed to Secure Debt, dated as of July 23, 1997, between the
           Company  and the  Agent,  with  respect  to the owned  real
           property  located  in  Laurens  County,  Georgia  (Exhibit
           10.1(e) to the Company's  Quarterly Report on Form 10-Q for
           the quarterly period ended August 2, 1997).                        *

10.1(f)    Deed to Secure Debt, dated as of July 23, 1997, between the
           Company  and the  Agent,  with  respect  to the owned  real
           property  located  in  Baldwin  County,  Georgia  (Exhibit
           10.1(f) to the Company's  Quarterly Report on Form 10-Q for
           the quarterly period
           ended August 5, 1997).                                             *

<PAGE>
                                  EXHIBIT INDEX


                                                                      Sequential
Exhibit No.                          Description                        Page No.
------------                        -------------                     ----------
10.1(g)    Deed to Secure Debt, dated as of July 23, 1997, between the
           Company  and the  Agent,  with  respect  to the owned  real
           property  located in Jefferson  County,  Georgia  (Exhibit
           10.1(g) to the Company's  Quarterly Report on Form 10-Q for
           the quarterly period ended August 3, 1997).                        *

10.1(h)    Pledge Agreement, dated September 14, 1998, between FAI and
           the Agent (Exhibit 4 to the Company's  Quarterly  Report on
           Form 10-Q for the quarterly period ended August 2, 1998).          *

10.1(i)    Pledge  Agreement  dated as of September 14, 1998,  between
           the  Company  and the  Agent  (Exhibit  4 to the  Company's
           Quarterly Report on Form 10-Q for the  
           quarterly period ended August 2, 1998).                            *

10.2       Incentive Plan for Senior Managers, effective as of
           July 23, 1997  (Exhibit 10.2 to the Company's
           Quarterly Report on Form 10-Q for the quarterly
           period ended August 3, 1997).                                      *

10.3       Incentive Plan for Key Employees, effective as of
           July 23, 1997  (Exhibit 10.3 to the Company's Quarterly
           Report on Form 10-Q for the quarterly period
           ended August 3,1 997).                                             *

10.4       Executive Stock Option Plan, effective as of
           July 23, 1997  (Exhibit 10.4 to the Company's
           Quarterly Report on Form 10-Q for the quarterly
           period ended August 3, 1997).                                      *

10.5       Environmental Cost Sharing and Indemnity Agreement
           dated as of July 18, 1997, among the Company, Tift
           County Development Authority and Burlen Corporation
           (Exhibit 10.5 to the Company's Quarterly Report on
           Form 10-Q for the quarterly period ended
           August 3, 1997).                                                   *
    
<PAGE>
                                  EXHIBIT INDEX

                                                                      Sequential
Exhibit No.                          Description                       Page No.
-----------                          -----------                      ----------
10.6(a)    Lease dated  January 31, 1995  between  1155 Avamer  Realty
           orp.,  and the Company  (Exhibit  10.1(a) to the Company's
           Quarterly Report on Form 10-Q for the quarter ended 
           January 29, 1995).                                                 *

10.6(b)    Lease Takeover Amendment, dated January 31, 1995
           between 1155 Avamer Realty Corp., and the Company
           (Exhibit 10.1(b) to the Company's Quarterly Report
           on Form 10-Q for the quarter ended January 29, 1995).              *

10.6(c)    First  Amendment  to Lease,  dated as of December 27, 1995
           between 1155 Avamer Realty Corp., and the Company (Exhibit
           10.1(h) to the Company's Annual Report
           on Form 10-K for the year ended October 29, 1995).                 *

10.6(d)    Lease  Surrender  Agreement,  dated as of August 31,  1998
           between 1155 Avamer Realty Corp., and the Company (Exhibit
           10 to the Company's Quarterly Report on
           Form 10-Q for the quarterly period ended August 2, 1998).          *

10.7(a)    Form of  Indemnity  Agreement,  effective as of October 9,
           1997,  between the  Company  and certain of its  corporate
           officers  (Exhibit  10.7(a) to the Company's Annual Report
           on Form 10-K
           for the year ended November 2, 1997).                              *

10.7(b)    Form of  Indemnity  Agreement,  effective as of October 9,
           1997,  between  the  Company  and its  Directors  (Exhibit
           10.7(b) to the  Company's  Annual  Report on Form 10-K for
           the year ended November
           2, 1997).                                                          *

10.8       Forstmann & Company, Inc. Incentive Compensation
           and Retention Program, effective as of
           November 14, 1996 (Exhibit 10.8 to the Company's
           Annual Report on Form 10-K for the year ended
           November 3, 1996).                                                 *

<PAGE>
                           EXHIBIT INDEX

                                                                      Sequential
Exhibit No.                          Description                        Page No.
-----------                          ------------                     ----------

10.9(a)     Agreement for Financial Consulting Services between
            Jay Alix & Associates and the Company, dated July 31, 1995
            (Exhibit 10.10(k) to the Company's Annual Report 
            on Form 10-K for the year ended November 3, 1996).                *

10.9(b)     Letter of Acknowledgment in Agreement dated
            August 18, 1995, between Jay Alix & Associates
            and the Company, outlining changes to "Agreement
            for Financial Consulting Services" dated July 31, 1995
            (Exhibit 10.10(l) to the Company's Annual Report
            on Form 10-K for the year ended October 29, 1995).                *

10.9(c)     Second  Amendment to Agreement  for  Financial  Consulting
            Services, dated December 20, 1996 (Exhibit 10.10(m) to the
            Company's Annual Report on Form 10-K for the year ended
            November 3, 1996).                                                *

10.10(a)    Agreement of Lease between 498 Seventh, LLC
            and the Company, dated as of September 15, 1998.                 138

10.10(b)    First Amendment of Lease between 498 Seventh, LLC
            and the Company, dated December 30, 1998.                        269

10.11       Employment  Agreement,  dated as of January 26, 1998
            between Brian A. Moorstein and the Company.                      273

10.11       Employment Agreement, dated as of January 26, 1998
            between Rodney J. Peckham and the Company.                       281

10.13       1997 Director's Compensation Plan as approved by
            the Company's shareholders during its Annual
            Meeting held on August 14, 1998.                           

21          Information Regarding Subsidiaries of the Registrant.      

27          Financial Data Schedule.                                   


(b)  The  Company  did not file a Current  Report on Form 8-K  during the fourth
     quarter of its fiscal year ended November 1, 1998.
<PAGE>
                                                                  Exhibit 3.1(e)


                              ARTICLES OF AMENDMENT

                                     of the

                            ARTICLES OF INCORPORATION

                                       of

                            FORSTMANN & COMPANY, INC.



To the Secretary of State:


                  Pursuant to the provisions of the Georgia Business Corporation
Code,  Section  14-2- 1006,  Forstmann & Company,  Inc.  amends its  Articles of
Incorporation, and for that purpose, submits the following statement:


                  FIRST:  The name of the  corporation  is  FORSTMANN & COMPANY,
INC. (the "Corporation").

                  SECOND:  Article V of the  Articles  of  Incorporation  of the
Corporation is amended in its entirety to read as follows:

                           "The  Corporation  shall  have  authority  to issue a
         total of  Thirty-Six  Million  (36,000,000)  shares of stock,  of which
         Thirty-Five Million  (35,000,000) shares shall be Common Stock having a
         par value of one cent  ($.01)  per share  and One  Million  (1,000,000)
         shares shall be  Preferred  Stock having a par value of one cent ($.01)
         per share.

                                 PREFERRED STOCK

                           Shares of the Preferred Stock may be issued from time
         to time in series,  and the Board of  Directors of the  Corporation  is
         authorized,  subject to the  limitations  provided by law, to establish
         and  designate one or more series of the  Preferred  Stock,  to fix the
         number of shares constituting each series, and to fix the designations,
         powers,  preferences  and  relative,  participating,  optional or other
         special rights,  qualifications,  limitations and restrictions thereof,
         if any,  of  each  series,  and the  variations  and  relative  rights,
         preferences,  limitations and  restrictions  as between series,  and to
         increase and decrease  the number of shares  constituting  each series.
         The authority of the Board of Directors of the Corporation with respect
         to each  series  shall  include,  but  shall  not be  limited  to,  the
         authority to determine the following:

                           (a)      the designation of such series, if any;

                           (b) the number of shares  initially  constituting any
         such series and any increase or decrease (to a number not less than the
         number of  outstanding  shares of such  series) of the number of shares
         constituting such series theretofore fixed;

                           (c) the rate or rates of, and the  conditions  on and
         the times at which,  dividends  on the shares of such  series  shall be
         paid,  the  preference or relation  which such divi dends shall bear to
         the  dividends  payable  on any  other  class or series of stock of the
         Corporation, and whether or not such dividends shall be cumulative and,
         if so, the date or dates from and after which they shall accumulate;

                           (d) whether or not the shares of such series shall be
         redeemable,  and, if so, the terms and  conditions of such  redemption,
         including, without limitation, the date or dates on or after which such
         shares  shall be  redeemable  and the amount per share  which  shall be
         payable on such  redemption,  which  amount  may vary  under  different
         conditions and at different redemption dates;

                           (e) the rights to which the  holders of the shares of
         any such  series  shall be  entitled on the  voluntary  or  involuntary
         liquidation,  dissolution or winding up, or on any  distribution of the
         assets,  of the Corporation,  which rights may be different in the case
         of a voluntary liquidation,  dissolution or winding up than in the case
         of such an involuntary event;

                           (f)  whether  or not the  shares  of any such  series
         shall have voting rights in addition to the voting  rights  provided by
         law and, if so, the terms and conditions  thereof,  including,  without
         limitation,  the  right  of the  holders  of such  shares  to vote an a
         separate  class,  either  alone or with the holders of shares of one or
         more  other  series of the  Preferred  Stock and the right to have more
         than one vote per share;

                           (g) whether or not a sinking fund or a purchase  fund
         shall be provided for the  redemption or purchase of the shares of such
         series and, if so, the terms and conditions thereof;

                           (h) whether or not the shares of such series shall be
         convertible  into, or  exchangeable  for,  shares of any other class or
         series of the same or any other class of stock of the Corporation  and,
         if so, the terms and  conditions of conversion or exchange,  including,
         without limitation,  any provision for the adjustment of the conversion
         or exchange rate or the conversion or exchange price; and

                           (i)  any  other  relative  rights,   preferences  and
         limitations.

                                  COMMON STOCK

                           (a) Subject to the  preferential  dividend  rights of
         the  Preferred  Stock,  as  determined by the Board of Directors of the
         Corporation pursuant to the foregoing provisions of this Article V, the
         holders of shares of the Common Stock shall be entitled to receive such
         dividends  as  may  be  declared  by  the  Board  of  Directors  of the
         Corporation.

                           (b) Subject to the preferential liquidation rights of
         the Preferred Stock  (including  dividends and  distributions  upon the
         dissolution of the  corporation)  and except as determined by the Board
         of Directors of the Corporation pursuant to the foregoing provisions of
         this  Article  V,  in  the  event  of  any  voluntary  or   involuntary
         liquidation,  dissolution or winding up of, or any  distribution of the
         assets of, the  Corporation,  the holders of shares of the Common Stock
         shall be entitled  to receive all of the net assets of the  Corporation
         available for distribu tion to its  shareholders  ratably in proportion
         to the number of shares of the Common Stock held by them.

                           (c)  Except as  otherwise  required  by law or by the
         provisions of these Articles of Incorporation, the holders of shares of
         the  Common  Stock  shall be  entitled  to vote on all  matters  at all
         meetings of the shareholders of the Corporation,  and shall be entitled
         to one vote for each share of the Common Stock entitled to vote at such
         meeting, voting together as one class with the holders of the Preferred
         Stock who are entitled to vote."

                  THIRD:   Section  1  of   Article  IX  of  the   Articles   of
Incorporation of the Corporation is amended in its entirety to read as follows:

                  "1. The Corporation  shall have a minimum of two and a maximum
         of seven directors. The Board of Directors of the Corporation may, from
         time to time,  within the  minimum  and  maximum,  change the number of
         directors."

                  FOURTH:  The  foregoing  amendments  were  recommended  to the
shareholders of the Corporation by the Board of Directors of the Corporation and
duly approved and adopted by the  shareholders  of the  Corporation at a meeting
thereof  duly  called  and held on  August  14,  1998,  in  accordance  with the
provisions of Section 14-2-1003 of the Georgia Business Corporation Code.

                  IN WITNESS WHEREOF,  the Corporation has caused these Articles
of Amendment to be executed and attested by its duly  authorized  officers  this
8th day of September 1998.

                                      /s/Rodney J. Peckham
                                     ---------------------------------
                                              RODNEY J. PECKHAM
                                           Executive Vice President


ATTEST:


By: /s/Laurence S. Markowitz
    -------------------------
       LAURENCE S. MARKOWITZ
       Assistant Secretary

<PAGE>
                                                                  Exhibit 4.1(b)

                               AMENDMENT NO. 1 TO
                          REGISTRATION RIGHTS AGREEMENT

                  AMENDMENT,  dated as of November 25, 1998, to the Registration
Rights  Agreement,  dated as of July 23,  1997 (the  "Agreement"),  by and among
Forstmann  & Company,  Inc.,  a Georgia  corporation  (the  "Company"),  and the
holders  of  Registrable  Common  Stock (as  defined in the  Agreement)  who are
signatories to the Agreement.

                              W I T N E S S E T H:

                  WHEREAS,  pursuant to the Agreement,  the Company was required
to file, not later than March 31, 1998, a shelf registration statement under the
Securities  Act of 1933,  as  amended,  covering  the  resale  of the  shares of
Registrable Common Stock held by the Holders (as defined in the Agreement);

                  WHEREAS,  the Company  has been unable to file a  registration
statement on Form S-3 due to its  inability to qualify for listing on The Nasdaq
Small Cap Market due to an insufficient number of shareholders; and

                  WHEREAS,  the Company and the Holders  desire to take steps to
enable the Holders to dispose of their shares of  Registrable  Common Stock more
easily,  should they wish to do so,  despite the Company's  delay in registering
such shares and while the Company continues its efforts to effect a registration
of such shares on Form S-3;

                  NOW,  THEREFORE,  the  parties  agree  that the  Agreement  is
amended as set forth below:

1.       Definitions. Capitalized terms used in this Amendment have the meanings
         given to them in the Agreement.

2.       Assignment.  Section  15 of the  Agreement  is  amended  to delete  the
         requirement  that a Transferee  hold at least 1% of the total number of
         shares  of  Common  Stock  outstanding  in order to enjoy  registration
         rights  with  respect to its  shares,  and to read in its  entirety  as
         follows:

                  "15.     Assignment.

                  The  provisions  of this  Agreement  shall be binding upon and
inure  to  the  benefit  of the  parties  hereto  and  their  respective  heirs,
successors  and  permitted  assigns.  Any  Holders  may assign to any  permitted
Transferee (as permitted under  applicable law) of its Registrable  Common Stock
its rights and obligations  under this Agreement,  provided that such Transferee
shall agree in writing  with the parties  hereto prior to the  assignment  to be
bound by this Agreement as if it were an original  party hereto,  whereupon such
assignee  shall for all purposes be deemed to be a Holder under this  Agreement.
Except as provided above or otherwise permitted by this Agreement,  neither this
Agreement nor any right, remedy, obligation or liability arising hereunder or by
reason  hereof  shall be  assignable  by any Holder  without  the prior  written
consent of the other parties  hereto.  The Company may not assign this Agreement
or any right,  remedy,  obligation or liability  arising  hereunder or by reason
hereof."

3.       Savings  Clause.  In all other  respects,  the Agreement shall continue
         unchanged and in full force and effect.

4.       Counterparts.   This   Amendment   may  be  signed  in  any  number  of
         counterparts,  each of which shall be an original, with the same effect
         as if the signatures thereto and hereto were upon the same instrument.

5.       Governing Law. This Amendment and the Agreement as amended hereby shall
         be governed by and construed in  accordance  with the laws of the State
         of New York.


                  [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                  IN WITNESS  WHEREOF,  the parties have executed this Amendment
as of the date first set forth above.

                                               FORSTMANN & COMPANY, INC.


                                               By:/s/ Rodney J. Peckham
                                               Name:Rodney J. Peckham
                                               Title:EVP & CFO


                                               HOLDERS:

                                               GRACE BROTHERS LTD.


                                               By:/s/Brad Whitmore
                                               Name:Brad Whitmore
                                               Title:Director


                                               CREDIT SUISSE FIRST BOSTON
                                               SECURITIES CORP.

                                               By:/s/ David J. Matlin
                                               Name: David J. Matlin
                                               Title:Managing Director

                                               DAYSTAR SPECIAL SITUATIONS
                                               FUND, L.P.

                                               By: DAYSTAR L.L.C.

                                               By:/s/ Bruce W. Gregory
                                               Name:Bruce W. Gregory
                                               Title:Partner

                                               DAYSTAR L.L.C.


                                               By:/s/ Bruce W. Gregory
                                               Name:Bruce W. Gregory
                                               Title:Partner


                                               BANKAMERICA CORP.


                                               By:/s/ Moria A. Cary
                                               Name:Moria A. Cary
                                               Title:Attorney-in-Fact


<PAGE>
                                                             Exhibit 10.1(a)(ii)

                           WAIVER AND AMENDMENT NO. 1

                                       TO

                                 LOAN AGREEMENT


         WAIVER AND AMENDMENT NO. 1 dated as of February 8, 1999 among FORSTMANN
& COMPANY,  INC., FORSTMANN APPAREL,  INC.  (collectively the "Borrowers"),  the
financial institutions listed on the signature pages hereof (each a "Lender" and
collectively,  the "Lenders") and BANKAMERICA  BUSINESS  CREDIT,  INC., as agent
(the "Agent").

         WHEREAS,  the  Borrowers,  the Agent and the  Lenders  are parties to a
certain Amended and Restated Loan and Security Agreement,  dated as of September
14, 1998 (the "Loan  Agreement"),  pursuant to which the  Lenders  have  agreed,
subject  to the terms and  conditions  therein  set forth,  to  provide  certain
financial accommodations to the Borrowers; and

         WHEREAS,  the Borrowers  desire that the Lenders waive  compliance with
certain  provisions of the Loan Agreement and amend the Loan Agreement,  and the
Lenders are willing,  subject to the terms and conditions hereinafter set forth,
to do so;

         NOW, THEREFORE, the Borrowers and the Lenders hereby agree as follows:

         SECTION 1. CAPITALIZED  TERMS.  Capitalized  terms used but not defined
herein shall have the respective meanings set forth in the Loan Agreement.

         SECTION 2. WAIVER OF  COMPLIANCE  WITH CERTAIN  PROVISIONS  OF THE LOAN
AGREEMENT.  Subject to the terms and provisions set forth herein, Lenders hereby
waive  compliance  with the provisions of Sections 9.24,  9.25, 9.26 and 9.30 of
the Loan Agreement  solely for the Borrowers'  Fiscal Year ending on November 1,
1998.

         SECTION 3. AMENDMENTS

                           (a)       Amendment to Section 1.1

                                    (i)     The    definitions    of   "Adjusted
                                            Tangible  Net Worth",  "Availability
                                            Reserve"  and  "EBITDA" set forth in
                                            Section  1.1 of the  Loan  Agreement
                                            are hereby deleted and replaced with
                                            the following  definitions in proper
                                            alphabetical order:

                                            "'Adjusted   Tangible   Net  Worth'
                                            means,  at any  date,  (a) the  book
                                            value   (after   deducting   related
                                            depreciation,          obsolescence,
                                            amortization,     valuation,    LIFO
                                            reserve,  and other proper  reserves
                                            as  determined  in  accordance  with
                                            GAAP) at which the Adjusted Tangible
                                            Assets   would   be   shown  on  the
                                            unconsolidated   balance   sheet  of
                                            Forstmann & Company,  Inc.,  at such
                                            date  prepared  in  accordance  with
                                            GAAP;  less (b) the  amount at which
                                            the Borrowers  liabilities  would be
                                            shown   on   such   balance   sheet,
                                            including   as    liabilities    all
                                            reserves  for   contingencies,   and
                                            other  potential  liabilities  which
                                            would  be  required  to be  shown on
                                            such  balance  sheet  in  accordance
                                            with GAAP."

                                            "'Availability  Reserve'  means  the
                                            sum of  $564,500 on and after May 3,
                                            1999;  $1,129,000  on and after June
                                            4, 1999 and  $1,693,520 on and after
                                            July 2, 1999 or such  lesser  amount
                                            as  determined  by the  Agent in its
                                            discretion."

                                            "'EBITDA' means, for any period, the
                                            sum of:
                                                     
                                 (i)        The  net   income  or  loss  of  the
                                            Borrowers     (determined    on    a
                                            consolidated   basis  in  accordance
                                            with GAAP) for such period; plus (or
                                            minus):

                                 (ii)       to the extent  that any of the items
                                            referred  to in any  of the  clauses
                                            (A) through (H) below were  deducted
                                            or added in the  calculation of such
                                            net income:

                                            (A)        interest  expense  of the
                                                       Borrowers     for    such
                                                       period;

                                            (B)        federal,  state, or local
                                                       income tax expense of the
                                                       Borrowers with respect to
                                                       operations    for    such
                                                       period;

                                            (C)        the    amount    of   all
                                                       depreciation          and
                                                       amortization   for   such
                                                       period;

                                            (D)        expenses  related  to the
                                                       relocation  of  machinery
                                                       and equipment, limited to
                                                       a total of  $200,000  for
                                                       Fiscal  Year  1999;   (E)
                                                       LIFO adjustments for such
                                                       period;    

                                            (F)        non-cash  gains or losses
                                                       from the sale,  disposal,
                                                       or impairment of property
                                                       (other  than  Inventory);
                                                       

                                            (G)        restructuring    charges,
                                                       limited  to an  aggregate
                                                       of $1,200,000  for Fiscal
                                                       Year  1999;  and  

                                            (H)        any items classified as a
                                                       non-cash  charge  at  the
                                                       sole  discretion  of  the
                                                       Agent for such period. "

                                    (ii)    The definition of "Maximum  Revolver
                                            Amount"  set forth in Section 1.1 of
                                            the Loan Agreement is hereby amended
                                            by deleting the sum of "$85,000,000"
                                            set forth  therein and  substituting
                                            therefor the sum of "$70,000,000."

                           (b)      Amendment to Section 2.1. The first sentence
                                    of  Section  2.1 of the  Loan  Agreement  is
                                    hereby  amended  by  deleting  the amount of
                                    "$116,450,000"   set   forth   therein   and
                                    substituting    therefor   the   amount   of
                                    "$101,450,000."

                           (c)      Amendment to Section 2.3.  Section 2.3(c) is
                                    hereby amended by adding the following three
                                    sentences to the end thereof:

                                            "Effective   March  1,  1999,   each
                           monthly installment shall be increased from an amount
                           equal to a Lender's  Pro Rata Share of $374,405 to an
                           amount  equal  to such  Lender's  Pro  Rata  Share of
                           $450,000. Borrower shall execute and deliver to Agent
                           replacement  notes for each Lender on or before March
                           15, 1999 and the  references in the Loan Documents to
                           "Term Loan Notes" shall be deemed to be references to
                           such replacement notes. Each Lender shall deliver its
                           old notes to Agent for cancellation and return to the
                           Borrowers,  after Agent's  receipt of the replacement
                           notes."

                           (d)      Amendment to Section 4.2. Section 4.2 of the
                                    Loan Agreement is hereby amended by deleting
                                    the second sentence  thereof in its entirety
                                    and substituting the following therefor:

                                            "If the Revolving Credit Facility is
                           terminated  at any  time  prior to  April  23,  2000,
                           whether  pursuant  to this  Section  or  pursuant  to
                           Section  11.2,  the  Borrowers  jointly and severally
                           agree to pay to the  Agent,  for the  account  of the
                           Lenders,  an early  termination fee equal to one half
                           of  one  percent  (.50%)  of the  sum of the  Maximum
                           Revolver Amount plus the then  outstanding  principal
                           balance of the Term Loans."

                           (e)      Amendment to Section 4.5. Section 4.5 of the
                                    Loan  Agreement is hereby  amended by adding
                                    the  following as clause "(d)" to the end of
                                    such Section 4.5:

                                    "(d) In the  event  that  any  appraisal  or
                                    update thereof obtained  pursuant to Section
                                    6.5  indicates  (as  determined by Agent) an
                                    increase  in the  ratio  of the  outstanding
                                    principal  balance  of the Term Loans to the
                                    orderly  liquidation value of the Borrower's
                                    Equipment  (determined as of the date of the
                                    appraisal  or update,  as  applicable)  such
                                    that such ratio is greater than .831 to 1.0,
                                    then Borrowers shall repay the Term Loans in
                                    an amount  required  to reduce such ratio to
                                    .831 to 1.0.  Any such  prepayment  shall be
                                    made  in  six  equal  monthly   installments
                                    beginning  on the  first  day  of the  month
                                    following   the   Agent's   receipt  of  the
                                    applicable  appraisal  or update and applied
                                    to the  principal  balance of the Term Loans
                                    in inverse  order of  maturity.  If any such
                                    appraisal  or  update  indicates  a ratio of
                                    .931  to  1.0  or  greater,   Borrowers  may
                                    request a re-appraisal by another  appraisal
                                    firm  acceptable  to Agent.  The  values set
                                    forth  in  the  two   appraisals   shall  be
                                    averaged   together  to   determine  if  any
                                    prepayment  is required  under this  Section
                                    4.5(d).  In  the  absence  of  an  Event  of
                                    Default,  Lenders agree that no appraisal or
                                    update  will  be  requested  before  August,
                                    1999.

                           (f)      Amendment to Section 6.11.  Section  6.11(c)
                                    is hereby amended to read in its entirety as
                                    follows:

                                    "(c) No Borrower shall,  without the Agent's
                                    prior  written  consent,  sell,  lease  as a
                                    lessor,  or otherwise dispose of any of such
                                    Borrower's  Equipment;   provided,  however,
                                    that such  Borrower  may dispose of obsolete
                                    or  unusable  Equipment  having  an  orderly
                                    liquidation  value no greater  than  $50,000
                                    individually,  or $500,000 in the  aggregate
                                    for all  Borrowers  in any Fiscal  Year,  or
                                    $2,500,000   in  the   aggregate   for   all
                                    Borrowers during the term of this Agreement,
                                    without the Lenders' consent, subject to the
                                    conditions  set forth in the next  sentence.
                                    In the event any of such  Equipment is sold,
                                    transferred   or   otherwise   disposed   of
                                    pursuant  to the  proviso  contained  in the
                                    immediately preceding sentence or otherwise,
                                    then such Borrower  shall deliver all of the
                                    cash proceeds of any such sale,  transfer or
                                    disposition  to the  Agent,  which  proceeds
                                    shall be applied first,  to the reduction of
                                    the  Term  Loans  (in the  inverse  order of
                                    maturity)  up  to  the  orderly  liquidation
                                    value of the Equipment sold,  transferred or
                                    disposed of, secondly,  to the repayment (in
                                    inverse  order)  of any  amounts  due  under
                                    Section 4.5(d);  and thirdly,  any remaining
                                    proceeds  shall be  applied  60% to the Term
                                    Loans in inverse  order of maturity  and 40%
                                    to repayment of Revolving Loans."

                           (g)      Amendment to Section 7.2.  Section 7.2(e) is
                                    hereby  amended by deleting the reference to
                                    Section  "9.26"  set  forth  in  clause  (i)
                                    thereof and substituting therefor "9.24."

                           (h)      Amendment to Section  9.24.  Section 9.24 of
                                    the Loan  Agreement is hereby deleted in its
                                    entirety  and   following   is   substituted
                                    therefor:

                                    "9.24  Minimum   EBITDA.   The  sum  of  the
                                    Borrowers  EBITDA less Capital  Expenditures
                                    and MIS Expenditures for the period from the
                                    first day of a Fiscal Year  (beginning  with
                                    the 1999 Fiscal  Year)  through the last day
                                    of  each  fiscal  quarter  set  forth  below
                                    occurring  in such  Fiscal Year shall not be
                                    less than the  respective  amounts set forth
                                    opposite   such   fiscal   quarter,   on   a
                                    consolidated basis:

                                Fiscal Quarter Ending            Amount
                                ---------------------         ------------
                                   January, 1999              ($4,500,000)
                                     April, 1999              ($2,400,000)
                                      July, 1999               $1,250,000
                                   October, 1999               $3,500,000
                                   January, 2000              ($4,000,000)
                                     April, 2000              ($2,000,000)
                                                   
                           (i)      Amendment to Section  9.25.  Section 9.25 of
                                    the Loan  Agreement is hereby amended in its
                                    entirety to read as follows:

                                    "9.25  Adjusted   Tangible  Net  Worth.  The
                                    Borrowers  will maintain  Adjusted  Tangible
                                    Net Worth for all  Borrowers'  determined as
                                    of the last  day of each  fiscal  month  set
                                    forth below,  of not less than the following
                                    amounts, on a consolidated basis:

                                         Month                        Amount
                                    --------------                  -----------
                                     January, 1999                  $20,500,000
                                    February, 1999                  $20,000,000
                                       March, 1999                  $21,500,000
                                       April, 1999                  $21,500,000
                                         May, 1999                  $23,500,000
                                        June, 1999                  $25,000,000
                                        July, 1999                  $25,000,000
                                      August, 1999                  $24,500,000
                                   September, 1999                  $24,000,000
                                     October, 1999                  $23,500,000
                            November, 1999 and each month end       $22,000,000
                                       thereafter       
                                                     
                           (j)      Amendment to Section.  9.26. Section 9.26 of
                                    the Loan  Agreement is hereby deleted in its
                                    entirety  and  the   following   substituted
                                    therefor:

                                    "9.26   [Intentionally Omitted]."

                           (k)      Amendment to Section.  9.30. Section 9.30 of
                                    the Loan  Agreement is hereby deleted in its
                                    entirety  and  the   following   substituted
                                    therefor:

                                    "9.30   [Intentionally Omitted]."


         SECTION 4. ADDITIONAL AGREEMENTS AND UNDERTAKINGS.

                           (a)      Borrowers  hereby  irrevocably  request that
                                    upon the effective  date of this  Agreement,
                                    Lenders  make a Revolving  Loan to Borrowers
                                    in the amount of $5,645,000, the proceeds of
                                    which   shall  be  applied  by  Agent  as  a
                                    principal  repayment  of the Term Loans,  in
                                    inverse order of maturity.

                           (b)      Notwithstanding   anything   in   the   Loan
                                    Documents to the contrary,  Borrowers  agree
                                    that at any time that  Availability  is less
                                    than    $1,693,520    (with     Availability
                                    calculated   for   this   purpose    without
                                    reference  to  the  Availability   Reserve),
                                    interest on the amount by which Availability
                                    is less than $1,693,520  shall be calculated
                                    at a  fluctuating  rate  of Base  Rate  plus
                                    2.00%  (and  on the  basis  of a year of 360
                                    days and actually days elapsed).

                           (c)      Borrowers  agree to deliver to Agent  within
                                    30 days of the Agent's  written  request any
                                    amendments or modifications to the Mortgages
                                    and/or title policies requested by Agent (if
                                    any).

         SECTION 5.  EFFECTIVENESS.  The waiver and amendment  made herein shall
become  effective  when (i) the Lenders (or  Majority  Lenders)  shall have duly
executed and delivered  this Agreement and  counterparts  hereof shall have been
duly executed and delivered to the Agent by the Borrowers;  (ii) Borrowers shall
have  paid a fee in the  amount of  $200,000  to Agent  for the  account  of the
Lenders, provided, however, that Borrowers may elect to make payment of such fee
in four equal monthly  installments  beginning March 31, 1999 but such fee shall
be fully  earned on the date  hereof;  and  (iii)  Borrowers  shall  have paid a
documentation fee for Agent's sole account in the amount of $3,500.

         SECTION 6.  COUNTERPARTS  AND  GOVERNING  LAW.  This  Agreement  may be
executed in counterparts,  each of which shall be an original, and all of which,
taken together,  shall constitute a single  instrument.  This Agreement shall be
governed by, and construed in accordance with the law of the State of New York.

         SECTION  7.   REFERENCES  TO  LOAN   AGREEMENT.   From  and  after  the
effectiveness  of this  Agreement  and the waivers and  agreements  contemplated
hereby,  all  references in the Loan  Agreement to "this  Agreement",  "hereof",
"herein",  and  similar  terms  shall  mean and refer to the Loan  Agreement  as
certain provisions thereof are waived or supplemented by this Agreement, and all
references in other documents to the Loan agreement shall mean such agreement as
certain provisions thereof are waived or supplemented by this Agreement.

         SECTION  8.  INVALIDITY.  Whenever  possible,  each  provision  of this
Agreement shall be interpreted in such manner as to be effective and valid under
all  applicable  laws  and  regulations.  If,  however,  any  provision  of this
Agreement shall be prohibited by or invalid under any such law or regulation, it
shall be deemed  modified to conform to the minimum  requirements of such law or
regulation,  or if for any  reason  it is not  deemed so  modified,  it shall be
ineffective  and valid  only to the  extent of such  prohibition  or  invalidity
without  the  remainder  thereof  or any of the  remaining  provisions  of  this
Agreement being prohibited or invalid.

         SECTION 9. RATIFICATION AND CONFIRMATION.  The Loan Agreement is hereby
ratified and confirmed and, except as herein waived or otherwise agreed, remains
unmodified and in full force and effect.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly  executed by their  respective  authorized  officers as of the day and year
first above written.



                                     FORSTMANN & COMPANY, INC.


                                     By:/s/Rodney J. Peckham
                                        -------------------------
                                     Title:EVP & CFO
                                  
                                     FORSTMANN APPAREL, INC.


                                     By:/s/Rodney J. Peckham
                                        ---------------------
                                     Title:EVP & CFO


                                     BANKAMERICA BUSINESS CREDIT, INC.
                                     Individually and as Agent


                                     By:/s/Michael J. Bedore
                                        --------------------
                                     Title:  Senior Account Officer



                                     THE CIT GROUP/COMMERCIAL SERVICES, INC.


                                     By:/s/Kenneth H. Wendler
                                         --------------------
                                     Title:  Vice President




                  IBJ WHITEHALL BUSINESS CREDIT CORP. f/k/a
                  IBJ  SCHRODER   BUSINESS  CREDIT,   INC.   (successor  to  IBJ
                  SCHRODER BANK AND TRUST, CO., INC.)


                                     By:/s/Edward A. Jesser, III
                                        ------------------------
                                     Title:  Senior Vice President



                                      JACKSON NATIONAL LIFE
                                      INSURANCE COMPANY

                                      By:  PPM FINANCE, INC.


                                      By:
                                      Title:
 







                                      LA SALLE  BUSINESS CREDIT INC.


                                      By:
                                      Title:



                                      PNC BANK NATIONAL ASSOCIATION


                                      By:
                                      Title:

<PAGE>
                                                               Exhibit 10.10(a)


                               AGREEMENT OF LEASE

                                     BETWEEN

                           498 SEVENTH, LLC, LANDLORD,

                                       AND

                          FORSTMANN & CO., INC., TENANT





                           Dated: September 15, 1998




<PAGE>
                                TABLE OF CONTENTS



Article                                                            Page

1.       Rent.....................................................  1
         ----

2.       Use and Occupancy........................................  1
         -----------------

3.       Tenant Alterations.......................................  2
         ------------------

4.       Maintenance..............................................  5
         -----------

5.       Window Cleaning..........................................  6
         ---------------

6.       Requirements of Law, Fire Insurance, Floor Loads.........  6
         ------------------------------------------------

7.       Subordination............................................  8
         -------------

8.       Property--Loss, Damage, Reimbursement, Indemnity.........  9
         ------------------------------------------------

9.       Destruction, Fire and Other Casualty..................... 10
         ------------------------------------

10.      Eminent Domain........................................... 13
         --------------

11.      Assignment, Mortgage, Etc................................ 13
         --------------------------

12.      Electric Current......................................... 19
         ----------------

13.      Access to Premises....................................... 21
         ------------------

14.      Occupancy................................................ 22
         ---------

15.      Bankruptcy............................................... 22
         ----------

16.      Default.................................................. 23
         -------

17.      Remedies of Landlord and Waiver of Redemption............ 24
         ---------------------------------------------

18.      Fees and Expenses........................................ 25
         -----------------

19.      Building Alterations and Management...................... 25
         -----------------------------------

20.      No Representations by Landlord........................... 25
         ------------------------------

21.      End of Term.............................................. 26
         -----------

22.      Quiet Enjoyment.......................................... 26
         ---------------

23.      Failure to Give Possession............................... 26
         --------------------------

24.      No Waiver................................................ 27
         ---------

25.      Waiver of Trial by Jury.................................. 27
         -----------------------

26.      Inability to Perform..................................... 27
         --------------------

27.      Bills and Notices........................................ 28
         -----------------

28.      Services Provided by Landlord............................ 28
         -----------------------------

29.      Captions................................................. 29
         --------

30.      Definitions.............................................. 30
         -----------

31.      Adjacent Excavation; Shoring............................. 30
         ----------------------------

32.      Rules and Regulations.................................... 31
         ---------------------

33.      Security Deposit......................................... 31
         ----------------

34.      Successors and Assigns................................... 33
         ----------------------

35.      Rental Payments.......................................... 33
         ---------------

36.      Tax Escalation........................................... 35
         --------------

37.      Option to Expand......................................... 37
         ----------------

38.      Air Conditioning......................................... 39
         ----------------

39.      Brokerage................................................ 39
         ---------

40.      Building Directory....................................... 40
         ------------------

41.      Exculpatory Clause....................................... 40
         ------------------

42.      Submission to Jurisdiction, Etc.......................... 40
         --------------------------------

43.      Modifications Requested by Mortgagee, Etc................ 41
         ------------------------------------------

44.      Tenant's Work............................................ 41
         -------------

45.      Insurance................................................ 43
         ---------

46.      Estoppel Certificate..................................... 43
         --------------------

47.      Holdover................................................. 44
         --------

48.      Acceptance of Keys....................................... 44
         ------------------

49.      Tenant's Access to the Demised Premises.................. 44
         ---------------------------------------

50.      Hazardous Materials...................................... 44
         -------------------

51.      Option to Extend......................................... 45
         ----------------

52.      Landlord's Contribution.................................. 47
         -----------------------

53.      Landlord's Work.......................................... 48
         ---------------

54.      Building Directory....................................... 49
         ------------------

55.      Signage.................................................. 49
         -------


Exhibit A - Demising Wall Plan
Exhibit B - Landlord's Work
Exhibit C - Mortgagee -  Non-Disturbance  Agreement  Exhibit D - Certificate  of
Occupancy  Exhibit E - Current  Cleaning  Specifications  Exhibit F - Alteration
Rules Exhibit G - Letter of Credit Exhibit H - Seventeenth (17th) Floor Rights
<PAGE>
         AGREEMENT OF LEASE, made as of this ___ day of September, 1998, between
498 SEVENTH,  LLC, a limited liability company duly organized and existing under
the laws of New York,  having an office c/o  George  Comfort & Sons,  Inc.,  200
Madison  Avenue,  New York,  New York 10016  ("Landlord"),  and FORSTMANN & CO.,
INC., a  corporation  duly  organized  and  existing  under the laws of Georgia,
qualified to do business in the State of New York and having a place of business
at 1155 Avenue of the Americas, New York, New York 10036 ("Tenant").

                               W I T N E S E T H:

         Landlord hereby leases to Tenant and Tenant hereby hires from Landlord
a portion of that floor known as the  seventeenth  (17th) floor as shown hatched
on Exhibit A annexed  hereto  (the  "premises"  or  "demised  premises")  in the
building known as 498 Seventh  Avenue  ("Building" or "building") in the Borough
of Manhattan, City of New York, for the term of approximately ten (10) years and
four (4) months  ("Term"),  or until the Term shall  sooner  cease and expire as
hereinafter  provided,  to  commence on the  "Commencement  Date" (as defined in
Article  30) and to end on the last day of the  calendar  month in which  occurs
that date that is ten (10) years and four (4) months after the Commencement Date
(the "Expiration Date"), both dates inclusive,  at a fixed annual rental ("Fixed
Rent") as set forth in Article 35, which Tenant agrees to pay in lawful money of
the United  States which shall be legal tender in payment of all debts and dues,
public and private,  at the time of payment,  in equal monthly  installments  in
advance  on the first  day of each  month  during  the  Term,  at the  office of
Landlord or such other place as Landlord may  designate,  without any set off or
deduction  whatsoever  except as otherwise  provided in this lease,  except that
Tenant shall pay the first full monthly  installment  for all of the premises on
the execution hereof.

         The  parties  hereto,  for  themselves,   their  heirs,   distributees,
executors, administrators, legal representatives, successors and assigns, hereby
covenant as follows:

1.       Rent

         Tenant shall pay the rent as above and as hereinafter provided.

2.       Use and Occupancy

         (A) Tenant  shall use and occupy the demised  premises  for  executive,
administrative,  sales (at  wholesale  only and not to the  general  public) and
general offices and a showroom of Tenant, and for no other purpose.

         (B)  Notwithstanding  anything contained in this lease to the contrary,
Tenant covenants and agrees that Tenant will not use the demised premises or any
part thereof, or permit the demised premises or any part thereof to be used, (i)
for a retail banking, trust company, or safe deposit business,  (ii) as a retail
savings bank, or as a savings and loan association,  or as a loan company, (iii)
for the sale of travelers checks or foreign  exchange,  (iv) as a news and cigar
stand, as such, (v) as a restaurant or bar, (vi) for the sale of  confectionery,
beverages, sandwiches, ice cream, baked goods or any other food, (vii) by or for
any  foreign  consulate  or agency  or  mission,  (viii) as a betting  parlor or
gambling place,  (ix) for a medical office or rendition of any health or related
services,  (x) by or for a labor union,  (xi) by or for a  pawnbroker  or public
finance  (personal  loan)  business,  (xii) by or for an employment or placement
agency,   (xiii)  as  a  check  cashing   establishment,   (xiv)  as  a  funeral
establishment,  (xv) as or for a "close out" store for  low-priced  merchandise,
(xvi) by or for any  domestic or foreign,  state or  municipal  governmental  or
quasi-governmental office,  department,  agency or facility, or any authority or
other entity which is affiliated  therewith or controlled  thereby,  (xvii) as a
school of any kind, (xviii) for the conduct of any business which results in the
presence  of the  general  public  in the  demised  premises,  except  by  prior
appointment,  provided,  however this subdivision (xviii) shall not be deemed to
prohibit  so-called  "open  house  during  market  weeks",  (xix) as a messenger
service,  except in connection with Tenant's own messengering  needs,  (xx) as a
manufacturing,  photographic  or  reproduction  service or business,  (xxi) as a
mailing or telephone  answering service,  (xxii) as or for a retail operation at
the premises, (xxiii) for the conduct of any public auction, gathering, meeting,
or  exhibition,  (xxiv) for the conduct of a retail  stock  brokerage  office or
business,  or (xxv)  storage  for retail  sale of any product or material in the
demised premises.

         (C)  Notwithstanding  the  foregoing,  Tenant  shall  be  permitted  to
install,  in  accordance  with Law and only if permitted by the  certificate  of
occupancy for the Building,  (i) dining  facilities,  but only for the exclusive
use of Tenant's own employees  and Tenant's  guests,  and (ii) a telephone  room
and/or a messenger center exclusively for Tenant's own internal needs.  Landlord
shall not be  obligated  to  provide  cleaning  services  to any  portion of the
premises used for the storage,  preparation,  service or  consumption of food or
for any other non-office use.

         (D) Except to the extent  performed by Tenant's own  employees,  Tenant
shall  not  obtain  or  accept  for use in the  demised  premises  towel,  floor
polishing,  lighting  maintenance,  cleaning or other similar  services from any
party  not  theretofore  approved  by  Landlord  (which  approval  will  not  be
unreasonably withheld or delayed). Such services shall be furnished only at such
hours,  in  such  places  within  the  demised  premises  and  pursuant  to such
regulations as Landlord reasonably prescribes.

         (E)  Notwithstanding  the  foregoing,  Tenant  shall  be  permitted  to
operate,  in accordance  with Law, two (2) handlooms and prepare its swatches in
the demised premises, all solely as an incidental use, and in no event to exceed
an area of 300 rentable square feet.

3.       Tenant Alterations

         (A)  Tenant  shall  not  make or  perform,  or  permit  the  making  or
performance of, any alterations, installations, improvements, additions or other
physical changes in or about the demised premises (collectively,  "Alterations")
(other than  nonstructural  Alterations  within the  premises  costing less than
$25,000 for any such  Alteration  or series of related  Alterations  that do not
require any  governmental  permit and not  adversely,  in Landlord's  good faith
judgment,  affecting  any of the  building's  systems  and  purely  cosmetic  or
decorative  changes such as wall coverings and floor covering,  provided that in
any and all such cases Tenant has given Landlord prior notice  thereof)  without
Landlord's prior written  consent.  Landlord agrees not unreasonably to withhold
or delay, its consent to any Alterations that (i) are nonstructural, (ii) do not
affect the  Building's  exterior,  (iii) do not adversely  affect the Building's
systems or  facilities,  (iv) do not affect any part of the Building  other than
the demised  premises,  (v) do not adversely  affect any service  required to be
furnished  by  Landlord  to  Tenant or to any other  tenant or  occupant  of the
Building, and (vi) do not reduce the value or utility of the Building;  provided
that such  Alterations  are performed  only by  contractors,  subcontractors  or
mechanics  as  may  be  approved  by  Landlord   (which  approval  will  not  be
unreasonably withheld or delayed) except as to electrical, plumbing, mechanical,
heating,  ventilating and air conditioning  trades,  provided,  however Landlord
will  maintain  from  time to time  and  provide  Tenant  on  request  a list of
currently  approved  contractors and  subcontractors  for the Building (with not
fewer  than  three  (3)  firms  for each  trade  except  that  with  respect  to
electrical,  plumbing,  mechanical,  heating,  ventilating and air  conditioning
trades,  the list  will  contain  not  fewer  than  four (4) firms for each such
trade).  All Alterations shall be done at Tenant's expense and at such times and
in such manner as Landlord may from time to time reasonably  designate  pursuant
to the Alteration  Rules annexed as Exhibit F. Prior to making any  Alterations,
Tenant (a) shall submit to Landlord detailed plans and specifications, including
layout,  architectural,  mechanical and structural  drawings (except that if the
proposed  Alterations are minor,  Tenant shall only be required to deliver plans
therefor if good construction  practice dictates that plans be prepared,  and in
any event such  plans  need only be  prepared  in such  detail as is  reasonably
warranted by the nature of the work), for each proposed Alteration and shall not
commence any such Alteration without first obtaining Landlord's written approval
of such  plans  and  specifications  (which  approval  will not be  unreasonably
withheld or delayed to the extent that Landlord is required not  unreasonably to
withhold or delay approval of the Alteration itself), (b) shall, at its expense,
obtain all permits,  approvals and certificates  required by any governmental or
quasi-governmental  bodies and deliver duplicates  thereof to Landlord,  and (c)
shall  furnish to Landlord  certificates  of  policies of worker's  compensation
insurance   (covering  all  persons  to  be  employed  by  Tenant  and  Tenant's
contractors  and   subcontractors   in  connection  with  such  Alteration)  and
comprehensive public liability (including property damage coverage) insurance in
such  amounts and as  otherwise  provided in Article  45(A).  Landlord  will use
reasonable  and good faith  efforts to respond  to  requests  for plan  approval
within seven (7) days (except  that with respect to  engineering  plans the time
period shall be ten (10) days) with regard to an initial  submission or material
modification  and five (5) days with regard to an  immaterial  modification.  If
Landlord fails to respond to a request for approval  within the applicable  time
period and provided  Tenant has given Landlord a second request  therefor (which
second  request  shall  not be given  prior to five  (5) days  after  Landlord's
receipt  of the  initial  request  in the case of the  aforesaid  seven  (7) day
period, seven (7) days after Landlord's receipt in the case of the aforesaid ten
(10) day period and three (3) days after  Landlord's  receipt in the case of the
aforesaid  five (5) day  period)  containing  in  bold-faced,  20 point type the
legend "Failure to respond is deemed approved  pursuant to Paragraph 3(A) of the
lease",  Landlord's  approval  shall be deemed  given unless  Landlord  responds
within three (3) business days after Landlord's  receipt of such second request.
As to  engineering  plans,  the  aforesaid  time periods for Landlord to respond
shall be conditioned upon Tenant  furnishing copies thereof to Edwards & Zuck or
such other  engineering  firm as to which  Landlord may from time to time advise
Tenant.  The grounds for any  disapproval  must be stated in reasonable  detail.
Promptly after completion of each Alteration, Tenant, at Tenant's expense, shall
furnish  Landlord  with (x) final "as built" plans and  specifications  for each
Alteration  (if "as  built"  plans  exist  and,  if not,  with  final  plans and
specifications with field notations certified by Tenant's architect) showing the
Alterations,  (y)  Building  Department  filing  documents,  permits  and  final
approvals  and other  evidence  reasonably  satisfactory  to  Landlord  that the
Alterations are in compliance with all applicable  legal  requirements,  and (z)
evidence reasonably satisfactory to Landlord that all laborers,  materialmen and
mechanics have been paid,  including duly executed and acknowledged  releases of
liens  against  the  demised  premises,  the  Building,  and the  materials  and
improvements therein from the general contractor and all subcontractors involved
with the installation  covering all of the Alterations.  Landlord will cooperate
with Tenant, at Tenant's expense,  to the extent reasonably  requested by Tenant
to facilitate  Tenant's  compliance  with  subdivisions  (b) and (y) above.  All
Alterations shall be made and performed in accordance with the Alteration Rules;
all  materials  and equipment to be  incorporated  in the demised  premises as a
result  of all  Alterations  shall  be of  good  quality;  and no  materials  or
equipment  incorporated  into  the  premises  shall  be  subject  to  any  lien,
encumbrance,  chattel mortgage,  title retention or security  agreement.  Tenant
shall  not,  at any time  prior to or during the Term,  directly  or  indirectly
employ, or permit the employment of, any contractor,  mechanic or laborer in the
demised premises, whether in connection with any Alteration or otherwise, if, in
Landlord's  sole but reasonable  discretion,  such  employment will interfere or
cause any conflict with other contractors, mechanics, or laborers engaged in the
construction,  maintenance  or operation of the Building by Landlord,  Tenant or
others. In the event of any such interference or conflict,  Tenant,  upon demand
of Landlord,  shall cause all  contractors,  mechanics or laborers  causing such
interference or conflict to leave the Building immediately.

         (B) No approval of any plans or  specifications  by Landlord or consent
by  Landlord  allowing  Tenant  to make any  Alterations  or any  inspection  of
Alterations  made  by or for  Landlord  shall  in any  way  be  deemed  to be an
agreement by Landlord that the  contemplated  Alterations  comply with any legal
requirements  or insurance  requirements or the certificate of occupancy for the
Building nor shall it be deemed to be a waiver by Landlord of the  compliance by
Tenant of any provision of this lease.

         (C)  Tenant  shall  promptly  reimburse  Landlord  for all  reasonable,
out-of-pocket fees, costs and expenses  including,  but not limited to, those of
attorneys,   architects  and  engineers,  reasonably  incurred  by  Landlord  in
connection  with  the  review  of  Tenant's  plans  and  specifications  for any
Alteration  and inspecting  the  Alterations  to determine  whether the same are
being  or have  been  performed  in  accordance  with  the  approved  plans  and
specifications   therefor  and  with  all  legal   requirements   and  insurance
requirements  and other  requirements  of this lease,  but  excluding  so-called
supervisory fees.

         (D) If any mechanic's  lien is filed against the demised  premises,  or
the Building of which the same forms a part,  for work claimed to have done for,
or materials furnished to, Tenant, whether or not done pursuant to this article,
the same shall be discharged by Tenant within  forty-five (45) days after notice
to Tenant, at Tenant's expense, by filing the bond required by law. All fixtures
(except  trade  fixtures)  and  all  paneling,  partitions,  railings  and  like
installations,  installed  in the  premises at any time,  either by Tenant or by
Landlord in Tenant's behalf,  shall, upon  installation,  become the property of
Landlord  and shall  remain upon and be  surrendered  with the demised  premises
unless,  in the  case  of  Non-Standard  Alterations,  as  hereinafter  defined,
Landlord  elects,  by  notice to Tenant  at the time it  approves  the same,  to
relinquish  Landlord's  rights  thereto and to have them  removed by Tenant,  in
which event the same shall be removed,  from the premises by Tenant prior to the
expiration of this lease, at Tenant's expense.  "Non-Standard Alterations" means
non-building  standard   installations  such  as  vaults,   kitchens  (excluding
pantries, air conditioning and private bathrooms, but including plumbing running
through the ceiling and/or floor in the space of any other tenant or occupant or
public space),  stairways,  raised concrete floors,  and/or other  installations
which  in  Landlord's  reasonable  judgment  are not  reasonably  useful  for an
ordinary  office  purposes.  Nothing in this Article  shall be construed to give
Landlord title to or to prevent  Tenant's  removal of trade  fixtures,  moveable
office furniture,  furnishings and equipment, but upon removal of any such items
from the premises or upon  removal of such  Non-Standard  Alterations  as may be
required by Landlord,  Tenant  shall  immediately,  at its  expense,  repair and
restore  the  premises  to good order and  condition  in  Landlord's  reasonable
judgment,  and repair any damage to the demised  premises or the Building due to
such removal.  All property permitted or required to be removed by Tenant at the
end of the Term remaining in the premises after Tenant's removal shall be deemed
abandoned and may, at the election of Landlord, either be retained as Landlord's
property or may be removed from the premises by Landlord, at Tenant's expense.

4.       Maintenance

         Tenant  shall,  throughout  the Term,  take  good  care of the  demised
premises and the fixtures and appurtenances therein. Tenant shall be responsible
for all  damage or  injury  to the  demised  premises  or any other  part of the
Building and the systems and equipment thereof,  whether requiring structural or
nonstructural  repairs,  caused by or resulting  from the  negligence  or wilful
misconduct  of  Tenant,  or which  arise  out of any  work,  labor,  service  or
equipment  done for or  supplied  to Tenant  (excluding  defects by  Landlord in
Landlord's Work in the demised  premises) or any subtenant or arising out of the
installation,  use or  operation  of the  property or equipment of Tenant or any
subtenant  (except  to the  extent  caused by  Landlord's  negligence  or wilful
misconduct.   (As  used  herein,  the  phrase  "Tenant's  negligence  or  wilful
misconduct" includes also the negligence or wilful misconduct of Tenant's or any
subtenant's contractors,  employees, agents, invitees (while in the premises) or
licensees and the phrase "Landlord's  negligence or wilful misconduct"  includes
also the negligence or wilful misconduct of Landlord's employees, contractors or
agents.)  Tenant  shall also repair all damage to the  Building  and the demised
premises  caused by the moving of Tenant's  fixtures,  furniture and  equipment.
Tenant  shall  promptly  make,  at Tenant's  expense,  all repairs in and to the
demised  premises  for  which  Tenant is  responsible,  using  only  contractors
approved  by  Landlord  (which  approval  will not be  unreasonably  withheld or
delayed).  Any other repairs in or to the Building or the facilities and systems
thereof  for which  Tenant is  responsible  shall be  performed  by  Landlord at
Tenant's  expense to the extent that such  expense is  commercially  reasonable.
Except for those obligations of Tenant, Landlord shall maintain in good working
order and repair the  exterior  and the  structural  portions  of the  Building,
including the structural  portions of the demised premises,  the public portions
of the Building  interior and the Building  plumbing,  mechanical and electrical
systems installed by Landlord and serving the demised premises.  With respect to
the heating,  ventilating  and air  conditioning  ("HVAC")  system,  Landlord is
responsible  for  maintenance of the base Building system and the HVAC machinery
installed by Landlord  (except to the extent  damaged by Tenant's  negligence or
wilful  misconduct),  and Tenant is responsible  for the maintenance of the HVAC
distribution  system and the HVAC  machinery  installed by Tenant (except to the
extent damaged by Landlord's  negligence or wilful  misconduct).  Landlord shall
also  make  all  repairs   necessitated  by  Landlord's   negligence  or  wilful
misconduct.  Tenant agrees to give prompt  notice of any defective  condition in
the premises for which Landlord may be  responsible  hereunder as soon as Tenant
or its employees has actual  knowledge  thereof.  There shall be no allowance to
Tenant for  diminution  of rental value and no liability on the part of Landlord
by reason  of  inconvenience,  annoyance  or injury  to  business  arising  from
Landlord or others making repairs, alterations,  additions or improvements in or
to  any  portion  of  the  Building  or the  demised  premises  or in and to the
fixtures,  appurtenances or equipment  thereof.  It is specifically  agreed that
Tenant shall not, except as expressly provided in this lease, be entitled to any
setoff or  reduction of rent by reason of any failure of Landlord to comply with
the  covenants of this or any other  article of this lease.  Tenant agrees that,
except as expressly provided in this lease,  Tenant's sole remedy at law in such
instance  will be by way of an action for  damages for breach of  contract.  The
provisions  of this  Article  4 shall  not  apply  in the  case of fire or other
casualty, which is dealt with in Article 9 hereof.

5.       Window Cleaning

         Tenant will not clean nor require,  permit,  suffer or allow any window
in the demised  premises to be cleaned  from the outside in violation of Section
202 of the Labor Law or any other applicable law or of the Rules of the Board of
Standards  and  Appeals,  or of any  other  Board or body  having  or  asserting
jurisdiction.

6.       Requirements of Law, Fire Insurance, Floor Loads

         (A)  Prior  to the  commencement  of the  Term,  if  Tenant  is then in
possession,  and at all times  thereafter,  Tenant,  at  Tenant's  sole cost and
expense,  shall (except as otherwise  expressly provided in this lease) promptly
comply with all present and future laws,  orders and  regulations  of all state,
federal,  municipal and local governments,  departments,  commissions and boards
and any direction of any public officer  pursuant to law, and all orders,  rules
and regulations of the New York Board of Fire  Underwriters,  Insurance Services
Office,  or any similar body  (collectively,  "Laws") that impose any violation,
order or duty upon  Landlord or Tenant with  respect to the demised  premises or
the Building if arising out of Tenant's  particular use or manner of use thereof
(as opposed to mere generic office use). The preceding sentence shall apply only
to Laws  relating  to the  physical  aspect of the demised  premises  (and shall
exclude illegal conditions created by Landlord in performing  Landlord's Work in
the  demised  premises)  as  opposed to Laws  relating  to  Tenant's  conduct of
business therein, with which it is Tenant's sole obligation to comply.  Landlord
shall cause the public portions of the Building (together with those portions of
the  Building  systems  and  structural  elements of the  Building  that are not
affected by Tenant's  Alterations  or other  actions) to comply with Laws to the
extent  necessary  for Tenant  safely and  lawfully to occupy the  premises  for
general  office use.  Nothing  herein shall  require  Tenant to make  structural
repairs or structural alterations unless Tenant has, by its manner of use of the
demised premises or method of operation therein,  violated any such Laws. Tenant
may, after securing Landlord to Landlord's  reasonable  satisfaction against all
damages,  interest,  penalties  and  expenses,  including,  but not  limited to,
reasonable  attorney's  fees, by cash deposit or by surety bond in an amount and
in a company  reasonably  satisfactory to Landlord,  contest and appeal any such
Laws provided that the same is done with all reasonable  promptness and provided
such appeal shall not subject  Landlord to prosecution for a criminal offense or
constitute  a default  under any lease or mortgage  under which  Landlord may be
obligated,  or cause the demised premises or any part thereof to be condemned or
vacated.  Except to the extent this lease makes the same the express  obligation
of Landlord,  Tenant shall not do or permit any act or thing to be done in or to
the  demised  premises  that is  contrary  to Law or that  invalidates  or is in
conflict with public liability,  fire or other policies of insurance at any time
carried by or for the benefit of Landlord  with respect to the demised  premises
or the  Building,  or that shall or might  reasonably  subject  Landlord  to any
liability or responsibility  to any person or for property damage.  Tenant shall
not keep anything in the demised  premises except as now or hereafter  permitted
by the  Fire  Department,  Board of Fire  Underwriters,  Fire  Insurance  Rating
Organization  or other  authority  having  jurisdiction,  and then  only in such
manner  and such  quantity  so as not to  increase  the rate for fire  insurance
applicable to the Building, nor use the premises in a manner which will increase
the insurance rate for the Building or any property located therein over that in
effect prior to the  commencement  of Tenant's  occupancy.  Tenant shall pay all
costs, expenses, fines, penalties or damages to the extent imposed upon Landlord
by reason of Tenant's  failure to comply with the provisions of this Article and
if, by reason of such failure,  the fire insurance rate shall,  at the beginning
of this lease or at any time  thereafter,  be higher than it otherwise would be,
then Tenant shall reimburse  Landlord,  as additional  rent hereunder,  for that
portion of all fire insurance  premiums  thereafter paid by Landlord which shall
have been charged because of such failure by Tenant. In any action or proceeding
wherein  Landlord and Tenant are  parties,  a schedule or "make-up" of rates for
the Building or demised premises issued by the New York Fire Insurance Exchange,
or other body making fire insurance  rates  applicable to said premises shall be
conclusive  evidence of the facts  therein  stated and of the several  items and
charges in the fire insurance  rates then applicable  thereto.  Tenant shall not
place a load upon any floor of the demised premises exceeding the floor load per
square  foot area  which it was  designed  to carry and which is  allowed by Law
unless  Tenant at  Tenant's  expense  adequately  reinforces  the floor so as to
comply with Law. Landlord reserves the right to reasonably  prescribe the weight
and position of all safes,  business  machines and  mechanical  equipment.  Such
installations  shall be placed and maintained by Tenant, at Tenant's expense, in
settings sufficient,  in Landlord's  reasonable judgment,  to absorb and prevent
vibration, noise and annoyance.

         (B) All work performed or installations  made by Tenant (or by Landlord
at Tenant's  request) in and to the demised  premises shall be done in a fashion
such that the demised  premises and the Building shall be in compliance with the
requirements  of Local Law 5 of 1973 of The City of New York, as heretofore  and
hereafter  amended  ("Local  Law  5").  The  foregoing  shall  include,  without
limitation,  (i)  relocation of existing fire detection  devices,  alarm signals
and/or  communication  devices  necessitated  by the  alteration  of the demised
premises,  and (ii)  installation  of such  additional fire control or detection
devices as may be  required by Laws as a result of  Tenant's  particular  use or
manner of use of the demised  premises (as opposed to mere generic  office use).
In  addition,  Tenant  shall cause the demised  premises to be  connected to the
Building "Class E" system (Landlord agrees to provide tie-in points for Tenant's
"Class E" panels on each floor of the demised  premises) and Landlord  shall, at
Tenant's  reasonable  expense,  arrange to have the demised  premises and Tenant
added to the  "Class E"  computer.  Except  to the  extent  caused  by  Tenant's
negligence  or  willful  misconduct,  Landlord  shall  be  responsible  for  the
maintenance  and repair of the Building  "Class E" system outside of the demised
premises and "Class E" computer.

         (C)  Except to the extent  caused by  Landlord's  negligence  or wilful
misconduct,  Landlord shall not be  responsible  for any damage to Tenant's fire
control or detection devices nor shall Landlord have any  responsibility for the
maintenance or replacement  thereof.  Tenant shall  indemnify  Landlord from and
against  all loss,  damage,  cost,  liability  or  expense  (including,  without
limitation,  reasonable attorneys' fees and disbursements)  suffered or incurred
by  Landlord  by reason of the  installation  and/or  operation  by Tenant,  its
agents, contractors, employees or licensees, or those of Tenant's subtenants, of
any such devices.

         (D) All work and  installations  required  to be  undertaken  by Tenant
pursuant to this Article  shall be  performed at Tenant's  sole cost and expense
and in accordance with the applicable provisions of this lease.

         (E) The fact that  Landlord  shall  have  heretofore  consented  to any
Alterations  made by Tenant in the demised  premises shall not relieve Tenant of
its obligations pursuant to this Article with respect to such Alterations.

         (F)  If any  utility  company  or  governmental  or  quasi-governmental
authority  requires  any work,  installation  or  improvement  to be made to the
Building in connection with any Alteration performed by Tenant, the installation
or operation of equipment or machinery in the demised  premises or for any other
reason  relating  to  Tenant's  particular  use or manner of use of the  demised
premises  (as  opposed to mere  generic  office  use),  Tenant  shall  reimburse
Landlord for the cost of such work, installation or improvement on demand unless
the  necessity  therefor  arose  solely by reason of a violation  not created by
Tenant, its employees, contractors, agents or subtenants.

         (G) Except as otherwise  expressly provided in this lease, Tenant shall
be  responsible,  at  Tenant's  expense,  for  causing  Tenant's  Work and other
Alterations  in  the  demised   premises  to  comply  with  the  Americans  with
Disabilities  Act as in  effect  from  time to  time,  and any  state  or  local
variations  thereof  (collectively,  "ADA").  As part of Landlord's  Work in the
demised  premises or the floor  containing the demised  premises,  Landlord will
cause the existing core bathrooms,  the elevator servicing the demised premises,
their call  buttons  and  signage,  hall  lanterns,  fire  wardens,  manual pull
stations  and core door  hardware,  if  required,  on such floor to comply  with
current ADA requirements.

7.       Subordination

         (A) This lease is subject and  subordinate  to all ground or underlying
leases and to all mortgages which may now or hereafter affect such leases or the
real  property  of  which  demised  premises  are a part  and  to all  renewals,
modifications,   consolidations,   replacements   and  extensions  of  any  such
underlying  leases and  mortgages.  This clause shall be  self-operative  and no
further  instrument  of  subordination  shall  be  required  by  any  ground  or
underlying lessor or by any mortgagee,  affecting any lease or the real property
of which the demised premises are a part. In confirmation of such subordination,
Tenant shall  execute  promptly any  certificate  that  Landlord may  reasonably
request.  Notwithstanding  the  foregoing,  Landlord  agrees  to use  reasonable
efforts to obtain from any future mortgagee and ground lessor (not including the
Fee  Mortgage,  as defined in Paragraph  (B) below,  which is dealt with in such
Paragraph  (B)) for  Tenant's  benefit an agreement  in  recordable  form and in
substance  customarily  adopted by the holder of the mortgage or ground lease (a
"Holder"),  as the  case  may  be,  to the  effect  that,  in the  event  of any
foreclosure  of such mortgage or the  termination  of such ground lease,  as the
case  may be,  the  Holder  will  not  make  Tenant  a party  defendant  to such
foreclosure or termination  (unless  required by applicable law) nor disturb its
possession under this lease,  provided Tenant shall not be in default  hereunder
beyond  any  applicable  grace  period  under  this lease for the curing of such
default  (a  "Non-Disturbance  Agreement").  To the extent  not so  provided  by
applicable  law,  in the event of the  enforcement  by a Holder of the  remedies
provided  for by law or by a ground  lease or a  mortgage,  if the Holder or any
successors  or  assigns  shall,  at its or their  sole  option,  succeed  to the
interest of Landlord under this lease whether  through  eviction,  possessory or
foreclosure  action or a deed in lieu of foreclosure and this lease shall not be
terminated or affected by such foreclosure or any such proceedings, Tenant shall
attorn to and  recognize  the  Holder  (or its  successors  or  assigns)  as its
landlord upon the terms, covenants,  conditions and agreements contained in this
lease to the same  extent and in the same  manner as if this lease were a direct
lease between the Holder (or its successors or assigns) and Tenant,  except that
the  Holder  (or its  successors  or  assigns),  whether  or not it  shall  have
succeeded to the interest of Landlord  under this lease,  shall not (i) have any
liability  for refusal or failure to perform or complete any work required to be
performed  by  Landlord  under this lease or any  workletter  annexed  hereto to
prepare the demised premises for Tenant's occupancy,  or any liability under any
guaranty or  indemnification  with respect to such work,  or otherwise  have any
obligation to prepare the demised  premises for occupancy in accordance with the
provisions of this lease, (ii) be liable for any act, omission or default of any
prior  landlord  under this lease,  (iii) be subject to any  offsets,  claims or
defenses  which  shall  have  heretofore  accrued  to Tenant  against  any prior
landlord  under  this  lease,  except for any offset  against  rental  expressly
provided  for in this lease,  and (iv) be bound by any rent or  additional  rent
which Tenant  might have paid to any prior  landlord for more than one (1) month
in  advance.  If  there  is any  inconsistency  between  the  provisions  of the
preceding  sentence and those of the  Non-Disturbance  Agreement entered into by
Tenant and a Holder,  then, as between Tenant and such Holder,  the terms of the
Non-Disturbance Agreement will prevail.

         (B) This lease,  and all rights of Tenant  hereunder,  are and shall be
subject and  subordinate  in all respects to the mortgage  dated March 27, 1997,
between Landlord,  as mortgagor,  and Lehman Brothers Holdings Inc. d/b/a Lehman
Capital,  a division of Lehman  Brothers  Holdings  Inc., as mortgagee,  and the
liens  created  or  continued  thereby  and to each and  every  advance  made or
hereafter to be made under such  mortgage,  and to all renewals,  modifications,
spreaders,  consolidations,  replacements and extensions thereof,  including any
increases in the principal sums secured thereby,  and any increases in the rates
of interest provided therein (collectively, the "Fee Mortgage"), and to each and
all  of  the  rights  of the  mortgagee  thereunder.  This  Paragraph  shall  be
self-operative and no further instrument of subordination shall be required.  In
confirmation of such  subordination,  Tenant shall promptly  execute and deliver
any certificate that the holder of the Fee Mortgage may reasonably request at no
expense  to  Tenant.  Landlord  agrees to use  reasonable  efforts to obtain and
deliver  to  Tenant  a  Non-Disturbance  Agreement  from the  holder  of the Fee
Mortgage  in the form as set forth in Exhibit C attached  hereto  simultaneously
with  Landlord's  execution and delivery of this lease. If Landlord fails timely
to deliver to Tenant such Non- Disturbance  Agreement from the holder of the Fee
Mortgage, Tenant shall have the right, exercisable no later than forty (40) days
from the date of this lease (as to which date time is of the  essence),  but not
after such Non-Disturbance Agreement has been delivered, to cancel and terminate
this lease by notice to Landlord. Upon the giving of such notice of cancellation
and termination,  this lease shall terminate and come to an end, and the parties
shall not have any further rights or obligations hereunder.  Landlord represents
that as of the date of this lease  there are no  mortgages  encumbering  the fee
interest  in the  Building  other  than the Fee  Mortgage  and that there are no
underlying leases.

8.       Property--Loss, Damage, Reimbursement, Indemnity

         Landlord  and its agents shall not be liable for any damage to property
of Tenant or of others  entrusted to employees of the Building,  nor for loss of
or damage to any property of Tenant by theft or otherwise, nor for any injury or
damage to persons or property  resulting  from any cause of  whatsoever  nature,
unless  caused by or due to the  negligence  or wilful  misconduct  of Landlord.
Landlord  and its agents will not be liable for any such damage  caused by other
tenants or persons in, upon or about the  Building  or caused by  operations  in
construction  of any private,  public or quasi  public work.  If at any time any
windows of the demised premises are closed,  darkened or bricked up for a period
of ten (10) or fewer business days for any reason whatsoever including,  but not
limited to Landlord's own acts (or permanently  closed,  darkened or bricked up,
if  required  by Law or,  in the  case of lot  line  windows,  in the  event  of
construction  of adjacent  improvements),  Landlord  shall not be liable for any
damage  Tenant  may  sustain  thereby  (except  to  the  extent  resulting  from
Landlord's  negligence or wilful misconduct) and Tenant shall not be entitled to
any compensation therefor nor abatement or diminution of rent nor shall the same
release  Tenant from its  obligations  hereunder  nor  constitute  an  eviction.
Subject to Article  9(H),  (I) and (K) Tenant shall  indemnify and save harmless
Landlord  against and from all  liabilities,  obligations,  damages,  penalties,
claims,  costs and  expenses  for which  Landlord  shall  not be  reimbursed  by
insurance, including reasonable attorneys' fees, paid, suffered or incurred as a
result  of any  breach  by  Tenant,  Tenant's  agents,  contractors,  employees,
invitees,  or  licensees,  of any covenant or  condition  of this lease,  or the
negligence or wilful  misconduct  of Tenant;  provided,  however,  that Tenant's
liability  with  respect to its  invitees  shall  extend only to such  invitees'
conduct  within  the  premises  or  when  acting  in  accordance  with  Tenant's
instructions  outside  of the  premises.  Tenant's  liability  under  this lease
extends to the acts and omissions of any subtenant  (not including any subtenant
holding by or through Landlord),  and any agent, contractor,  employee,  invitee
(except as set forth above) or licensee of any subtenant.  In case any action or
proceeding is brought against Landlord by reason of any such claim, Tenant, upon
written notice from Landlord,  will, at Tenant's expense,  resist or defend such
action or proceeding by counsel  approved by Landlord in writing,  such approval
not to be  unreasonably  withheld  or delayed,  and  counsel  for the  insurance
carrier being deemed approved.

9.       Destruction, Fire and Other Casualty

         (A) If the  demised  premises or any part  thereof  shall be damaged by
fire or other casualty,  Tenant,  reasonably  promptly after obtaining knowledge
thereof,  shall give  immediate  notice thereof to Landlord and this lease shall
continue in full force and effect except as hereinafter set forth.

         (B) If thirty (30%) percent or less of the demised premises are damaged
or rendered untenantable by fire or other casualty, the damages thereto shall be
repaired  by and at the expense of  Landlord  and the rent shall be  apportioned
from the day following the casualty,  until Landlord  notifies  Tenant that such
repair is substantially completed (or until Tenant uses the same for any purpose
or  commences  occupancy  thereof for the conduct of any  business,  if sooner),
according to the part of the premises that is tenantable.

         (C) If more than  thirty  (30%)  percent of the  demised  premises  are
damaged or rendered untenantable (or Tenant is denied access thereto) by fire or
other  casualty  and Tenant  does not use any of the  demised  premises  for any
purpose,  then the  rent  shall  be  proportionately  paid up to the time of the
casualty  and  thenceforth  shall cease until the date when the  premises or the
affected  portion  shall have been  repaired and restored by Landlord and Tenant
may  lawfully  occupy the same for the conduct of its  business (or until Tenant
uses the same for any purpose or commences  occupancy thereof for the conduct of
any  business,  if  sooner),  but  subject to  Landlord's  right to elect not to
restore the same as hereinafter provided.

         (D) If more than  thirty  (30%)  percent of the  demised  premises  are
rendered  untenantable  or (whether or not the demised  premises  are damaged in
whole  or in part)  if the  Building  shall  be so  substantially  damaged  that
Landlord  shall decide to demolish it or to rebuild it, then,  in either of such
events,  Landlord may elect to terminate this lease (provided  Landlord does not
discriminate  solely against  Tenant) by written notice to Tenant,  given within
ninety  (90)  days  after  such  fire or  casualty,  specifying  a date  for the
expiration  of this  lease,  which  date  shall not be more than sixty (60) days
after the giving of such notice, (provided,  however, if the demised premises or
access  thereto have not been  affected by such  casualty  Tenant shall have the
right by written  notice to  Landlord  given no later than thirty (30) days from
receipt of  Landlord's  notice  (time being of the essence) to postpone the date
specified  by  Landlord  for the  expiration  of  this  lease  to a date  (to be
specified in Tenant's  notice) which shall not be later than one hundred  eighty
(180)  days  from the  date of  Landlord's  notice  of  termination  or the date
originally set forth as the expiration date of this lease, whichever is sooner),
and upon the date  specified in Landlord's or Tenant's  notice,  as the case may
be, the Term shall expire as fully and  completely as if such date were the date
set forth above for the  termination  of this lease and Tenant  shall  forthwith
quit,  surrender  and  vacate  the  premises  without  prejudice,   however,  to
Landlord's  rights and remedies  against  Tenant under the lease  provisions  in
effect  prior to such  termination,  and any rent owing shall be paid up to such
date and any payments of rent made by Tenant which were on account of any period
subsequent to such date shall be returned to Tenant.  Unless  Landlord or Tenant
shall serve a termination notice as provided for herein, Landlord shall make the
repairs and restorations with all reasonable  expedition,  subject to delays due
to adjustment of insurance  claims,  labor troubles and causes beyond Landlord's
reasonable  control.  After  any such  casualty,  Tenant  shall  cooperate  with
Landlord's  restoration by removing from the premises, as promptly as reasonably
possible,   all  of  Tenant's  salvageable   inventory  and  movable  equipment,
furniture, and other property. Tenant's liability for rent shall resume ten (10)
days after  written  notice from  Landlord  that the premises are  substantially
ready for Tenant's lawful occupancy for normal business purposes.

         (E) Tenant  acknowledges  that  Landlord  will not carry  insurance  on
Tenant's  furniture  and  furnishings  or any  fixtures,  equipment  or personal
property  of Tenant  removable  by Tenant and agrees that  Landlord  will not be
obligated to repair any damage thereto or replace the same.

         (F) Tenant  hereby  waives the  provisions  of Section  227 of the Real
Property Law and agrees that the  provisions  of this  Article  shall govern and
control in lieu thereof.

         (G)      Supplementing the foregoing provisions of this Article,

(i) if an independent  contractor  chosen by Landlord  estimates that Landlord's
portion of any restoration  necessitated by damage or destruction to the demised
premises  by  fire  or  other  casualty  (collectively   "Casualty")  cannot  be
substantially  completed  within six (6) months after that date when  adjustment
with the  insurance  carrier(s)  has been  completed  and  Landlord  has in fact
received the insurance  proceeds (the "Insurance Date") (which estimate shall be
obtained  and  delivered  to  Tenant  within  forty-five  (45)  days  after  the
Casualty),  Tenant may  terminate  this lease by notice sent to Landlord  within
thirty (30) days after receipt of Landlord's notice (time being of the essence),
(ii) if Landlord's  portion of any restoration  necessitated by Casualty has not
been  substantially  completed within six (6) months after the Insurance Date of
the applicable Casualty,  then Tenant may terminate this lease by notice sent to
Landlord  within  thirty  (30) days after the  expiration  of such six (6) month
period (time being of the  essence),  or (iii) if,  within  eighteen (18) months
prior to the  Expiration  Date, the demised  premises are materially  damaged by
Casualty,  Tenant may terminate  this lease by giving written notice to Landlord
thereof  within  thirty  (30) days after such  damage or  Casualty.  In any such
event,  this lease shall  terminate  on the date such  notice is sent  provided,
however,  if this lease is  terminated  as a result of a Casualty  that does not
affect the demised  premises or access  thereto,  Tenant shall have the right in
its  notice to specify a date for  termination  of this lease not later than one
hundred  eighty  (180)  days  from  the  date of the  Casualty,  or to the  date
originally set forth as the expiration date of this lease,  whichever is sooner.
On or before such effective date,  Tenant shall vacate and surrender  possession
of the demised premises in the condition  required by this lease, Fixed Rent and
other amounts  payable  under this lease shall be prorated as of such  effective
date.  Notwithstanding  the foregoing,  the six (6) month period  referred to in
subparagraph  (ii) above shall be extended by up to an additional six (6) months
to the extent  such  restoration  is delayed by reason of  circumstances  of the
nature  set  forth in  Article  26 or  otherwise  beyond  Landlord's  reasonable
control.

         (H)  Anything  hereinbefore  contained  in this Article to the contrary
notwithstanding,   Landlord  and  Tenant  shall  each   endeavor  to  secure  an
appropriate clause in, or an endorsement upon, each fire or extended coverage or
rent or business  interruption  insurance policy obtained by it and covering the
Building, the demised premises or the personal property,  fixtures and equipment
located therein or thereon, pursuant to which the respective insurance companies
waive  subrogation  or permit the  insured,  prior to any loss,  to agree with a
third  party to waive any claim it might  have  against  such third  party.  The
waiver of  subrogation  or  permission  for  waiver  of any  claim  hereinbefore
referred to (which the parties each confirm to each other is available as of the
date of this lease) shall  extend to the agents of each party and its  employees
and, in the case of Tenant,  shall also extend to its related  corporations  and
all other  persons  and  entities  occupying  or using the  demised  premises in
accordance with the terms of this lease and, in the case of Landlord, shall also
extend to all general and limited  partners and members of Landlord.  If, and to
the extent that such waiver or  permission  can be obtained only upon payment of
an additional charge,  then, except as provided in the following two paragraphs,
the party  benefiting  from the waiver or permission  shall pay such charge upon
demand, or shall be deemed to have agreed that the party obtaining the insurance
coverage  in  question  shall  be  free of any  further  obligations  under  the
provisions hereof relating to such waiver or permission.

         (I) If Landlord  is unable at any time to obtain one of the  provisions
referred to in Paragraph (H) of this Article in any of its  insurance  policies,
Landlord shall cause Tenant to be named in such policy or policies as one of the
insureds,  but if any  additional  premium shall be imposed for the inclusion of
Tenant as such an insured,  Tenant shall pay such additional premium upon demand
or  Landlord  shall be excused  from its  obligations  under this  Article  with
respect to the insurance  policy or policies for which such additional  premiums
would be imposed. If Tenant is named as one of the insureds in any of Landlord's
policies in accordance with the foregoing,  Tenant shall endorse promptly to the
order of Landlord,  without recourse,  any check, draft or order for the payment
of money  representing  the  proceeds  of any such  policy or any other  payment
growing  out of or  connected  with such  policy and Tenant  hereby  irrevocably
waives any and all rights in and to such proceeds and payments.

         (J) If Tenant is  unable  at any time to obtain  one of the  provisions
referred to in Paragraph (H) of this Article in any of its  insurance  policies,
Tenant shall cause Landlord, its partners and members to be named in such policy
or policies  as one of the  insureds,  but if any  additional  premium  shall be
imposed for the  inclusion  of Landlord as such an insured,  Landlord  shall pay
such  additional  premium  upon  demand  or  Tenant  shall be  excused  from its
obligations  under  Paragraph  (H) of this Article with respect to the insurance
policy or policies  for which such  additional  premiums  would be  imposed.  If
Landlord,  its  partners  and members are named as one of the insureds in any of
Tenant's  policies in accordance with the foregoing,  Landlord and such partners
and members shall endorse promptly to the order of Tenant, without recourse, any
check,  draft or order for the payment of money representing the proceeds of any
such policy or any other  payment  growing out of or connected  with such policy
and  Landlord  hereby  irrevocably  waives  any  and all  rights  in and to such
proceeds and payments.

         (K) Subject to Paragraphs (H), (I) and (J) of this Article, and insofar
as may be permitted by the terms of the insurance  policies  carried by it, each
party hereby releases the other with respect to any claim (including a claim for
negligence)  which it might  otherwise  have  against  the other party for loss,
damage or  destruction  with respect to its  property by fire or other  casualty
(including  rental  value or business  interest,  as the case may be)  occurring
during the Term.

10.      Eminent Domain

         (A) If the whole or any part of the  demised  premises in excess of 10%
of the aggregate rentable area thereof shall be acquired or condemned by eminent
domain for any public or quasi  public use or  purpose,  then and in that event,
the Term  shall  cease  and  terminate  from the date of title  vesting  in such
proceeding and Tenant shall have no claim for the value of any unexpired portion
of the Term and Tenant hereby assigns to Landlord  Tenant's  entire  interest in
any such award.

         (B)  Tenant  shall be  entitled  to  claim,  prove and  receive  in any
condemnation  proceeding  such  awards as may be allowed  for  moving  expenses,
fixtures and other property  installed by it at its sole cost and expense in the
demised  premises,  provided such awards do not adversely  affect the awards for
Landlord's  interest in the Land (as hereinafter  defined) and Building.  In the
event of a temporary taking of the use of the demised  premises,  Tenant may, if
it elects, remain liable in accordance with the terms of this lease, and in such
case there shall be no  abatement of rent,  but Landlord  shall assign to Tenant
any award made for such temporary taking of the use of the demised premises. Any
such election on the part of Tenant shall be exercised by the service of written
notice on Landlord  within  thirty (30) days after the actual taking of such use
for a temporary period.

11.      Assignment, Mortgage, Etc.

         (A) Except as otherwise expressly permitted in this Article 11, Tenant,
for  itself,  its  heirs,   distributees,   executors,   administrators,   legal
representatives,  successors and assigns,  expressly covenants that it shall not
assign,  mortgage or encumber this agreement,  nor underlet, or suffer or permit
the demised premises or any part thereof to be used by others, without the prior
written  consent of Landlord  in each  instance.  A transfer of a fifty  percent
(50%) or more beneficial interest in Tenant, whether such transfer occurs at one
time, or in a series of related transactions,  and whether of stock, partnership
interest or otherwise, by any party in interest shall be deemed an assignment of
this  lease,  but not  including  transfers  (i)  resulting  from the death of a
shareholder or partner of Tenant, or (ii) to or among the existing  shareholders
or  partners  of Tenant,  their  immediate  families  or trusts for the  benefit
thereof, or (iii) on a recognized national securities exchange. If this lease is
assigned, or if the demised premises or any part thereof is underlet or occupied
by anybody  other than  Tenant,  Landlord  may collect  rent from the  assignee,
under-tenant or occupant,  and apply the net amount collected to the rent herein
reserved, but no such assignment, underletting, occupancy or collection shall be
deemed  a  waiver  of  this  covenant,   or  the  acceptance  of  the  assignee,
under-tenant  or  occupant  as tenant,  or a release of Tenant  from the further
performance by Tenant of covenants on the part of Tenant herein  contained.  The
consent by Landlord to an  assignment or  underletting  shall not in any wise be
construed to relieve Tenant from obtaining the consent in writing of Landlord to
any further  assignment or underletting  with respect to an undertenant or other
occupant in accordance with this lease.

         (B) Tenant shall neither:  (i) publicly  advertise the  availability of
the  premises or any part  thereof at a rental rate less than the rental rate at
which Landlord is then offering to lease  comparable  space in the Building,  or
(ii) if Landlord has available or expects to have available  within the next six
(6) months space of approximately  the same size, assign this lease to or sublet
to or permit the  occupancy  of all or any part of the  demised  premises by any
other party which is then a tenant, subtenant, licensee or occupant of any space
in the Building or which has negotiated  with Landlord for space in the Building
within the six (6) month  period  preceding  the date of  Landlord's  receipt of
"Tenant's Notice" as defined in Paragraph (C).

         (C) If Tenant  wishes to assign this  lease,  sublet all or any part of
the demised  premises or permit the demised premises to be occupied by any other
party (occupancy by a third party being deemed, for the purposes of this Article
11, to be a sublease),  Tenant shall first notify Landlord ("Tenant's  Notice"),
specifying (i) if the proposed transaction is an assignment or a sublease of all
or  substantially  all of the demised premises or a sublease of a portion of the
demised  premises for all or  substantially  all of the  remaining  term of this
lease (each, a "Major  Sublease"),  all of the bona fide material business terms
(the  "Business  Terms") on which  Tenant  would be willing to  consummate  such
transaction, including, without limitation, any separate consideration therefor,
the  rental  rate to be  paid  (including  any  escalation  and  base  years  or
additional  rent payable),  the term thereof  (including any renewal options and
the  anticipated  commencement  date (which shall not be earlier than sixty (60)
days after receipt of Tenant's Notice) and expiration date thereof), any work to
be performed or paid for by Tenant, whether in the affected space or in order to
make the affected  space  maintainable  as an  independent  unit, the amount and
duration  of any  rent  concessions,  the  cost  and  extent  of  any  so-called
"take-over"  obligations  to be  assumed  by  Tenant  and any  other  conditions
(including,  without limitation, the commencement and expiration dates thereof),
and (ii) if the  transaction  is neither an assignment  nor a Major Sublease (in
which case it would be a "Minor  Sublease"),  a copy of the  executed  documents
consummating  such Minor  Sublease  and  information  regarding  the name of and
character of the business of the sublessee,  a summary of the Business Terms and
current  information  as to the  financial  responsibility  and  standing of the
proposed  sublessee.   Tenant  shall  also  provide  Landlord  with  such  other
information in connection with a sublease as it reasonably  requests.  If only a
portion of the  demised  premises  is to be  sublet,  Tenant's  Notice  shall be
accompanied  by a reasonably  accurate  floor plan,  indicating  the space to be
sublet. The portion of the demised premises to which such proposed assignment or
sublease is to be applicable is hereinafter referred to as the "Space."

         (D)  Landlord  may,  within  forty-five  (45) days after its receipt of
Tenant's  Notice in  connection  with an  assignment  (other  than  pursuant  to
Paragraph (O) hereof) or a Major Sublease  (other than pursuant to Paragraph (N)
hereof), by notice to Tenant ("Landlord's Notice"),  require (i) if the proposed
transaction was an assignment or a Major Sublease for all or  substantially  all
of the  demised  premises,  that  Landlord  and Tenant  enter into an  agreement
terminating this lease entirely, or (ii) if the proposed transaction was a Major
Sublease of a portion of the demised  premises,  that  Landlord and Tenant enter
into an agreement terminating this lease with respect to the Space, on the terms
set forth in Paragraph (E). If Landlord fails to exercise such option,  it shall
not  unreasonably  withhold,  delay or  condition  its  consent to the  proposed
assignment or Major Sublease,  once Tenant submits documentation similar to that
required to be submitted in connection  with a Minor  Sublease and provided that
the negotiated final assignment or Major Sublease is consummated  within six (6)
months of the date of Tenant's Notice at a net effective sales price or constant
net effective  subrental (taking into account all applicable Business Terms), as
the case may be, of not less than  ninety-two  and one-half  (92.5%)  percent of
that specified in Tenant's Notice (calculated on a present value basis with the
interest factor being the then-current "prime" or "base" rate of Citibank,  N.A.
("Prime  Rate")).  If the negotiated final assignment or Major Sublease is to be
at a net effective sales price or constant net effective subrental,  as the case
may be, of less than  ninety-two and one-half  (92.5%) percent of that specified
in Tenant's Notice, or if the proposed transaction is not consummated within six
(6) months of the date of Tenant's Notice,  or if at any time thereafter  during
the Term Tenant wishes to enter into another assignment or Major Sublease,  then
Tenant shall be required to send another  Tenant's  Notice with respect  thereto
and  Landlord  shall have the same right of recapture  with  respect  thereto as
above specified.

         (E) If Landlord  requires that this lease be terminated with respect to
all or a portion of the demised premises pursuant to Paragraph (D), then (i) (if
the transaction is a Major Sublease of less than all or substantially all of the
demised  premises) (a) Tenant at its expense shall perform the work necessary to
separate  the Space from the balance of the demised  premises,  and (b) Landlord
shall at Tenant's expense install a separate submeter to measure the consumption
of electricity in the Space (or, in the alternative,  the parties shall agree on
an equitable  method to allocate  electricity  charges between the Space and the
balance of the demised premises), and (ii) Landlord and Tenant shall execute and
deliver an agreement  (a) if the proposed  transaction  was an  assignment  or a
Major Sublease of all or substantially all of the demised premises,  terminating
this lease as of the proposed commencement date set forth in Tenant's Notice, or
(b) if the  proposed  transaction  was a  Major  Sublease  of less  than  all or
substantially all of the demised premises terminating this lease with respect to
the Space as of the proposed  commencement  date set forth in Tenant's Notice or
such later date as Tenant shall  vacate and  surrender  the demised  premises to
Landlord in  accordance  with the terms of this  lease,  and in such case and on
such date there  shall be a pro rata  reduction  of the Fixed Rent and  Tenant's
Proportionate  Share of Taxes based on the  relative  sizes of the Space and the
initial demised premises.

         (F) If the proposed  transaction  was a Minor  Sublease,  then Landlord
shall not unreasonably withhold, delay or condition its consent thereto.

         (G) No permitted or consented to assignment  of this lease  (including,
without  limitation,  pursuant  to  Paragraph  (O) of  this  Article)  shall  be
effective  or valid  unless and until  Tenant  delivers  to  Landlord  duplicate
originals of the  instrument of assignment  duly executed and  acknowledged,  in
recordable  form  (wherein  the  assignee  assumes the  performance  of Tenant's
obligations  under this lease from and after the date of the assignment) and all
related and accompanying documents.

         (H) In the event of any such assignment,  Landlord and the assignee may
modify this lease in any  manner,  without  notice to Tenant or  Tenant's  prior
consent,  without thereby terminating  Tenant's liability for the performance of
its obligations under this lease,  except that any such  modification  which, in
any way,  increases  any of such  obligations  shall not,  to the extent of such
increase only, be binding upon Tenant.

         (I) No  permitted  or  consented  to sublease of all or any part of the
demised premises (not including a Sublease,  but including,  without limitation,
pursuant to Paragraph (N) of this Article) or  modification  of a sublease shall
be effective or valid  unless and until  Tenant  delivers to Landlord  duplicate
originals of the instrument of sublease  (containing the provisions  required by
Paragraph (J) of this Article) and all related and accompanying  documents.  Any
such sublease shall be subject and subordinate to this lease.

         (J)  Any  such  sublease  shall  contain  substantially  the  following
provisions:

                         (i)     "In the event of a default under any underlying
lease of all or any portion of the premises  demised hereby which results in the
termination of such lease,  the subtenant  hereunder shall, at the option of the
lessor under any such lease ("Under lying Lessor"),  attorn to and recognize the
Underlying Lessor as landlord hereunder and shall,  promptly upon the Underlying
Lessor's request,  execute and deliver all instruments  necessary or appropriate
to confirm such attornment and recognition. Not withstanding such attornment and
recognition,  the Underlying Lessor shall not (a) be liable for any previous act
or omission of the landlord  under this  sublease,  (b) be subject to any offset
which shall have accrued to the subtenant  hereunder  against said landlord,  or
(c) be bound by any  modification  of this sublease or by any prepayment of more
than one month's rent,  unless such  modification or prepayment  shall have been
previously approved in writing by the Underlying Lessor. The subtenant hereunder
hereby waives all rights under any present or future law to elect,  by reason of
the  termination  of such  underlying  lease,  to  terminate  this  sublease  or
surrender possession of the premises demised hereby.

                        (ii)       This sublease may not be assigned or modified
or the premises demised hereunder  further sublet, in whole or in part,  without
the prior written consent of the Underlying  Lessor in accordance with the terms
of the Underlying Lease."

         (K)  Landlord's  consent to any  assignment  or sublease  shall neither
release Tenant from its liability for the  performance  of Tenant's  obligations
hereunder  during the balance of the Term nor  constitute its consent to any (i)
further  assignment of this lease or of any  permitted  sublease or (ii) further
sublease of all or any portion of the  premises  demised  hereunder or under any
permitted sublease. If a sublease to which Landlord has consented is assigned or
modified  or all or any portion of the  premises  demised  thereunder  is sublet
without the consent of Landlord in each  instance  obtained  then,  Tenant shall
immediately terminate such sublease, or arrange for the termination thereof, and
proceed expe ditiously to have the occupant thereunder dispossessed.

         (L) Tenant shall pay to Landlord,  promptly upon demand  therefor,  all
reasonable  out-of-pocket  costs and expenses  (including,  without  limitation,
reasonable attorneys' fees and disbursements) incurred by Landlord in connection
with any assignment of this lease or assignment or  modification of any sublease
or sublease of all or any part of the demised premises.

         (M) If Landlord  gives its consent to any  assignment  of this lease or
assignment of any sublease or to any sublease or if Tenant otherwise enters into
any assignment or sublease permitted  hereunder,  Tenant shall, in consideration
therefor, pay to Landlord, as and when received by Tenant:


                  (i) in the case of an  assignment,  fifty (50%) percent of the
amount, if any, by which (a) all sums and other considerations paid to Tenant by
or on behalf of the assignee for or by reason of such assignment (including, but
not  limited  to,  sums  paid  for the  sale of  Tenant's  fixtures,  equipment,
furniture,  furnishings or other personal  property,  less in the case of a sale
thereof,  the then fair  market  value  thereof)  exceeds  (b) the amount of any
rental  concessions  and work  allowance  granted by Tenant or costs incurred by
Tenant in preparing the demised premises for the assignee's occupancy (amortized
on a straight line basis,  without  interest,  over the initial Term if there is
any  deferral  of sums or other  consideration  to be paid to  Tenant),  and all
reasonable and customary  out-of-pocket  expense  reasonably  incurred by Tenant
directly relating to such assignment for so-called take-over costs,  advertising
costs, brokerage commissions, architect's and legal fees, but only to the extent
such  commissions,  expenses  and  fees  are  reasonable  and  actually  paid to
independent  and  unrelated  third  parties,  as evidenced  by  receipted  bills
furnished  to Landlord and amounts  paid to Landlord  pursuant to Paragraph  (L)
hereof; and

                  (ii) in the case of a  sublease,  fifty  (50%)  percent of the
amount,  if  any,  by  which  (a)  any  rents,   additional   charges  or  other
consideration  payable  under or by  reason of the  sublease  to Tenant by or on
behalf of the subtenant  (including,  but not limited to, sums paid for the sale
or rental of Tenant's fixtures, equipment,  furniture or other personal property
paid for solely by Tenant,  less, in the case of a sale  thereof,  the then fair
market value  thereof)  exceeds (b) the sum of (x) the Fixed Rent and additional
rent  accruing  during the term of the  sublease in respect of the Space (at the
rate per square foot payable by Tenant  hereunder)  pursuant to the Term and (y)
the amount of any rental  concessions  and work  allowance  granted by Tenant or
costs incurred by Tenant in physically separating the Space from the rest of the
demised  premises  or  otherwise  in  preparing  the Space  for the  subtenant's
occupancy  (amortized  on a straight  line  basis,  without  interest,  over the
initial term of the sublease),  and all  reasonable and customary  out-of-pocket
expenses  reasonably incurred by Tenant directly relating to such subletting for
so-called take-over costs, advertising costs, brokerage commissions, architect's
and legal fees, but only to the extent such  commissions,  expenses and fees are
reasonable and actually paid to  independent  and unrelated  third  parties,  as
evidenced by receipted  bills furnished to Landlord and amounts paid to Landlord
pursuant to Paragraph (L) hereof.

         (N) Tenant may, without Landlord's prior written consent,  but upon not
less than  fifteen  (15) days'  prior  written  notice to  Landlord,  permit any
corporations or other business entities which control, are controlled by, or are
under common control with Tenant (herein referred to as a "related corporation")
to sublet or use all or part of the  demised  premises  for any of the  purposes
permitted to Tenant,  subject  however to compliance  with Tenant's  obligations
under this lease  (other than  Paragraphs  (C),  (D),  (E),  (F) and (M) of this
Article)  provided  that (i) Tenant  shall not be in default  beyond  applicable
notice and cure periods in the performance of any of its obligations  under this
lease,  (ii) prior to such subletting or use Tenant furnishes  Landlord with the
name of any such related corporation,  together with a certification of Tenant's
chief  financial  officer,  and such  other  proof as  Landlord  may  reasonably
request,  that such subtenant is a related  corporation of Tenant,  and (iii) in
the reasonable,  good faith judgment of Landlord the proposed  subtenant is of a
character  such  as is in  keeping  with  the  then  existing  character  of the
Building.  Within ten (10) days after  Landlord's  request from time to time, an
officer  of Tenant  shall  certify to  Landlord  that such  subtenant  remains a
related  corporation  of Tenant,  failing which the  provisions of Paragraph (M)
shall apply retroactive to the date of Landlord's such request.  Such subletting
shall  not be  deemed  to vest in any  such  related  corporation  any  right or
interest in this lease or the demised  premises  nor shall it relieve,  release,
impair or  discharge  any of Tenant's  obligations  hereunder.  For the purposes
hereof,  "control"  shall be deemed to mean  ownership  of more than fifty (50%)
percent of all of the voting stock of such  corporation or more than fifty (50%)
percent  of all of the  legal  and  equitable  interest  in any  other  business
entities.

         (O) Tenant may, without  Landlord's prior written consent,  and without
complying with  Paragraphs  (C), (D), (F) and (M) above,  but upon not less than
fifteen  (15) days' prior  written  notice to  Landlord,  assign or transfer its
entire  interest  in this lease and the  leasehold  estate  hereby  created to a
related  corporation or a successor  entity of Tenant (as hereinafter  defined);
provided,  however,  that (i) Tenant shall not be in default  beyond  applicable
notice and cure periods in the performance of any of its obligations  under this
lease,  (ii) the  proposed  occupancy  shall not  increase  the office  cleaning
requirements (if any) over those if Tenant had continued its occupancy or impose
an extra burden (except for a de minimis amount) upon the building  equipment or
building  services,  and  (iii) the  proposed  assignee  shall not be  entitled,
directly or indirectly, to diplomatic or sovereign immunity and shall be subject
to the  service of process  in, and the  jurisdiction  of the courts of New York
State.  A  "successor  entity" as used in this  Paragraph  (O) shall mean (a) an
entity into which or with which Tenant, its successors or assigns,  is merged or
consolidated,  in accordance with applicable statutory provisions for the merger
or consolidation,  provided that, by operation of law or by effective provisions
contained in the instruments of merger or consolidation,  the liabilities of the
entities participating in such merger or consolidation are assumed by the entity
surviving such merger or  consolidation,  or (b) an entity  acquiring this lease
and the term  hereof and the estate  hereby  granted,  the  goodwill  and all or
substantially all of the other property and assets of Tenant,  its successors or
assigns, and assuming all or substantially all of the liabilities of Tenant, its
successors and assigns,  or (c) an entity purchasing all or substantially all of
the voting stock or other equity interests in Tenant,  or (d) any successor to a
successor   entity  becoming  such  by  either  of  the  methods   described  in
subdivisions (a) and (b) above;  provided that in each such case (x) such merger
or consolidation,  or such acquisition and assumption,  or such purchase, as the
case may be, is for a good business  purpose and not principally for the purpose
of transferring the leasehold estate created hereby,  and (y) immediately  after
giving  effect to any such  merger or  consolidation,  or such  acquisition  and
assumption,  or such  purchase,  as the case may be, the entity  surviving  such
merger or created by such  consolidation  or acquiring  such assets and assuming
such  liabilities,  or purchasing  such stock,  as the case may be, shall have a
demonstrable  tangible net worth,  as determined in  accordance  with  generally
accepted accounting principles,  consistently applied, and certified to Landlord
by an independent  certified public accountant,  at least equal to the higher of
that of Tenant on the day immediately prior to the date of merger, consolidation
or  acquisition,  as the  case may be,  or that of  Tenant  on the  date  Tenant
executes  this lease which  Tenant  represents  and warrants to be not less than
$48,000,000.00.  The acquisition by Tenant, its successors or assigns, of all or
substantially  all  of  the  assets,  together  with  the  assumption  of all or
substantially  all of the obligations and liabilities of any corporation,  shall
be deemed to be a merger for the purposes of this Article.

         (P) Notwithstanding anything to the contrary herein above contained, in
no event will there be permitted to be more than three (3) occupants  (including
Tenant and its related  corporations) in the demised premises that have separate
entrances.

         (Q) In the event Tenant claims that Landlord has unreasonably withheld,
delayed or  conditioned  its consent  under this Article 11 for more than thirty
(30) days after  receipt of a request  from  Tenant,  in those  instances  where
Landlord has agreed not to  unreasonably  withhold its  consent,  Tenant's  sole
remedy shall be to have such dispute resolved by an informal hearing ("Hearing")
upon and subject to the terms and  conditions  hereinafter  set forth in Article
41(B).

12.      Electric Current

         (A) Tenant  covenants  and agrees that at all times its use of electric
current shall not exceed the capacity of then existing  feeders or risers to, or
wiring  installations  in, the Building and demised  premises (which will not be
less than six (6) watts of electric current per rentable square foot,  connected
load) and Tenant  may not use any  electrical  equipment  which,  in  Landlord's
opinion,  reasonably  exercised,  will overload such  installations or interfere
with the use thereof by other tenants of the Building.

         (B) From and after the Commencement Date, Landlord agrees to furnish up
to six (6) watts of electric  current per rentable square foot (connected  load)
terminated at a disconnect  switch within the demised  premises for Tenant's use
in the demised  premises  (exclusive of that consumed by the "base  building air
conditioning  machinery" as hereinafter defined),  upon and subject to the terms
and conditions set forth in this Article 12. Tenant is to be responsible for the
distribution of such electricity throughout the demised premises. From and after
the  Commencement  Date or such earlier date as Tenant takes  possession  of the
demised  premises or any part  thereof  (whichever  date first  occurs being the
"Electric  Commencement  Date"),  Tenant shall  purchase  all  electric  current
consumed in the demised premises (including,  without limitation,  such electric
energy as is consumed in connection  with the operation of the  ventilation  and
air  conditioning  equipment  servicing the demised  premises)  from Landlord or
Landlord's  designated  agent.  Tenant will pay to Landlord as additional rent a
sum equal to (i)  "Landlord's  Cost Rate" (as that term is hereinafter  defined)
plus 5%, for the relevant billing period,  multiplied by (ii) the total kilowatt
hours recorded on Tenant's  sub-meter or submeters  during such billing  period.
"Landlord's Cost Rate" shall mean the rate schedule at which Landlord  purchases
electricity  from the company  providing  electric  service to the Building (the
"Electric  Company") for the relevant  billing period.  Tenant's  consumption of
electrical  energy at the demised  premises  will be measured by submeters to be
installed by Landlord at Landlord's expense.

         (C) Where more than one submeter  measures  Tenant's  electric  service
(including such electric  energy as is consumed by the HVAC equipment  servicing
the demised  premises),  the  service  rendered  through  each  submeter  may be
computed  and billed as an aggregate  total in  accordance  with the  provisions
hereof.  Bills therefor may be rendered  monthly and shall be payable within ten
(10) days, as additional rent.

         (D) Landlord  shall not in any way be liable or  responsible  to Tenant
for any loss,  damage or expense which Tenant may sustain or incur if either the
quantity or character of electric  service is changed or is no longer  available
or suitable  for  Tenant's  requirements,  except to the extent  resulting  from
Landlord's  failure to pay the Electric  Company or gross  negligence or willful
misconduct  (but,  in no  event,  will  Landlord  have  any  responsibility  for
consequential  damages).  Subject to Tenant's  compliance with Articles 3 and 54
and all other  applicable  provisions of this lease,  and provided  Landlord has
available shaft space for risers,  Landlord agrees, in principle,  to install at
Tenant's  sole  reasonable  expense  additional  risers  to  provide  additional
electric capacity to the premises. Any such additional capacity must be obtained
by Tenant from the Electric Company without  diminution of, or any other adverse
effect upon, the Building or the electrical capacity and electrical cost for the
balance  of the  Building.  Any riser or  risers  necessary  to supply  Tenant's
electrical  requirements  in excess of those  specified in Paragraph (B) will be
installed by Landlord at the sole reasonable cost and expense of Tenant and only
if, in Landlord's  reasonable judgment,  the same is reasonably  practicable and
will not cause adverse damage or injury to the building or the operation thereof
or the demised premises,  or cause or create a dangerous or hazardous condition.
In addition to the installation of such riser or risers,  Landlord will also, at
the sole  reasonable  cost and expense of Tenant,  install  all other  equipment
proper and necessary in connection therewith, subject to the aforesaid terms and
conditions.  All of such costs and  expense  shall be paid by Tenant to Landlord
within  ten (10)  days  after  rendition  of any  bill or  statement  to  Tenant
therefor, as additional rent.

         (E) Provided  Landlord does not discriminate  against Tenant,  Landlord
may discontinue  such service of electric current upon ninety (90) days (or such
lesser time as may be required by Law or the Electric Company) to Tenant without
being liable to Tenant  therefor and without in any way affecting  this lease or
the liability of Tenant  hereunder or causing a diminution  of Fixed Rent.  Such
discontinuance  is not to be deemed to be a lessening or  diminution  of service
within the meaning of any law,  rule or  regulation  now or  hereafter  enacted,
promulgated or issued. If Landlord so discontinues  furnishing  electric current
to Tenant,  Tenant shall arrange to obtain  electric  current  directly from the
Electric  Company.  Such electric current may be furnished to Tenant by means of
the then existing building system feeders,  risers and wiring to the extent that
the same are  available,  suitable  and safe for such  purposes.  All meters and
additional  panel  boards,  feeders,  risers,  wiring and other  conductors  and
equipment that may be required to obtain and to measure Tenant's  consumption of
electric  current  directly  from the Electric  Company  shall be installed  and
maintained by Landlord,  at Landlord's  expense  unless such  discontinuance  is
required by Law or the  Electric  Company in which event it shall be at Tenant's
expense.  Provided  Tenant  proceeds  promptly and  diligently  after receipt of
Landlord's  notice to arrange to obtain and to measure  Tenant's  consumption of
electric  current  directly  from  the  Electric   Company,   Landlord  may  not
discontinue  electric  service until Tenant is able to obtain  service  directly
from the Electric  Company (unless  Landlord is compelled to do so by Law or the
Electric Company).

         (F) If any tax is  imposed  upon  Landlord's  receipt  from the sale or
resale  of  electric  energy  to  Tenant  by any  federal,  state  or  municipal
authority,  Tenant agrees to pay Landlord on demand  Tenant's  pro-rata share of
such taxes, as additional rent.

         (G) Anything in Paragraph (C) to the contrary  notwithstand ing, if the
Electric   Commencement  Date  occurs  prior  to  the  installation  and  proper
calibration  of the  submeters,  then Tenant  shall pay  Landlord  for  Tenant's
consumption of electricity in the demised premises amounts reasonably  estimated
by  Landlord's  electrical  consultant to be those that Tenant would pay if such
meters  were  fully  operational  not to  exceed a rate of $1.50  per  annum per
rentable square foot of the demised  premises.  In addition,  if during any time
during the Term,  it is  determined  that the  submeters  servicing  the demised
premises  are or were not properly  calibrated  or were  malfunctioning,  Tenant
shall pay  Landlord an amount  reasonably  estimated  by  Landlord's  electrical
consultant, based on Tenant's prior usage, to be the amount that would have been
payable by Tenant had such malfunction not occurred.

         (H) Anything in this Article to the contrary notwithstanding, if Tenant
disputes any determination made by Landlord's  electrical consultant or engineer
("Landlord's  Electrical  Consultant")  pursuant to  Paragraph  (G),  Tenant may
challenge  such  determination  (but not any prior  determination  of Landlord's
Electrical  Consultant),  within  thirty (30) days after  receipt  thereof (time
being of the  essence),  by  submitting  a different  estimate  made by Tenant's
reputable  independent  electrical engineer or qualified  consultant  ("Tenant's
Electrical Consultant"), which shall be paid by Tenant. If Landlord's Electrical
Consultant and Tenant's  Electrical  Consultant agree on a  determination,  such
agreement  shall  be  conclusive  upon the  parties.  If  Landlord's  Electrical
Consultant and Tenant's Electrical  Consultant cannot agree, they shall select a
third reputable independent  electrical engineer or qualified consultant,  to be
paid equally by both parties,  to make a binding  determination  with respect to
such  dispute.  If  Landlord's  Electrical  Consultant  and Tenant's  Electrical
Consultant  cannot select a third  electrical  engineer or consultant,  the same
shall be  selected  by the  Presiding  Judge of the  Appellate  Division  of the
Supreme  Court  of the  State of New  York,  First  Department.  No delay in the
resolution  of any such  dispute  shall  affect the  effective  date of any such
determination.

13.      Access to Premises

         Landlord or  Landlord's  agents  shall have the right (but shall not be
obligated) to enter the demised  premises in any emergency at any time,  and, at
other reasonable  times upon reasonable  advance notice (which may be telephonic
or  oral),  to  examine  the same and to make  such  repairs,  replacements  and
improvements  as  Landlord  may  deem  necessary  to  the  demised  premises  in
accordance with Landlord's  rights or obligations  under this lease or necessary
or reasonably desirable to any other portion of the Building. Landlord shall use
reasonable  efforts to minimize  interference with Tenant's occupancy while such
work is in progress and shall cooperate with Tenant as to the scheduling of such
work, but Landlord will not be required to use overtime labor unless required in
order to prevent material disruption to Tenant's operations. Tenant shall permit
Landlord to use and maintain  and replace  pipes and conduits in and through the
demised premises and to erect new pipes and conduits therein provided such pipes
and conduits are either boxed or concealed  under floors,  behind walls,  in the
ceiling  or  in  closets.   Upon  the  completion  of  such  work,  repairs  and
installations,  there shall be no reduction  (except to a de minimis  extent not
exceeding seventeen (17) square feet per usable area in the demised premises and
the  affected  portions  of the  demised  premises  shall have been  restored to
substantially their condition immediately prior to the performance of such work,
repairs or  installations.  Landlord may, during the progress of any work in the
demised  premises,  take all necessary  materials and equipment into the demised
premises without the same  constituting an eviction nor shall Tenant be entitled
to any  abatement  of rent while such work is in progress  nor to any damages by
reason of loss or interruption of business or otherwise  provided  Landlord acts
in accordance with good  construction  practice and uses  reasonable  efforts to
minimize interference with Tenant.  Throughout the Term, Landlord shall have the
right to enter the  demised  premises  at  reasonable  hours upon notice for the
purpose of showing  the same to  prospective  purchasers  or  mortgagees  of the
Building,  and during the last twelve (12) months of the Term for the purpose of
showing the same to  prospective  tenants.  If Tenant is not present to open and
permit an entry into the premises,  Landlord or Landlord's  agents may enter the
same  whenever  such entry may be  necessary  or  permissible  by master key (or
forcibly  in the  event  of an  emergency)  and,  provided  reasonable  care  is
exercised to safeguard Tenant's  property,  such entry shall not render Landlord
or its agents liable therefor,  nor in any event shall the obligations of Tenant
hereunder  be  affected.  If during the last month of the Term Tenant shall have
removed all of Tenant's  property  therefrom,  Landlord may  immediately  enter,
alter,  renovate  or  redecorate  the demised  premises  without  limitation  or
abatement of rent,  or incurring  liability to Tenant for any  compensation  and
such act shall have no effect on this lease or Tenant's obligations hereunder.

14.      Occupancy

         (A) Tenant will not at any time use or occupy the  demised  premises in
violation of the certificate of occupancy issued for the Building (the "C/O"), a
copy of which is attached as Exhibit D.  Landlord  will not amend the C/O in any
way that would  adversely  affect Tenant's use of the premises for its permitted
use  hereunder.  Tenant has  inspected the premises and agrees to accept them in
their "as is"  condition on the  Commencement  Date,  subject to  completion  of
Landlord's  Work,  and  except  for  latent  defects.  In any  event,  except as
otherwise expressly provided herein,  Landlord makes no representation as to the
condition  of the  premises  and  Tenant  agrees to accept  the same  subject to
violations,  whether or not of record,  which have no adverse effect on Tenant's
occupancy of the demised premises.

         (B) Landlord  represents  that, upon completion of Landlord's Work, the
premises will be in compliance with all Laws (including ADA) that are applicable
to space in such  condition  (i.e.,  not including  Laws that are  applicable by
reason of Tenant's Work or the fact that Tenant's Work has yet to be completed).

15.      Bankruptcy

         (A) Anything  elsewhere in this lease to the contrary  notwithstanding,
this lease may be  cancelled  by Landlord by the sending of a written  notice to
Tenant  within a reasonable  time after the  happening of any one or more of the
following events: (1) the commencement of a case in bankruptcy or under the laws
of any  state  naming  Tenant  as  the  debtor  which,  if  involuntary,  is not
discharged or stayed within sixty (60) days of the commencement  thereof, or (2)
the making by Tenant of an assignment or any other  arrangement  for the benefit
of creditors  under any state statute.  Neither  Tenant nor any person  claiming
through or under  Tenant,  or by reason of any statute or order of court,  shall
thereafter be entitled to possession of the demised premises but shall forthwith
quit and surrender the demised premises.

         (B) It is stipulated and agreed that in the event of the termination of
this  lease  pursuant  to  Paragraph  (A)  hereof,   Landlord  shall  forthwith,
notwithstanding any other provisions of this lease to the contrary,  be entitled
to recover  from  Tenant as and for  liquidated  damages an amount  equal to the
difference  between the rent reserved hereunder for the unexpired portion of the
Term and the fair and  reasonable  rental value of the demised  premises for the
same period. In computing such damages the difference between any installment of
rent  becoming  due  hereunder  after the date of  termination  and the fair and
reasonable  rental  value of the demised  premises for the period for which such
installment  was payable shall be discounted to the date of  termination  at the
Federal  discount  rate then in effect.  If the  premises or any part thereof be
relet by Landlord for the  unexpired  Term of this lease,  or any part  thereof,
before presentation of proof of such liquidated damages to any court, commission
or tribunal,  the amount of rent reserved upon such reletting shall be deemed to
be the  fair  and  reasonable  rental  value  for the  part or the  whole of the
premises so relet during the term of the  reletting.  Nothing  herein  contained
shall  limit or  prejudice  the right of  Landlord  to prove  for and  obtain as
liquidated  damages by reason of such termination an amount equal to the maximum
allowed by any statute or rule of law in effect at the time when,  and governing
the  proceedings  in which,  such damages are to be proved,  whether or not such
amount be greater,  equal to or less than the amount of the difference  referred
to above.

         (C) Without limiting any of the foregoing provisions of this Article 15
or Articles 16 or 17 hereof, if, pursuant to the Bankruptcy Code of 1978, as the
same may be amended,  Tenant is  permitted  to assign this lease in disregard of
the  obligations  contained in Article 11 hereof,  Tenant  agrees that  adequate
assurance of future  performance by the assignee permitted under such Code shall
mean the deposit of cash security with Landlord in an amount equal to the sum of
nine (9) months Fixed Rent then reserved  hereunder  plus an amount equal to all
additional  rent payable  under this lease for the calendar  year  preceding the
year in which such  assignment  is intended to become  effective,  which deposit
shall be held by  Landlord,  without  interest,  for the  balance of the Term as
security for the full and faithful  performance of all of the obligations  under
this lease on the part of Tenant yet to be performed.  If Tenant  receives or is
to receive any  valuable  consideration  for such an  assignment  of this lease,
sixty  (60%)  percent  of such  consideration  shall be and  become the sole and
exclusive  property of Landlord  and shall be paid over to Landlord  directly by
such assignee. In addition, adequate assurance shall mean that any such assignee
of this lease shall have a net worth,  exclusive of good will, equal to at least
fifteen (15) times the aggregate of the Fixed Rent reserved  hereunder  plus all
additional rent for the preceding calendar year as aforesaid.

16.      Default

         (A) If Tenant defaults in fulfilling any of the covenants of this lease
other than the covenant for the payment of rent or  additional  rent,  or if any
execution  or  attachment  shall be issued  against  Tenant  or any of  Tenant's
property  whereupon the demised  premises  shall be taken or occupied by someone
other than Tenant; or if this lease be rejected under ss. 235 of Title 11 of the
U.S.  Code  (bankruptcy  code),  then,  in any one or more of such events,  upon
Landlord  serving a written  twenty (20) days notice upon Tenant  specifying the
nature of said  default and upon the  expiration  of said  twenty (20) days,  if
Tenant shall have failed to comply with or remedy such  default,  or if the said
default or omission  complained  of shall be of a nature that the same cannot be
completely  cured or remedied within said twenty (20) day period,  and if Tenant
shall not have diligently  commenced curing such default within such twenty (20)
day period, and shall not thereafter with reasonable diligence and in good faith
proceed to remedy or cure such  default,  then Landlord may serve a written five
(5)  days'  notice of  cancellation  of this  lease  upon  Tenant,  and upon the
expiration of said five (5) days this lease and the Term shall end and expire as
fully and  completely as if the  expiration of such five (5) day period were the
day herein  definitely  fixed for the end and  expiration  of this lease and the
Term and Tenant shall then quit and surrender  the demised  premises to Landlord
but Tenant shall remain liable as hereinafter provided.

         (B) If the notice  provided for in Paragraph (A) hereof shall have been
given,  and the Term shall expire as aforesaid,  or if Tenant shall make default
in the payment of the rent reserved herein or any item of additional rent herein
mentioned or any part of either or in making any other payment  herein  required
for more than ten (10) days  after  notice  from  Landlord  of such  default  in
payment,  then and in any of such events Landlord may, without notice,  re-enter
the demised  premises  and  dispossess  Tenant and the legal  representative  of
Tenant or other  occupant of the  demised  premises  by summary  proceedings  or
otherwise  and remove  their  effects and hold the premises as if this lease had
not been made,  and Tenant  hereby  waives the service of notice of intention to
re-enter or to  institute  legal  proceedings  to that end. If Tenant shall make
default  hereunder prior to the date fixed as the commencement of any renewal or
extension  of this lease,  Landlord  may cancel and  terminate  such  renewal or
extension agreement by written notice.


17.      Remedies of Landlord and Waiver of Redemption

         In case of any such default,  reentry,  expiration and/or dispossess by
summary proceedings or otherwise, (a) the rent shall become due thereupon and be
paid up to the time of such reentry,  dispossess and/or expiration, (b) Landlord
may  relet  the  premises  or any part or parts  thereof,  either in the name of
Landlord or otherwise,  for a term or terms,  which may at Landlord's  option be
less than or exceed  the period  which  would  otherwise  have  constituted  the
balance  of the Term and may grant  concessions  or free rent or charge a higher
rental than that in this lease,  and/or (c) Tenant or the legal  representatives
of Tenant  shall also pay  Landlord,  as  liquidated  damages for the failure of
Tenant  to  observe  and  perform  Tenant's  covenants  herein  contained,   any
deficiency between the rent hereby reserved and/or covenanted to be paid and the
net amount,  if any, of the rents collected on account of the lease or leases of
the demised  premises  for each month of the period which would  otherwise  have
constituted  the  balance  of the Term.  The  failure of  Landlord  to relet the
premises  or any part or parts  thereof  shall not  release  or affect  Tenant's
liability for damages  (provided  that Landlord does not  arbitrarily  refuse to
relet).  Landlord shall not be deemed to have  arbitrarily  refused to relet the
demised  premises or any part or parts thereof if: (i) Landlord  first rents any
other vacant space in the  Building,  (ii)  Landlord  refuses to rent all or any
part of the demised  premises to any party which  Landlord,  in its  discretion,
exercised in good faith,  considers an  unsuitable  tenant for the Building or a
party with whose financial condition Landlord is dissatisfied, or (iii) Landlord
refuses  to rent all or any part of the  demised  premises  because  a  proposed
leasing  transaction  is, in  Landlord's  discretion,  exercised  in good faith,
financially  or  otherwise   unsatisfactory  to  Landlord.   In  computing  such
liquidated   damages  there  shall  be  added  to  the  said   deficiency   such
out-of-pocket expenses as Landlord may incur in connection with reletting,  such
as reasonable legal expenses, reasonable attorneys' fees, brokerage, advertising
and for keeping the demised premises in good order or for preparing the same for
reletting.  Any such liquidated damages shall be paid in monthly installments by
Tenant on the rent day  specified  in this lease and any suit brought to collect
the amount of the  deficiency  for any month shall not  prejudice in any way the
rights of  Landlord  to collect  the  deficiency  of any  subsequent  month by a
similar proceeding.  Landlord,  in putting the demised premises in good order or
preparing  the  same  for  re-rental  may,  at  Landlord's  option,   make  such
alterations,  repairs, replacements,  and/or decorations in the demised premises
as Landlord, in Landlord's sole judgment,  considers advisable and necessary for
the  purpose  of  reletting  the  demised  premises,  and  the  making  of  such
alterations,  repairs, replacements,  and/or decorations shall not operate or be
construed to release  Tenant from  liability  hereunder as  aforesaid.  Landlord
shall in no event be  liable  in any way  whatsoever  for  failure  to relet the
demised premises  (except that Landlord shall not arbitrarily  refuse to relet),
or, in the event that the demised premises are relet, for failure to collect the
rent thereof under such  reletting,  and in no event shall Tenant be entitled to
receive any excess, if any, of such net rents collected over the sums payable by
Tenant to Landlord  hereunder.  In the event of a breach or threatened breach by
either party of any of the covenants or provisions hereof, the other party shall
have the right of injunction  and the right to invoke any remedy  allowed at law
or in equity as if re-entry,  summary  proceedings  and other  remedies were not
herein provided for. Mention in this lease of any particular  remedy,  shall not
preclude  Landlord  from any other  remedy,  in law or in equity.  Tenant hereby
expressly  waives  any and all  rights  of  redemption  granted  by or under any
present or future laws in the event of Tenant being evicted or dispossessed  for
any cause,  or in the event of  Landlord  obtaining  possession  of the  demised
premises,  by reason of the  violation  by  Tenant of any of the  covenants  and
conditions of this lease, or otherwise.

18.      Fees and Expenses

         (A) If Tenant shall  default  (after  notice and the  expiration of any
applicable cure period) in the observance or performance of any term or covenant
on Tenant's  part to be observed or  performed  under or by virtue of any of the
terms or  provisions  in any  article  of this  lease,  then,  unless  otherwise
provided  elsewhere  in this  lease,  Landlord  may  immediately  or at any time
thereafter  and  without   further  notice  perform  the  obligation  of  Tenant
thereunder  and Tenant shall,  within  thirty (30) days after demand,  reimburse
Landlord for its reasonable out-of-pocket costs incurred in connection therewith
as additional rent, provided, however Landlord agrees not to perform any work on
behalf of Tenant at  Tenant's  expense  so long as Tenant  shall  have  promptly
commenced and is diligently pursuing to completion the performance of such work.
If the Term shall have  expired  at the time of making of such  expenditures  or
incurring of such  obligations,  such sums shall be  recoverable  by Landlord as
damages.

         (B) Whenever this lease provides that a party shall be responsible  for
costs or expenses  incurred by the other  party,  such  responsibility  shall be
limited to reasonable out-of-pocket costs and expenses.

         (C) If any legal proceeding is brought by reason of the claimed default
of either party hereto,  the prevailing party shall be entitled to reimbursement
by the other for its reasonable attorneys' fees.

         (D) Any  reservation  of a right by  Landlord to enter upon the demised
premises and to make or perform any repairs,  alterations,or  other work in, to,
or about the demised  premises  which,  in the first  instance,  is the Tenant's
obligation pursuant to this lease, shall not be deemed to:

                  (i)      impose any obligation on Landlord to do so;

                  (ii)     render Landlord liable to Tenant or any third party
for the failure to do so; or

                  (iii) relieve Tenant from any obligation to indemnify Landlord
as otherwise provided elsewhere in this lease.

19.      Building Alterations and Management

         Landlord shall have the right at any time without the same constituting
an eviction and without  incurring  liability  to Tenant  therefor to change the
arrangement and/or location of public entrances,  passageways,  doors, doorways,
corridors, elevators, stairs, toilets or other public parts of the Building and,
upon  reasonable  prior  notice  to  Tenant,  to  change  the  name,  number  or
designation by which the Building may be known.  Except to the extent  otherwise
expressly  provided in this lease,  there  shall be no  allowance  to Tenant for
diminution of rental value and no liability on the part of Landlord by reason of
inconvenience,  annoyance or injury to business  arising from  Landlord or other
tenants  making any repairs in the Building or any such  alterations,  additions
and improvements.  Furthermore, Tenant shall not have any claim against Landlord
by reason of Landlord's  imposition of such reasonable controls on the manner of
access to the Building by Tenant's  social or business  visitors as Landlord may
deem necessary for the security of the Building and its occupants.

20.      No Representations by Landlord

         Neither Landlord nor Landlord's agents have made any representations or
promises  with respect to the physical  condition of the Building or the Land or
the demised  premises,  the rents,  leases,  expenses of  operation or any other
matter or thing affecting or related to the premises except as herein  expressly
set forth  and no  rights,  easements  or  licenses  are  acquired  by Tenant by
implication or otherwise except as expressly set forth in the provisions of this
lease.  Tenant has  inspected  the  Building  and the  demised  premises  and is
thoroughly  acquainted  with their condition and agrees to take the same "as is"
except as provided in  Articles  14 and 53 and  acknowledges  that the taking of
possession of the demised  premises by Tenant shall be conclusive  evidence that
the said  premises  were in good and  satisfactory  condition  at the time  such
possession  was so taken,  except for  completion of Landlord's  Work and latent
defects.  All understandings and agreements  heretofore made between the parties
hereto are merged in this contract,  which alone fully and completely  expresses
the agreement between Landlord and Tenant, and any executory agreement hereafter
made shall be ineffective to change, modify,  discharge or effect an abandonment
of it in whole or in part,  unless such  executory  agreement  is in writing and
signed  by the party  against  whom  enforcement  of the  change,  modification,
discharge or abandonment is sought.

21.      End of Term

         Upon the expiration or other termination of the Term, Tenant shall quit
and surrender to Landlord the demised  premises,  broom clean, in good order and
condition,  ordinary  wear and damages which Tenant is not required to repair as
provided  elsewhere  in this lease  excepted,  and Tenant  shall  remove all its
personal  property and other property required to be removed pursuant to Article
3(D).  Tenant's obligation to observe or perform this covenant shall survive the
expiration or other termination of this lease.

22.      Quiet Enjoyment

         Landlord  covenants  and agrees with Tenant that upon Tenant paying the
rent and additional  rent and observing and performing all the terms,  covenants
and  conditions,  on Tenant's  part to be  observed  and  performed,  Tenant may
peaceably and quietly enjoy the premises hereby demised, subject,  nevertheless,
to the terms and conditions of this lease including, but not limited to, Article
41 hereof and to the ground leases, underlying leases and mortgages hereinbefore
mentioned.

23.      Failure to Give Possession

         If Landlord is unable to give possession of the demised premises on the
date of the  commencement  of the Term hereof,  because of the  holding-over  or
retention of  possession  of any tenant,  undertenant  or  occupants  or, if the
demised  premises  are located in a building  being  constructed,  because  such
building has not been  sufficiently  completed  to make the  premises  ready for
occupancy or because of the fact that a  certificate  of occupancy  has not been
procured or for any other reason beyond Landlord's reasonable control,  Landlord
shall not be subject to any  liability  for failure to give  possession  on said
date  and  the  validity  of  this  lease  shall  not  be  impaired  under  such
circumstances,  nor shall the same be  construed in any wise to extend the Term,
but the rent payable  hereunder  shall be abated and the performance of Tenant's
other  obligations  hereunder will be stayed (provided Tenant is not responsible
for Landlord's  inability to obtain  possession) until after Landlord shall have
given  Tenant  written  notice that the  premises  are  substantially  ready for
Tenant's  occupancy.  If  permission  is  given  to  Tenant  to  enter  into the
possession of the demised  premises or to occupy premises other than the demised
premises prior to the date  specified as the  commencement  of the Term,  Tenant
covenants  and agrees  that such  occupancy  shall be deemed to be under all the
terms,  covenants,  conditions  and  provisions of this lease,  except as to the
covenant to pay rent.  The provisions of this article are intended to constitute
"an express  provision to the  contrary"  within the meaning of Section 223-a of
the New York Real Property Law.

24.      No Waiver

         (A) The failure by either party to seek redress for violation of, or to
insist upon the strict  performance  of, any covenant or condition of this lease
or of any of the Rules or Regulations set forth or hereafter adopted by Landlord
shall not prevent a subsequent  act which would have  originally  constituted  a
violation  from  having all the force and effect of an original  violation.  The
receipt  by  Landlord  or the  payment by Tenant of rent with  knowledge  of the
breach of any covenant of this lease shall not be deemed a waiver of such breach
and no  provision  of this lease shall be deemed to have been waived by Landlord
or Tenant unless such waiver be in writing signed by Landlord or Tenant,  as the
case may be. No payment by Tenant or receipt by Landlord of a lesser amount than
the monthly rent herein  stipulated  shall be deemed to be other than on account
of the earliest  stipulated  rent, nor shall any endorsement or statement of any
check or any  letter  accompanying  any  check or  payment  as rent be deemed an
accord and  satisfaction,  and Landlord may accept such check or payment without
prejudice to Landlord's  right to recover the balance of such rent or pursue any
other  remedy  in this  lease  provided.  No act or thing  done by  Landlord  or
Landlord's  agents  during the Term shall be deemed an acceptance of a surrender
of the premises, and no agreement to accept such surrender shall be valid unless
in writing signed by Landlord. No employee of Landlord or Landlord's agent shall
have any power to accept the keys of the premises  prior to the  termination  of
this  lease and the  delivery  of keys to any such agent or  employee  shall not
operate as a termination of this lease or a surrender of the premises.

         (B)  Supplementing  the  foregoing  provisions  of this  Article 24, no
payment made pursuant hereto by Tenant to Landlord under protest shall be deemed
to be a waiver of  Tenant's  rights to  contest  either  the  amount  of, or the
liability for, such payment.

25.      Waiver of Trial by Jury

         It is  mutually  agreed by and  between  Landlord  and Tenant  that the
respective  parties  hereto  shall and they hereby do waive trial by jury in any
action,  proceeding  or  counterclaim  brought by either of the  parties  hereto
against  the  other  on any  matters  whatsoever  arising  out of or in any  way
connected with this lease, the relationship of Landlord and Tenant, Tenant's use
of or  occupancy  of the  premises,  and any  emergency  statutory  or any other
statutory  remedy.  It is further  mutually  agreed  that in the event  Landlord
commences any summary proceeding for possession of the premises, Tenant will not
interpose  any  counterclaim  of  whatever  nature  or  description  in any such
proceeding  including  a  counterclaim  under  Article 4 unless such waiver will
result under  applicable law in the waiver of Tenant's right to bring such claim
in a separate proceeding.

26.      Inability to Perform

         (A) This lease and the  obligation of Tenant to pay rent  hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed  shall in no wise be affected,  impaired or excused  (except to the
extent  expressly set forth in this lease) because Landlord is unable to fulfill
any of its obligations  under this lease or to supply or is delayed in supplying
any service  expressly or  impliedly to be supplied or is unable to make,  or is
delayed in making any repair, additions, alterations or decorations or is unable
to supply or is delayed in  supplying  any  equipment or fixtures if Landlord is
prevented or delayed from so doing by reason of strike or labor troubles or any
cause whatsoever beyond Landlord's  reasonable control other than lack of funds,
including,  but not limited  to,  government  preemption  in  connection  with a
National  Emergency  or by  reason  of any  rule,  order  or  regulation  of any
department or subdivision  thereof of any government  agency or by reason of the
conditions  of supply and demand which have been or are affected by war or other
emergency.

         (B) Whenever Tenant,  by the terms of this lease,  shall be required to
make any alterations or repairs or perform or comply with any Laws, or any other
requirement  of this lease other than those that can be performed by the payment
of money only,  Tenant  shall not be deemed to be in default in respect  thereof
and Landlord  shall not enforce or exercise any of Landlord's  rights under this
lease if and so long as (i) Tenant,  in good faith,  uses  diligent,  reasonable
efforts to comply with and with due  diligence  proceeds to perform and meet all
the covenants,  agreements and obligations  relating thereto on Tenant's part to
be observed and performed  hereunder,  (ii) the non-performance or default shall
be caused by strikes,  lockouts,  non-availability of labor or materials, war or
national defense preemptions,  governmental restrictions,  acts of God, or other
causes  beyond  the  reasonable  control of Tenant,  and (iii)  Landlord  is not
thereby subjected to criminal or civil liability or a default under any Building
mortgage or underlying lease.

27.      Bills and Notices

         All notices,  bills,  statements and other  communications which either
party may be  required  or may desire to give to the other  shall be in writing,
except as otherwise  expressly provided in this lease. A notice of default which
Landlord  may  desire  or  be  required  to  give  to  Tenant  shall  be  deemed
sufficiently  given or rendered if  delivered  to Tenant  personally  or sent by
registered or certified mail, return receipt requested, or nationally recognized
overnight  courier  providing a receipt,  Attention:  Chief  Financial  Officer,
addressed  to Tenant at the Building or at the last known  residence  address or
business address of Tenant with a copy to: Christy & Viener, Attention: Laurence
S. Markowitz, and the time of the rendition of such bill or statement and of the
giving of such notice or  communication  shall be deemed to be the time when the
same is  received  by Tenant or  delivery  is  refused.  Any notice by Tenant to
Landlord  must be  served by  registered  mail,  return  receipt  requested,  or
nationally  recognized  overnight  courier providing a receipt,  Attention:  Mr.
Peter Duncan,  addressed to Landlord at the address first hereinabove given with
a copy to Stuart D. Byron,  Esq. at Tenzer Greenblatt LLP, 405 Lexington Avenue,
New York,  New York  10174,  and  shall be deemed  delivered  when  received  by
Landlord or delivery is refused.  Either party shall have the right to designate
a different  address  for  receipt of notice upon notice to the other.  See also
Article 43 regarding notices to Mortgagee.

28.      Services Provided by Landlord

         (A) Throughout the Term,  Landlord  shall provide,  at Landlord's  cost
(except as otherwise provided in this lease):

                  (i) Necessary elevator facilities on business days from 8 a.m.
to 6 p.m. and  Saturdays  (except  holidays as  designated in Article 30) from 8
a.m.  to 1 p.m.  and have at least  one  elevator  subject  to call at all other
times.

                  (ii) Heat to the demised premises when and as required by Law,
on  business  days from 8 a.m.  to 6 p.m.  and  Saturdays  (except  holidays  as
designated in Article 30) from 8 a.m. to 1 p.m.

                  (iii) Water for ordinary lavatory and drinking  purposes,  but
if Tenant uses or consumes  water for any other purposes (of which fact Landlord
shall be the sole judge), Landlord may install a water meter at Tenant's expense
which Tenant shall thereafter maintain at Tenant's expense in good working order
and repair to register Tenant's water consumption and Tenant shall pay for water
consumed as shown on said meter as additional rent within thirty (30) days after
bills are rendered.

                  (iv)  Cleaning  service for the  demised  premises on business
days (provided the same are kept in order by Tenant) in accordance with building
standard cleaning  specifications  from time to time in effect.  Landlord agrees
that its  building  standard  cleaning  specifications  shall  be  substantially
similar to other  comparable  office  buildings from time to time. A copy of the
current building standard cleaning specifications are attached hereto as Exhibit
E. Landlord  shall remove or cause the removal and Tenant shall pay Landlord the
cost of removal of any of Tenant's refuse and rubbish and woolen scraps from the
Building other than ordinary office refuse and rubbish.

                  (v) Condenser water for the base building air  conditioning at
all times  during the Term  subject to the terms and  conditions  of this lease.
Tenant shall pay Landlord for such condenser water at the rate of $80.00 per ton
per annum as the same may be increased by Landlord  form time to time but not in
excess of the percentage  increase in the Revised Consumer Price Index for Urban
Consumers,  published  by the Bureau of Labor  Statistics  of the United  States
Department of Labor, for the City of New York, New York, All Items, (1982-1984 =
100) or a successor or substitute index appropriately adjusted, by comparing the
index for the month in which such cost is increased  by Landlord  over the index
for the month in which this lease is dated.

All  services  specifically  required  to be  provided by Landlord in this lease
shall be provided by Landlord substantially in conformance with the standards of
comparable office buildings.

         (B) For Tenant's use of heat, air  conditioning,  ventilation,  freight
elevators  and loading docks during other than the normal  business  hours above
set forth,  Tenant shall reimburse Landlord for its actual  out-of-pocket  costs
for labor  (including  fringe  benefits) and other direct expenses that Landlord
incurs by reason of  overtime  use by Tenant,  plus 7.5%.  There is a  four-hour
minimum on non-business days.

         (C)  Landlord  reserves  the  right to stop  services  of the  heating,
elevators, plumbing, air conditioning, ventilation, power systems or cleaning or
other  services,  if any,  when  necessary by reason of accident or for repairs,
alterations,   replacements  or  improvements  necessary  or  desirable  in  the
reasonable  judgment of Landlord  for as long as may be  reasonably  required by
reason thereof;  provided,  however,  that Landlord  agrees to use  commercially
reasonable  efforts  to cause  such  suspended  service to be resumed as soon as
reasonably practicable,  but Landlord will not be required to use overtime labor
in connection therewith unless Tenant's operations would be materially disrupted
thereby.

29.      Captions

         The  Captions  are  inserted  only as a matter of  convenience  and for
reference  and in no way define,  limit or describe  the scope of this lease nor
the intent of any provisions thereof.

30.      Definitions

         (A) The term "office" or "offices,"  wherever used in this lease, shall
not be construed  to mean  premises  used as a store or stores,  for the sale or
display,  at any  time,  of  goods,  wares  or  merchandise  of any  kind,  as a
restaurant,  shop,  booth,  bootblack  or other stand,  barber  shop,  for other
similar  purposes,  or for  manufacturing  other than as expressly  provided and
limited in Article 2(E) hereof.  The term "Landlord" means a landlord or lessor,
and as used in this lease means only the owner,  or the mortgagee in possession,
for the time  being of the Land  and  Building  (or the  owner of a lease of the
Building or of the Land and Building), so that in the event of any sale or sales
of the Land and/or  Building or of this lease, or in the event of a lease of the
Building, or of the Land and Building,  the said Landlord shall be and hereby is
entirely  freed and  relieved  of all  covenants  and  obligations  of  Landlord
hereunder  thereafter  accruing,  and it shall be deemed and  construed  without
further  agreement  between  the parties or their  successors  in  interest,  or
between the parties and the  purchaser  at any such sale,  or the said lessee of
the Building,  or of the Land and Building,  that the purchaser or the lessee of
the  Building  has  assumed  and agreed to carry out any and all  covenants  and
obligations of Landlord  hereunder.  The words "re-enter" and "re-entry" as used
in this lease are not  restricted to their  technical  legal  meaning.  The term
"business days" as used in this lease shall exclude  Saturdays,  Sundays and all
days  observed  by the  State  or  Federal  Government  as  holidays  and  those
designated  as holidays  by the  applicable  Building  service  union  employees
service contract or by the applicable  Operating Engineers contract with respect
to HVAC service.

         (B) The  following  terms  contained  in this Article 30 shall have the
meanings  hereinafter  set forth as such terms are used  throughout  this lease,
including the exhibits, schedules and riders hereto (if any).

                        (i)         "Tenant's   Proportionate  Share  of  Taxes"
                                    shall be 2.03%.

                        (ii)        "Commencement  Date" shall mean such date as
                                    Landlord substantially completes the work re
                                    quired to be performed by Landlord  pursuant
                                    to items 1 through 8 of  Exhibit B in and to
                                    the  demised  premises  and  tenders  vacant
                                    possession   thereof   to  Tenant   free  of
                                    demolition   debris,   refuse  and  rubbish.
                                    Landlord  shall  provide  not less  than ten
                                    (10) days notice of the anticipated  date of
                                    such substantial completion.

                        (iii)       "Broker" shall mean  collectively  Cushman &
                                    Wakefield,  Inc. and George Comfort & Sons.,
                                    Inc.

                        (iv)        "Base Tax Year" shall mean the calendar year
                                    1999,  which is in  effect  one-half  of the
                                    aggregate  of the  two  (2)  New  York  City
                                    fiscal tax years,  the first commencing July
                                    1, 1998 and ending  June 30,  1999,  and the
                                    second  commencing  July 1, 1999 and  ending
                                    June 30, 2000.

31.      Adjacent Excavation; Shoring

         If an  excavation  shall be made  upon  land  adjacent  to the  demised
premises,  or shall be authorized to be made,  Tenant shall afford to the person
causing or authorized to cause such excavation license to enter upon the demised
premises for the purpose of doing such work as said person shall deem  necessary
to preserve  the wall of the  Building  from injury or damage and to support the
same by proper  foundations  without any claim for damages or indemnity  against
Landlord, or diminution or abatement of rent.

32.      Rules and Regulations

         Tenant and Tenant's servants, employees, agents, visitors and licensees
shall observe  faithfully and comply strictly with the Rules and Regulations and
such  other  and  further  reasonable  Rules  and  Regulations  as  Landlord  or
Landlord's agents may from time to time adopt. Landlord agrees to act reasonably
in its applications of the Rules and Regulations. Notice of any additional Rules
or  Regulations  shall be given in such  manner as Landlord  may elect.  In case
Tenant  disputes  the  reasonableness  of  any  additional  Rule  or  Regulation
hereafter made or adopted by Landlord or Landlord's  agents,  the parties hereto
agree to submit the question of the  reasonableness  of such Rule or  Regulation
for  decision to the New York office of the  American  Arbitration  Association,
whose  determination  shall be final and conclusive upon the parties hereto. The
right to dispute the  reasonableness  of any additional  Rule or Regulation upon
Tenant's  part  shall be deemed  waived  unless the same  shall be  asserted  by
service of a notice in writing upon  Landlord  within twenty (20) days after the
giving of notice thereof.  Nothing in this lease contained shall be construed to
impose upon Landlord any duty or obligation to enforce the Rules and Regulations
or terms,  covenants  or  conditions  in any other  lease,  as against any other
tenant and Landlord  shall not be liable to Tenant for  violation of the same by
any other  tenant,  its  servants,  employees,  agents,  visitors or  licensees.
Landlord  shall   promulgate  and  enforce  the  Rules  and   Regulations  in  a
non-discriminatory manner with respect to all office tenants. To the extent that
the  provisions  of this  lease  conflict  with the Rules and  Regulations,  the
provisions of this lease shall control.


33.      Security Deposit

         (A)      Tenant has deposited with Landlord the sum of $825,000.00
(the "Security  Deposit") in the form of a letter of credit as  hereinafter  set
forth as security for the faithful  performance  and observance by Tenant of the
terms,  provisions and conditions of this lease. If Tenant defaults with respect
to any of the terms, provisions and conditions of this lease, including, but not
limited to, the payment of rent and  additional  rent (subject to any applicable
notice and/or cure periods), Landlord may draw upon the letter of credit, and/or
may use,  apply  and/or  retain the  proceeds  thereof or any cash  security  so
deposited,  to the extent  required  for the payment of any rent and  additional
rent or any other sum as to which  Tenant is in default or for any sum  Landlord
may expend or be required to expend by reason of  Tenant's  default,  including,
but not limited to, any damages or deficiency in the re-letting of the premises,
whether such damages or deficiency  accrued before or after summary  proceedings
or other re-entry by Landlord.  If Tenant fully and faithfully complies with all
of the terms,  provisions,  covenants and conditions of this lease, the Security
Deposit,  or so much  thereof as  Landlord  shall not have  applied as set forth
herein,  shall be promptly  returned to Tenant after the  expiration  or earlier
termination of this lease and after delivery of entire possession of the demised
premises to Landlord. In the event of a sale of the land and Building or leasing
of the Building,  Landlord shall transfer the Security  Deposit to the vendee or
lessee and Landlord shall thereupon be released by Tenant from all liability for
the return thereof; and Tenant agrees to look solely to the new Landlord for the
return of the  Security  Deposit,  and it is agreed that the  provisions  hereof
shall apply to every  transfer or assignment  made of the Security  Deposit to a
new Landlord.  Tenant  further  covenants that it will not assign or encumber or
attempt to assign or encumber the Security Deposit and that neither Landlord nor
its  successors or assigns shall be bound by any such  assignment,  encumbrance,
attempted assignment or attempted encumbrance.

         (B) Tenant has  delivered,  as the  Security  Deposit,  an  irrevocable
letter of credit (the "Letter of Credit") in the amount of the Security  Deposit
issued by a New York City commercial bank acceptable to Landlord in its sole but
good faith  discretion,  in the form of the letter of credit  annexed  hereto as
Exhibit G, to be held by Landlord as security in  accordance  with this Article.
The Letter of Credit shall (i) initially expire not less than one (1) year after
the date of  issuance,  (ii) provide for  automatic  renewals for periods of not
less than one (1) year,  and (iii)  have a final  expiration  date not less than
four (4) months after the  Expiration  Date.  Tenant  shall pay to Landlord,  on
demand and as additional rent  hereunder,  all fees and charges paid by Landlord
to the bank issuing the Letter of Credit in connection  with the transfer of the
same to any future owner or lessee of the Building.  In addition to its right to
draw upon the Letter of Credit as stated in Paragraph (A) above,  Landlord shall
also have the right to draw down all or any  portion  of the Letter of Credit if
Landlord  receives  notice  that the date of expiry of the Letter of Credit will
not be  extended by the issuing  bank and  Landlord  may retain the same for the
Security  Deposit,  in which event after  deducting all of Landlord's  expenses,
Landlord  will hold the net proceeds as cash  security in  accordance  with this
Article.  If Landlord shall have drawn down the Letter of Credit and applied all
or any portion thereof,  then, upon Landlord's  request,  Tenant shall cause the
Letter of Credit to be amended,  or cause an  additional  Letter of Credit to be
issued (in each case in  compliance  with this  Article),  so that the aggregate
balance of such  Letter(s)  of Credit  shall  equal the  required  amount of the
Security  Deposit;  and if Tenant fails to do so within five (5)  business  days
after demand,  Landlord may obtain such Letter of Credit on Tenant's  behalf and
all of Landlord's  expenses in so doing, above the cash security then being held
by Landlord, shall be payable by Tenant on demand as additional rent.

         (C) Tenant  will be  permitted  to reduce  the  amount of the  Security
Deposit by $165,000.00  after the expiration of the fortieth (40th) month of the
Term and by $110,000.00 after the expiration of each of the fifty-second (52nd),
sixty-fourth  (64th) and eighty-eighth  (88th) months of the Term provided that,
for each such  reduction,  Tenant has achieved a Positive  Cash Flow (as defined
below), as certified by an officer of Tenant and an independent certified public
accountant  acceptable  to  Landlord,  for  Tenant's  most recent  fiscal  year.
"Positive  Cash Flow"  shall  mean net  income  determined  in  accordance  with
regularly  prepared financial  statements  prepared in accordance with generally
accepted accounting principles but adding back depreciation and amortization and
deducting capital  expenditures and principal payments of debt.  Notwithstanding
anything to the contrary  contained herein, no reduction in the Security Deposit
shall be permitted  unless,  at such time, no default exists under this lease on
Tenant's  part.  (However,  if such a default exists and Tenant is therefore not
entitled to a particular  reduction in the Security Deposit, and if such default
is thereafter cured by Tenant,  Tenant will become entitled to such reduction at
that time provided that the  conditions  permitting  such reduction are still in
effect;  i.e.,  that  Tenant had a Positive  Cash Flow,  certified  as above set
forth,  for the most recent  fiscal  year.) If the  Security  Deposit is then in
cash, Landlord will pay to Tenant the amount of any applicable  reduction within
fifteen (15) business days after Tenant's  request  therefor  accompanied by any
required  certifications  or other  documentation.  If the Security Deposit is a
Letter of Credit,  then,  upon receipt of any required  certifications  or other
documentation, Landlord will accept a Letter of Credit in the proper reduced
amount in  exchange  for the  existing  Letter of Credit,  or will enter into an
amendment  of the Letter of Credit  reducing  the  amount  thereof to the proper
reduced amount.

         (D) To the extent  that  Landlord is holding  the  Security  Deposit in
cash,  Landlord will (i) accept a new Letter of Credit  subject to all the terms
and conditions of this Article in  substitution  therefor,  and (ii) deposit the
cash in an interest bearing account,  and provided Tenant is not in default, all
interest,  except for one (1%) percent per annum of the principal  amount of the
Security  Deposit  (which shall be retained and applied by Landlord as a service
charge in connection with the maintenance of the security account) shall be paid
annually to Tenant.

34.      Successors and Assigns

         The covenants,  conditions and agreements contained in this lease shall
bind and inure to the benefit of Landlord and Tenant and their respective heirs,
distributees,  executors,  administrators,  successors, and, except as otherwise
provided in this lease, their assigns.

35.      Rental Payments

         (A) The annual Fixed Rent for the premises shall be as follows:

                  (i) for the one (1) year period commencing on the Commencement
Date,  Four  Hundred  Twenty-Two   Thousand  Nine  Hundred  Seventy  and  60/100
($422,970.60) Dollars per annum;

                  (ii) for the one (1) year period commencing on the first (1st)
anniversary of the  Commencement  Date,  Four Hundred  Thirty-Four  Thousand Six
Hundred Two and 29/100 ($434,602.29) Dollars per annum;

                  (iii) for the one (1) year  period  commencing  on the  second
(2nd) anniversary of the Commencement Date, Four Hundred Forty-Six Thousand Five
Hundred Fifty-Three and 85/100 ($446,553.85) Dollars per annum;

                  (iv) for the one (1) year period commencing on the third (3rd)
anniversary of the  Commencement  Date, Four Hundred  Ninety-One  Thousand Seven
Hundred Fifty and 08/100 ($491,750.08) Dollars per annum;

                  (v) for the one (1) year period commencing on the fourth (4th)
anniversary  of the  Commencement  Date,  Five Hundred Five Thousand Two Hundred
Seventy-Three and 21/100 ($505,273.21) Dollars per annum;

                  (vi) for the one (1) year period commencing on the fifth (5th)
anniversary of the Commencement Date, Five Hundred Nineteen Thousand One Hundred
Sixty-Eight and 22/000 ($519,168.22) Dollars per annum;

                  (vii)  for the one (1) year  period  commencing  on the  sixth
(6th)  anniversary of the Commencement  Date, Five Hundred  Eighty-Two  Thousand
Eight Hundred Nineteen and 35/100 ($582,819.35) Dollars per annum;

                  (viii) for the one (1) year period  commencing  on the seventh
(7th) anniversary of the Commencement Date, Five Hundred  Ninety-Eight  Thousand
Eight Hundred Forty-Six and 88/100 ($598,846.88) Dollars per annum;

                  (ix)  for the one (1) year  period  commencing  on the  eighth
(8th)  anniversary of the Commencement  Date, Six Hundred Fifteen Thousand Three
Hundred Fifteen and 17/100 ($615,315.17) Dollars per annum; and

                  (x) for the period  commencing on the ninth (9th)  anniversary
of the  Commencement  Date to and including  the  Expiration  Date,  Six Hundred
Thirty-Two Thousand Two Hundred
Thirty-Six and 34/100 ($632,236.34) Dollars per annum.

         (B) All payments other than Fixed Rent to be made by Tenant pursuant to
this lease shall be deemed  additional rent and, in the event of any non-payment
thereof,  Landlord shall have all rights and remedies  provided for herein or by
law for non-payment of rent.

         (C) All  payments  of Fixed  Rent and  additional  rent  (collectively,
sometimes  called  "rent" or "rental"  herein) to be made by Tenant  pursuant to
this lease shall be made by checks  payable in U.S.  funds drawn upon a New York
City bank which is a member of the New York Clearing  House  Association  or any
successor  thereto or at Tenant's  election by wire transfer drawn on a New York
City bank.

         (D) If Landlord  receives  from Tenant any payment less than the sum of
the Fixed Rent and  additional  rent then due and owing  pursuant to this lease,
Tenant  hereby  waives its right,  if any, to designate  the items to which such
payment  shall be applied and agrees that  Landlord in its sole  discretion  may
apply such payment in whole or in part to any Fixed Rent, any additional rent or
to any combination thereof then due and payable hereunder.

         (E)  Unless  Landlord  shall  otherwise  expressly  agree  in  writing,
acceptance of Fixed Rent or additional  rent from anyone other than Tenant shall
not relieve  Tenant of any of its obliga tions under this lease,  including  the
obligation to pay Fixed Rent and  additional  rent,  and Landlord shall have the
right at any time,  upon  notice to Tenant,  to require  Tenant to pay the Fixed
Rent and additional rent payable  hereunder  directly to Landlord.  Furthermore,
such  acceptance  of Fixed  Rent or  additional  rent  shall  not be  deemed  to
constitute  Landlord's consent to an assignment of this lease or a subletting or
other  occupancy  of the demised  premises by anyone  other than  Tenant,  nor a
waiver of any of Landlord's rights or Tenant's obligations under this lease.

         (F) Landlord's  failure to timely bill all or any portion of any amount
payable  pursuant  to this  lease for any period  during the Term shall  neither
constitute a waiver of Landlord's right to ultimately  collect such amount or to
bill  Tenant at any  subsequent  time  retroactively  for the  entire  amount so
unbilled,  which previously  unbilled amount shall be payable within thirty (30)
days after being so billed.

         (G) Provided this lease shall be in full force and effect, Tenant shall
be entitled  to a credit  against  the  installments  of the Fixed Rents for the
second  (2nd) to the fifth  (5th)  full  calendar  months  commencing  after the
Commencement  Date, in the aggregate  amount of One Hundred Forty  Thousand Nine
Hundred Ninety and 20/100 ($140,990.20) Dollars which credit shall be applied in
four (4) equal  installments  at the rate of  Thirty-Five  Thousand  Two Hundred
Forty-Seven and 55/100 ($35,247.55) Dollars per month commencing from the second
(2nd) to the fifth (5th) full calendar months after the Commencement Date;

                  All other terms and  conditions of this lease shall be in full
force and effect during such periods, including, but not limited to, Articles 12
and 36.

         (H) If on the  Commencement  Date, or at any time during the Term,  the
Fixed Rent or additional rent reserved in this lease is not fully collectible by
reason  of any  federal,  state,  county  or city  law,  proclamation,  order or
regulation,  or any  direction  of any public  officer or body  pursuant  to law
(collectively,  "Rent  Law"),  Tenant  agrees to take such steps as Landlord may
request to permit  Landlord to collect  the  maximum  rents which may be legally
permissible  from time to time during the effective period of such Rent Law (but
not in excess of the  amounts  reserved  therefor  under this  lease).  Upon the
termination  of the  effective  period  of such Rent  Law,  Tenant  shall pay to
Landlord,  to the extent  permitted  by the Rent Law, an amount equal to (i) the
Fixed Rent and additional rent which would have been paid pursuant to this lease
but for such legal  rent  restriction,  less (ii) the Fixed Rent and  additional
rent paid by Tenant to Landlord during the effective period of such Rent Law.

36.      Tax Escalation

         (A) For purposes hereof:

                  (i) "Real  Estate  Taxes" shall mean all the real estate taxes
and  any  general  or  special  assessments,  vault  taxes,  government  levies,
municipal  taxes,  county  taxes  or  any  governmental   charge,   ordinary  or
extraordinary,  unforeseen as well as foreseen, of any kind or nature whatsoever
(exclusive  of  interest  and  penalties)  levied,  assessed  or  imposed by any
governmental  authority having jurisdiction upon or with respect to the Building
and land upon  which it is  located  ("Land")  (including,  without  limitation,
assessments for public benefits to the Land or Building and Business Improvement
District taxes or assessments and similar impositions);  provided, however, that
if,  because of any change in the taxation of real  estate,  any increase or any
other tax or assessment, however denominated (including, without limitation, any
franchise,  income, profit, sales, use, occupancy, gross receipts or rental tax)
is  imposed  upon  Landlord  or the  owner of the Land or the  Building,  or the
occupancy,  rents or income therefrom, in substitution for or in addition to any
of the  foregoing  Real Estate Taxes or for an increase in any of the  foregoing
Real Estate Taxes, such increase or other tax or assessment shall be deemed part
of Real Estate Taxes computed as if Landlord's  sole asset were the Land and the
Building. Anything contained herein to the contrary notwithstanding, Real Estate
Taxes shall not be deemed to include  (a) any taxes on  Landlord's  income,  (b)
franchise taxes, (c) estate,  gift, transfer or inheritance taxes, (d) mortgage,
recording and capital gains taxes incurred with respect to a sale or refinancing
of the  Building  and/or Land,  (e) any increase in Real Estate Taxes  resulting
from physically  adding space to the Building,  or (f) any similar taxes imposed
on Landlord,  unless such taxes are levied,  assessed or imposed as a substitute
for the whole or any part of, or as a substitute  for an increase in, the taxes,
assessments,  levies,  fees,  charges and  impositions  that now constitute Real
Estate Taxes.

                  (ii) "Base Year  Taxes"  shall mean the Real  Estate  Taxes as
finally determined for the Base Tax Year.

         (B) If the Real  Estate  Taxes for any year  during the Term exceed the
Base Year Taxes, Tenant shall pay Landlord Tenant's Proportionate Share of Taxes
of such excess within thirty (30) days after  Landlord shall furnish to Tenant a
statement (the "Tax Statement") setting forth the amount thereby due and payable
by Tenant. If Real Estate Taxes are payable by Landlord to the applicable taxing
authority  in  installments,  then  Landlord  shall  bill  Tenant  for  Tenant's
Proportionate  Share of Taxes of the excess Real Estate  Taxes in  corresponding
installments,  such that Tenant's payment is due not later than thirty (30) days
prior to the date when Landlord is obligated to pay the Real Estate Taxes to the
applicable  taxing  authority.  If the actual amount of Real Estate Taxes is not
known  to  Landlord  as of the  date of the Tax  Statement,  then  Landlord  may
nevertheless  bill  Tenant  for such  installment  on the basis of a good  faith
estimate,  in which event Tenant shall pay the amount so estimated within thirty
(30) days after receipt of such bill,  subject to prompt refund by Landlord,  or
payment by Tenant,  upon a  supplemental  billing  by  Landlord  once the amount
actually  owed by Tenant is  determined.  Except as provided in the  immediately
preceding sentence, Landlord shall provide Tenant with a copy of the current tax
bill used in the preparation of the Tax Statement with such Tax Statement.

         (C) If Landlord  receives  any refund of Real Estate Taxes for any year
subsequent  to the Base Tax Year for which  Tenant  has made a payment  pursuant
hereto, Landlord shall (after deducting from such refund all reasonable expenses
incurred in  connection  therewith)  pay Tenant,  within  thirty (30) days after
receipt,  Tenant's  Proportionate  Share of Taxes of the net refund. If Landlord
succeeds in reducing any assessed  valuation for the Land and the Building prior
to the  billing of Real  Estate  Taxes for any year  subsequent  to the Base Tax
Year,  Tenant shall pay Landlord  Tenant's  Proportionate  Share of Taxes of the
reasonable expenses so incurred by Landlord.

         (D) If any year  subsequent  to the  Base  Tax  Year is only  partially
within the Term, all payments  pursuant hereto shall be appropriately  prorated,
based on the portion of such year which is within the Term. Except as limited by
Articles 9 and 10: (i)  Tenant's  obligation  to make the  payments  required by
Paragraphs  (B)  and  (C)  shall  survive  the  Expiration  Date  or any  sooner
termination of this lease,  and (ii) Landlord's  obligation to make the payments
required  by  Paragraph  (C) shall  survive  the  Expiration  Date or any sooner
termination of this lease pursuant to Articles 9 and 10.

         (E) Each final Tax Statement (as opposed to an estimated Tax Statement)
given by Landlord pursuant to Paragraph (B) shall be binding upon Tenant unless,
within  the  earlier  to occur of one (1) year  after  its  receipt  of such Tax
Statement and copy of the  applicable  bill or one (1) year after the end of the
Term,  Tenant notifies  Landlord of its disagreement  therewith,  specifying the
portion thereof with which Tenant disagrees. Pending resolution of such dispute,
Tenant shall,  without  prejudice to its rights,  pay all amounts  determined by
Landlord to be due, subject to prompt refund by Landlord (without interest) upon
any contrary determination.

         (F)  Landlord  hereby  notifies  Tenant that  Landlord  has applied for
benefits under the Industrial and Commercial  Incentive Program ("ICIP") for the
Building.  In  connection  therewith,  all of  Tenant's  construction  managers,
contractors and subcontractors  employed in connection with construction work at
the Building  shall be  contractually  required by Tenant to comply with the New
York City Office of Labor  Services/Construction  Division ("OLS")  requirements
applicable to construction  projects  benefiting from the ICIP. Such compliance,
as of the date hereof, includes the following:  the submission and approval of a
Construction Employment Report, attendance at a pre-construction conference with
representatives  of the OLS and adherence to the provisions of Article 22 of the
ICIP Rules and Regulations, the provisions of New York City Charter Chapter 13-B
and the provisions of Executive Order No. 50 (1980).  Furthermore, at Landlord's
request,  Tenant shall (i) report to Landlord the number of workers  permanently
engaged in employment in the  premises,  the nature of each worker's  employment
and, to the extent applicable,  the New York City residency of each worker, (ii)
provide  access to the premises to employees  and agents of the  Department  (as
such term is defined in the ICIP Rules and Regulations) at all reasonable times,
and (iii) enforce the contractual obligations of Tenant's construction managers,
contractors and subcontractors to comply with the OLS requirements.

37.      Option to Expand

         (A)      For purposes of this Article,

                  (i)  rentable   space   consisting  of  all  or  part  of  the
seventeenth (17th) floor (collectively, "Expansion Space") in the Building shall
be deemed  "Available"  only if and when (a) such space becomes vacant,  free of
occupants and  tenancies and rights (the "Third Party  Rights") of third parties
existing as of the date of this lease or (b) (x) the then existing tenant of any
such space has not  exercised an option to renew or extend the term of its lease
and the time by which such tenant must  exercise such option has expired and (y)
subject to Paragraph E below,  if Landlord has given an Offer Notice (as defined
below)  and  Tenant  has not given a  Tenant's  Acceptance  Notice  in  response
thereto, the then existing occupant thereof is not negotiating with Landlord for
a lease or renewal  thereof,  and (z) all Third  Party  Rights and the rights of
CLAIRTEX  CORP.  with respect to such space have expired or been waived  without
having been  exercised,  or (c) Landlord  reasonably  expects  that,  within the
succeeding  six (6) months,  the lease  therefor will be terminated  (whether by
agreement, summary dispossess proceeding or otherwise) and Landlord will receive
vacant possession thereof free of any claims and Third Party Rights and CLAIRTEX
CORP. All current Third Party Rights,  rights of currently  existing  tenants to
renew and  rights  of  Clairtex  Corp.  are set forth in  Exhibit  H.  Except as
provided in this lease or unless  Landlord  has given an Offer Notice and Tenant
has not given a Tenant's Acceptance Notice in response thereto,  Landlord agrees
not to grant any new rights to Expansion Space that may become  Available unless
the same are subject and subordinate to the rights of Tenant under this Article.

                  (ii)  "Business  Terms"  shall  mean  the  material   economic
business  terms upon which  Landlord is willing in its sole  discretion to enter
into a lease for the Offered Space (as hereinafter defined),  including, without
limitation,  the rental rate to be paid, any escalation payment  obligations and
the applicable base years,  any other  additional rent, any work to be performed
or paid for by Landlord,  the amount and duration of any rent  concessions,  and
the cost and extent of any so-called  "take-over"  obligations  to be assumed by
Landlord. The lease of any Offered Space shall be co-terminous with the lease of
the initial demised premises.

                  (iii)  "Net  Effective  Rental"  shall mean the  constant  net
effective rental payable for the Offered Space for the portion of the balance of
the Term covered thereby,  taking into account all applicable Business Terms and
calculated on the basis of an interest factor of the then-current Prime Rate.

         (B) Tenant's  rights under this Article shall exist only if and so long
as (i) Tenant is not in default under this lease after notice and  expiration of
any applicable grace period, and (ii) Tenant exercises such rights in the manner
and within the  applicable  time period set forth in Paragraph (C)  hereinbelow,
and (iii) there are at least five (5) years then  remaining  in the Term (as the
same may have then been or may  simultaneously  be extended  pursuant to Article
51),  and (iv)  Tenant  shall  itself and its related  companies  (as defined in
Article  11(N) hereof) be occupying at least eighty (80%) per cent of the entire
premises  then  demised  hereunder.  Notwithstanding  anything  to the  contrary
contained herein,  Landlord need not send Tenant an Offer Notice with respect to
any  Available  Expansion  Space  if  Landlord  in  good  faith  then  currently
contemplates  leasing such Available  Expansion  Space as part of a larger block
either  containing  at least a full  floor  in the  building  contiguous  to the
demised  premises or at least 75,000 square feet  anywhere in the  building,  in
addition to the Available Expansion Space.

         (C) If and when any  Expansion  Space becomes  Available,  and provided
that the  conditions  contained  in  Paragraph  (B)  above are then  being  met,
Landlord shall promptly deliver a notice (the "Offer Notice") to Tenant offering
to lease  such space  (together,  at  Landlord's  option,  with any other  space
(consisting of at least an additional full floor) that Landlord wishes to market
with such space  (collectively,  the "Offered  Space")) and stating the Business
Terms of such offer. Tenant shall thereupon have the right, to be exercised by a
notice  ("Tenant's  Acceptance  Notice")  given to  Landlord  no later  than the
fifteenth (15th) day after Landlord delivers such Landlord's Offer Notice (as to
which time shall be of the  essence),  to lease all but not part of the  Offered
Space on the terms  hereinafter  set forth.  Tenant  shall not have the right to
lease less than all of the Offered  Space.  Not later than thirty (30) days from
the giving of Tenant's  Acceptance  Notice,  Tenant shall  deliver to Landlord a
letter of credit as  required  by Article 33, or an  amendment  to the  existing
Letter of Credit complying with Article 33, in each case increasing the Security
Deposit by an amount (the "Additional  Security Deposit") initially equal to the
aggregate sum of Landlord's  anticipated costs in connection with the leasing of
the  Offered  Space to Tenant,  including,  but not  limited  to, any work to be
performed  or  paid  for by  Landlord  in or to  the  Offered  Space,  brokerage
commissions,  attorneys'  fees,  rent  concessions,  work allowances or credits,
so-called  "take-over"  obligations  to be  assumed by  Landlord,  and any other
costs,  credits or allowances  that Landlord may incur or grant.  Subject to the
same  conditions set forth in Article 33(C),  Tenant will be permitted to reduce
the  Additional  Security  Deposit by an amount equal to eleven (11%) percent of
the initial  Additional  Security Deposit on each of the first,  second,  third,
fourth and fifth anniversaries of the Expansion Space Commencement Date.

         (D) If Tenant timely delivers Tenant's  Acceptance Notice,  then, as of
the date (the "Expansion Space  Commencement  Date") on which Landlord  delivers
possession  of the  Offered  Space to Tenant in the  condition  set forth in the
Business Terms, the Offered Space shall become part of the demised premises upon
all the terms and conditions set forth in Landlord's  Offer Notice and otherwise
upon all the same  applicable  terms and conditions set forth in this lease with
respect to the initial demised premises.  Tenant's  Proportionate Share of Taxes
with respect to the Offered  Space shall be the rentable  square feet  contained
therein  divided by 811,046,  expressed as a percentage.  Landlord agrees to use
diligent  efforts to cause the  Expansion  Space  Commencement  Date to occur as
promptly as reasonably  practicable after Landlord receives vacant possession of
the Offered Space.

         (E) If Tenant fails timely to deliver Tenant's  Acceptance  Notice with
respect to the Offered  Space,  Tenant shall be deemed to have waived its rights
with  respect to such  Offered  Space and  Landlord  shall be free to lease such
Offered Space to any third party on such terms and  conditions as Landlord shall
determine;  provided, however, that if Landlord wishes to enter into a lease for
the Offered  Space at less than 92.5% of the Net Effective  Rental  contained in
the initial or immediately  prior  Landlord's  Offer Notice with respect to such
Offered Space, or Landlord wishes to enter into a lease for less than the entire
Offered Space  contained in the initial or immediately  prior  Landlord's  Offer
Notice,  then Landlord shall give Tenant a new  Landlord's  Offer Notice (unless
Landlord  is  not  required  to  do  so  pursuant  to   Paragraph   (B)  hereof)
incorporating  Business  Terms  equivalent  to those that  triggered  Landlord's
obligation to deliver the new Landlord's Offer Notice, and Tenant shall have the
right, to be exercised by Tenant's  Acceptance Notice given to Landlord no later
than the tenth (10th) day after Landlord  delivers such Landlord's  Offer Notice
(as to which  time  shall be of the  essence),  to lease all but not part of the
Offered Space or the new Offered  Space,  as the case may be, on such new terms,
in the same  manner as set forth above with  respect to the  initial  Landlord's
Offer Notice.

         (F) Promptly after  Tenant's  delivery of Tenant's  Acceptance  Notice,
Landlord and Tenant shall  execute and deliver an  agreement  incorporating  the
applicable  Offered Space into the demised  premises and setting forth the terms
of the leasing  thereof;  provided that the failure of the parties to enter into
such an  agreement  shall not affect  their  respective  rights and  obligations
hereunder.

         (G) If any occupant of any Offered  Space leased by Tenant as aforesaid
does not vacate its space by the expiration of the then-existing lease therefor,
Landlord  shall,  at its sole expense,  diligently  pursue all  available  legal
remedies in order to obtain vacant possession of such space, including,  without
limitation,  the expeditious commencement and diligent prosecution of a holdover
proceeding,  and shall keep Tenant  apprised of the status of such efforts.  The
parties  acknowledge that by reason of the practices and procedures of the Civil
Court of New York County,  Landlord and Tenant Part,  it may not be possible for
Landlord  expeditiously to recover vacant possession of all or a portion of such
space from such  occupant.  Therefore,  no such holdover by such occupant  shall
entitle  Tenant to  recover  damages or any other  amount  from  Landlord  or to
terminate  this lease at any time,  nor shall  Landlord  be required to make any
payment to, or enter into any  agreement  with,  such  occupant to facilitate or
accomplish  the recovery of vacant  possession of such space.  The provisions of
this Paragraph are intended to constitute "an express provision to the contrary"
within the meaning of Section 223-a of the New York Real Property Law.

         (H)  Notwithstanding  anything to the contrary contained herein, in the
event that any Expansion Space  consisting of 2,500 or less rentable square feet
is  leased by  Tenant  and  added to this  lease  (the  "Unit")  and  thereafter
Expansion  Space  becomes  Available  which is contiguous to the Unit and Tenant
does not give Landlord a Tenant's  Acceptance Notice with respect thereto,  then
Landlord at its option shall have the right to relocate Tenant from the Unit and
substitute any comparable space in the Building in place of the Unit.

38.      Air Conditioning

         (A)  Whenever  the  System  is  in  operation,  Tenant  shall  use  its
reasonable  efforts to close the venetian  blinds  and/or  drapes in the demised
premises.  Tenant  shall  comply  with  reasonable  regulations  promulgated  by
Landlord in  connection  with  heating,  ventilating  and air  conditioning  the
Building.

         (B) Landlord will install the base building air conditioning  servicing
the demised premises in accordance with Exhibit B.

39.      Brokerage

         Tenant  and  Landlord  each  represents  that it did not deal  with any
broker or finder in  connection  with this lease other than the  Broker.  Tenant
shall indemnify Landlord against any liability and expense (including reasonable
attorney's fees) for any brokerage  commission or finder's fee claimed by anyone
other  than  the  Broker  based  on the  actions  of  Tenant  or its  agents  or
representatives.  Landlord  will pay Broker a commission  pursuant to a separate
agreement  between  Landlord and Broker and shall  indemnify  Tenant against any
liability and expense (including  reasonable  attorney's fees) for any brokerage
commission or finder's fee claimed by anyone, including the Broker, based on the
actions of Landlord or its agents or  representatives.  The  parties'  liability
hereunder shall survive any expiration or termination of this lease.

40.      Building Directory

         The listing of any party's name other than Tenant's shall neither grant
such party any right or interest in this lease  and/or the demised  premises nor
constitute  Landlord's  consent to any assignment or sublease to or occupancy by
such party.

41.      Exculpatory Clause

         (A) Anything herein to the contrary  notwithstanding,  the liability of
Landlord  and any prior  landlord  hereunder  and the  partners  and  members of
Landlord and any prior  landlord  hereunder for  negligence,  failure to perform
lease  obligations or otherwise  under or in connection with this lease shall be
limited to their  respective  interests in the Land and  Building.  Tenant shall
neither  seek to enforce nor enforce any  judgment or other  remedy  against any
other asset of Landlord or any prior landlord hereunder or any partner or member
of Landlord or any prior landlord hereunder or any party that holds any interest
in Landlord or any prior landlord hereunder.

         (B)  Anything in this lease to the contrary  notwithstanding,  wherever
any  provision  is made in this lease for  Landlord's  consent or  approval,  or
exercise  of  judgment or  imposition  of a  requirement,  rule,  regulation  or
designation,  or any determination by Landlord's agent, such consent or approval
shall not be withheld or delayed  unreasonably or in bad faith and such judgment
or imposition of a requirement, rule, regulation or designation or determination
of Landlord's  agent,  shall be exercised  reasonably and in good faith.  Tenant
hereby waives any claim against Landlord which it may have  (including,  without
limitation,  a claim for damages)  based upon any assertion that Landlord or its
agent  unreasonably  withheld  or  delayed  any such  consent  or  approval,  or
exercised  its  judgment  or  imposed  a   requirement,   rule,   regulation  or
determination  or designation or otherwise acted  unreasonably  (but Tenant does
not waive any claim that Landlord acted in bad faith).  Whenever  Tenant alleges
that Landlord has acted unreasonably with respect to a matter arising under this
lease (but not in bad faith),  Tenant's sole remedy  therefor shall be to send a
notice to Landlord  ("Hearing  Notice"),  specifying  the matter with respect to
which it alleges that Landlord has acted  unreasonably  ("Dispute") and electing
to have the Dispute resolved by an informal hearing ("Hearing") upon and subject
to the terms and conditions hereinafter set forth:

                         (i)         The Hearing shall be held at the offices of
the hearing officer,  who shall be selected  pursuant to the then existing rules
and procedures of the American Arbitration Association in New York City, and who
shall be an attorney,  duly  admitted in New York,  with at least ten (10) years
experience in Manhattan office leasing ("Hearing Officer");

                        (ii)      The Hearing shall be held within ten (10) days
after the Hearing Officer is designated pursuant to substantive and
procedural rules to be established by the Hearing Officer;

                       (iii)     The determination by the Hearing Officer shall
be conclusive upon the parties and shall be made within seven (7)
days after the Hearing is completed; and

                        (iv)        If Landlord is determined to have acted
properly,  Tenant  shall pay the fees of the  Hearing  Officer.  If  Landlord is
determined to have acted improperly, Landlord shall pay such fees.

42.      Submission to Jurisdiction, Etc.

         (A) Tenant  hereby  represents  to  Landlord  that it is not  entitled,
directly  or  indirectly,  to  diplomatic  or  sovereign  immunity  (or,  in the
alternative,  Tenant hereby  irrevocably and  unconditionally  waives diplomatic
and/or sovereign  immunity if Tenant is entitled  thereto).  This lease shall be
deemed to have been made in New York County, New York, and shall be construed in
accordance  with the laws of the State of New York.  All actions or  proceedings
relating,  directly  or  indirectly,  to this lease shall be  litigated  only in
courts  located  within the County of New York.  Tenant,  any  guarantor  of the
performance of its  obligations  hereunder  ("Guarantor")  and their  respective
successors and assigns hereby irrevocably subject themselves to the jurisdiction
of any state or federal  court  located  within such county,  waive the personal
service of any process upon them in any action or  proceeding  therein and agree
that such process may be served by certified or registered mail,  return receipt
requested,  directed to Tenant and any successor at Tenant's address hereinabove
set forth,  to  Guarantor  and any  successor  at the  address  set forth in the
instrument  of  guaranty  and to any  assignee  at the  address set forth in the
instrument of assignment. Such service shall be deemed made when such process is
received or delivery thereof is refused.

         (B) If any monies  owing by Tenant  under this lease are paid more than
ten (10) days after the date such monies are payable  pursuant to the provisions
of this lease,  Tenant shall pay Landlord interest  thereon,  at the lesser (the
"Interest  Rate") of the then maximum lawful rate or four (4%) percent per annum
over the  then-current  Prime Rate from time to time in  effect,  for the period
from the date such monies were payable to the date such monies are paid.

         (C) The  submission  of this lease to Tenant  shall not  constitute  an
offer by  Landlord  to execute  and  exchange  a lease  with  Tenant and is made
subject to Landlord's execution and delivery thereof.

         (D) Landlord  and Tenant each  respectively  represent  that the person
executing  this lease on its behalf is duly  authorized to execute,  acknowledge
and deliver this lease.

         (E) The provisions of this Article shall survive the expiration of this
lease.

43.      Modifications Requested by Mortgagee, Etc.

         (A) If any present or prospective mortgagee of the Land or the Building
or  any  leasehold  interest  therein  requires,  as a  condition  precedent  to
extending or issuing its loan, the  modification of this lease in such manner as
does not lessen Tenant's rights or increase its obligations  hereunder or lessen
Landlord's obligations or increase Landlord's rights (except, in each case, to a
de minimis  extent),  Tenant  shall not delay or  withhold  its  consent to such
modification and shall execute and deliver such confirming documents therefor as
such mortgage reasonably requires.

         (B) From and after written request by Landlord, Tenant agrees to send a
copy of all  notices of default  given by Tenant to  Landlord  hereunder  to the
holder of the Fee Mortgage and Tenant  agrees to accept any cure of such default
by the holder of the Fee  Mortgage,  provided  such cure is  commenced  promptly
after  the  holder  of the Fee  Mortgage  obtains  sufficient  control  over the
Building to do so and is diligently  prosecuted  thereafter  (but nothing herein
shall require the holder of the Fee Mortgage to cure any such default).

44.      Tenant's Work

         (A) Tenant shall,  at its expense,  and in compliance  with the further
provisions of this Article 44, the  "Alteration  Rules" annexed as Exhibit F and
other applicable  provisions of this lease, make such Alterations in the demised
premises as Tenant may  consider  necessary or desirable to prepare the same for
Tenant's initial  occupancy  ("Tenant's  Work").  In addition,  Tenant shall, at
Tenant's  expense,  make all modifications and additions and replacements to the
alarm systems  within the demised  premises as may be  necessitated  by Tenant's
Work.

         (B) Tenant  shall have  prepared by a licensed  architect,  at Tenant's
expense, and shall submit to Landlord for its approval,  complete,  detailed and
fully dimensioned  architectural,  electrical,  mechanical and engineering plans
and drawings  (1/8" scale),  and  specifications  for Tenant's  Work  ("Tenant's
Plans").  Tenant's Plans shall conform to the existing physical condition of the
Building,  the  filed  plans  and  specifications  for  the  Building,  and  all
applicable laws and requirements of law and public authorities and the rules and
regulations implementing the same.

         (C) Upon Landlord's written approval of Tenant's Plans, which shall not
be unreasonably withheld and which shall be granted or withheld within seven (7)
business days after Landlord's  actual receipt thereof,  Tenant, at its expense,
shall  cause  Tenant's  Plans   (including   necessary   mechanical   plans  and
specifications) to be filed with the governmental  agencies having  jurisdiction
thereof,  in order to  obtain,  and  shall  obtain,  all  governmental  permits,
approvals,   licenses,   authorizations,   waivers,  consents  and  certificates
(collectively "Permits") that may be required in connection with the performance
of Tenant's  Work.  Tenant's  Plans shall be  delivered  to Landlord by personal
delivery  and shall not be deemed  received  until  actual  receipt  thereof  as
evidenced by a signed and dated receipt. If Landlord does not respond within the
aforesaid  seven (7) day period and  provided  that  Tenant  gives  Landlord  an
additional  notice  stating  that  Landlord has so failed to respond and stating
that if Landlord  fails to respond  within five (5) business  days of receipt of
such  additional  notice that  approval  will be deemed  granted,  and  Landlord
continues  to fail to respond  within such five (5) day period,  Tenant's  plans
will be deemed  approved.  Landlord shall with  reasonable  promptness  sign the
applications  for such  Permits  prepared  by Tenant  which  require  Landlord's
signature and shall  otherwise  cooperate  with Tenant,  at Tenant's  reasonable
expense,  in connection  with Tenant's  efforts to obtain the Permits and Tenant
shall indemnify and hold Landlord harmless against any claim, cost, liability or
expense resulting from any error, omission or other impropriety or deficiency in
any such  application.  Tenant's  Work shall be  governed by the  provisions  of
Articles 3 and 6 as modified and  supplemented  by this Article.  Landlord shall
permit Tenant's  contractors,  subcontractors and suppliers to move construction
materials,  supplies and equipment for Tenant's Work to the demised premises and
to  remove  construction  waste  and  debris  therefrom,  by an  elevator  to be
designated by Landlord,  at times appointed by Landlord after normal hours or on
other than business days,  giving effect to other  previously made  appointments
and  subject to payment of any  applicable  fees  therefor,  provided,  however,
Tenant shall be allowed an aggregate of twenty (20) hours non-consecutive use of
freight  elevator  without cost during the course of Tenant's Work or during the
time that Tenant  moves into the  Building.  Tenant  shall,  and shall cause its
contractors,  subcontractors  and suppliers to, comply with the Alteration Rules
and  Landlord's  reasonable  directions  for the  coordination  and  control  of
construction  activities in the Building and the  protection and security of the
Building and its systems, facilities and occupants.

         (D) If, by reason of the  existence of a violation in the Building that
was not  caused by Tenant,  its  agents,  contractors  or  employees,  Tenant is
delayed in the substantial  completion of Tenant's Work, the  Commencement  Date
will be  delayed  by one day for each day of any such  delay in the  substantial
completion  of Tenant's Work directly and solely caused by the existence of such
violation. Landlord will, as promptly as reasonably practicable after receipt of
notice of any such violation from Tenant,  use all reasonable  efforts to remove
or cure any such violation.

45.      Insurance

         (A)  During  the Term  Tenant  shall pay for and keep in force  general
liability  policies in standard  form  protecting  against any and all liability
occasioned  by  accident  or  occurrence,  such  policies  to be  written  on an
occurrence basis, with such deductibles as are reasonably acceptable to Landlord
and by recognized and well-rated  insurance  companies,  having a policyholder's
rating of no less than "A" and a financial  size category of not less than "XII"
in the most  current  edition of Best's  Insurance  Reports  and  authorized  to
transact  business  in the State of New York.  The minimum  limits of  liability
shall be a combined single limit with respect to each occurrence in an amount of
not less than $5,000,000 for injury (or death) and damage to property (which may
be  carried  under a basic  $1,000,000  policy  and an  umbrella  policy for the
balance  provided  that at all  times  during  the Term  there  is no less  than
$5,000,000  coverage with respect to the demised premises and the Building).  If
at any time during the Term it appears that public  liability or property damage
limits in the City of New York for premises similarly situated, due regard being
given to the use and occupancy  thereof,  are higher than the foregoing  limits,
then Tenant shall  increase the  foregoing  limits  accordingly.  Landlord,  its
managing  agent and each  mortgagee of whom Tenant has received  notice shall be
named as additional insureds in the aforesaid  insurance policies.  Tenant shall
also secure and keep in force "all risk" property  insurance,  including loss by
fire and, by means of the standard extended coverage endorsement, loss or damage
by such other casualties as may be covered thereby, covering all of its personal
property, machinery,  equipment, trade fixtures, goods, merchandise,  furniture,
furnishings and other items removable by Tenant located in the demised  premises
for the full  replacement  value  thereof from time to time.  All such  policies
shall also  provide  that  Landlord  and each such  mortgagee  shall be afforded
thirty (30) days prior notice of cancellation  of said  insurance.  Tenant shall
deliver  Acord 27  certificates  of  insurance  evidencing  such  policies or at
Landlord's  request,  duplicate  originals  of such  policies.  All premiums and
charges for the aforesaid  insurance shall be paid by Tenant and if Tenant shall
fail to make such payment when due,  Landlord may,  after giving Tenant at least
ten (10) days notice, make it and the amount thereof shall be repaid to Landlord
by Tenant on demand and the amount  thereof may, at the option of  Landlord,  be
added to and become a part of the  additional  rent  payable  hereunder.  Tenant
shall not violate or permit to be violated any condition of any of said policies
and Tenant shall perform and satisfy the  requirements of the companies  writing
such policies.

         (B)  Landlord  will  maintain   liability  and  casualty  insurance  in
conformity with that  maintained with respect to other similar  buildings in the
vicinity.

46.      Estoppel Certificate

         Each party,  at any time,  and from time to time,  upon at least twenty
(20) days' prior notice by the other, shall execute,  acknowledge and deliver to
the requesting party, and/or to any other person, firm or corporation  specified
by the requesting  party, a statement  certifying  that this lease is unmodified
and in full force and effect  (or,  if there have been  modifications,  that the
same is in full force and effect as modified  and  stating  the  modifications),
stating  the dates to which the Fixed Rent and  additional  rent have been paid,
stating  whether or not there exists any default by the  requesting  party under
this lease,  and, if so,  specifying  each such  default,  and any other matters
reasonably  requested by the requesting party or the recipient.  Notwithstanding
the foregoing,  neither party shall be required to furnish such a statement more
frequently  than three (3) times per year and Landlord shall be entitled to give
such  statement to the best of its  knowledge and to take an exception for items
of additional rent that have not yet been billed.

47.      Holdover

         If Tenant  holds over after the  expiration  of the Term,  the  parties
hereby  agree  that  Tenant's  occupancy  of  the  demised  premises  after  the
expiration  of the Term  shall be upon all of the terms set forth in this  lease
except  that Tenant  shall pay as a use and  occupancy  charge for the  holdover
period an amount equal to the higher of (A) an amount equal to two (2) times the
sum of (i) the pro rata Fixed Rent payable by Tenant during the last year of the
Term and (ii) the pro rata  additional  rent  payable by Tenant  during the last
year of the Term, (provided that for the first month of such holdover period the
multiplier  shall be reduced to one and one-half (1 1/2), or (B) an amount equal
to the then market rental value for the demised premises. Such use and occupancy
charge shall be in lieu of consequential damages.

48.      Acceptance of Keys

         If Landlord or Landlord's  managing or rental agent accepts from Tenant
one or more keys to the demised  premises  in order to assist  Tenant in showing
the demised premises for subletting or other  disposition or for the performance
of work therein for Tenant or for any other purpose,  the acceptance of such key
or keys  shall not  constitute  an  acceptance  of a  surrender  of the  demised
premises nor a waiver of any of Landlord's rights or Tenant's  obligations under
this lease including,  without limitation, the provisions relating to assignment
and subletting and the condition of the demised premises.

49.      Tenant's Access to the Demised Premises

         Subject to Landlord's reasonable security regulations and circumstances
beyond Landlord's  reasonable  control,  Tenant shall have access to the demised
premises twenty-four (24) hours per day, every day of the year.

50.      Hazardous Materials

         (A)  Neither  Landlord  nor  Tenant  shall  cause or permit  "Hazardous
Materials"  (as  defined  below)  to be  used,  transported,  stored,  released,
handled,  produced or installed in or from the demised premises or the Building,
except that  inflammable or combustible (but not explosive) items may be brought
into and used within the demised  premises or the  Building as may be needed for
the maintenance and operation of equipment found in an office building,  so long
as done in  compliance  with all laws and  governmental  requirements.  The term
"Hazardous  Materials"  shall,  for the  purposes  hereof,  mean any  flammable,
explosive or  radioactive  materials,  hazardous or toxic  substances or wastes,
asbestos  or any  material  containing  asbestos,  and any  other  substance  or
material  defined as hazardous by any  federal,  state or local law,  ordinance,
rule  or  regulation,   including,   without   limitation,   the   Comprehensive
Environmental  Response  Compensation and Liability Act of 1980, as amended, the
Hazardous Materials  Transportation Act, as amended, the Resources  Conservation
and Recovery Act, as amended, the Superfund Amendment and Reauthorization Act of
1986, or by the regulations  adopted and  publications  promulgated  pursuant to
each of the  foregoing.  In the  event of a  breach  of the  provisions  of this
Article by either party,  the other party,  in addition to all of its rights and
remedies  under this lease and pursuant to Law, may require the violating  party
to remove any such Hazardous Materials from the demised premises or the Building
in the manner  prescribed  for such  removal  by all  requirements  of Law.  The
provisions of this Article shall survive the expiration or sooner termination of
this lease.

         (B) Landlord warrants and represents that no Hazardous Material that is
required  under  presently  existing Law to be removed will exist in the demised
premises  on  the  Commencement   Date.  In  the  event  of  a  breach  of  said
representation  that is the sole cause of delaying  Tenant's Work (other than if
caused  by  materials  introduced  to the  demised  premises  by or on behalf of
Tenant),  as Tenant's sole and exclusive remedy, and at Landlord's sole cost and
expense,  Landlord  shall  cause  such  Hazardous  Material  to  be  removed  in
accordance with all applicable Laws and the  Commencement  Date shall be delayed
by one day for each day that the  completion of Tenant's Work is delayed  solely
by reason of the presence or Hazardous  Materials  that  Landlord is required to
remove.

51.      Option to Extend

         (A) So long as  Tenant  (together  with its  related  corporations)  is
occupying the entire demised  premises,  Tenant may elect to extend the Term for
all (but not a portion  of) the  premises,  for one (1)  additional  consecutive
period of five (5) years commencing on the day following the initial  Expiration
Date and ending on the fifth (5th)  anniversary of the initial  Expiration  Date
(the "Extension Term"),  unless sooner terminated  pursuant to any of the terms,
conditions or covenants of this lease or pursuant to law, provided that:

                         (i)      Tenant shall give Landlord notice by overnight
courier  or  registered  mail,  return  receipt  requested  (hereinafter  called
"Extension  Notice") of its election to extend the Term for the  Extension  Term
not later than ten (10) months prior to the  commencement of the Extension Term,
time being of the essence, and

                        (ii)      Tenant is not in monetary or material non-
monetary  default under this lease beyond any applicable  notice or grace period
as of the time of the giving of an Extension Notice.

         (B) (i) The  Fixed  Rent  payable  by  Tenant to  Landlord  during  the
Extension  Term is to be a sum  equal  to 100% of the fair  market  rent for the
demised premises  determined as of the first day of that calendar month which is
six (6) months prior to the  commencement  of the  Extension  Term (such date is
hereinafter called  "Determination  Date") and which determination shall be made
within a reasonable  period of time after the  occurrence  of the  Determination
Date pursuant to the provisions of Paragraph (C) hereof.

                        (iii)    For the purposes hereof, fair market rent shall
take into account all relevant factors, including without limitation, the actual
condition of the demised premises as of the  Determination  Date, the base years
applicable  to Article 36, and  Tenant's  options  pursuant to this  Article and
Article 37.

         (C) (i)  Landlord  and  Tenant  shall  endeavor  to agree upon the fair
market rent for the demised premises during the thirty (30) day period following
the Determination  Date. If Landlord and Tenant cannot reach an agreement within
thirty (30) days after the Determination  Date, Landlord and Tenant respectively
shall select a reputable,  qualified,  licensed real estate broker with at least
ten (10) years experience in mid-town New York County office leasing,  having an
office in mid-town  New York  County and  familiar  with the rentals  then being
charged in the Building and in comparable buildings  (respectively,  "Landlord's
Broker" and "Tenant's Broker"),  who shall confer promptly after their selection
by Landlord and Tenant and shall  endeavor to agree upon the fair market rent of
the demised  premises.  If  Landlord's  Broker and Tenant's  Broker cannot reach
agreement  within sixty (60) days after the  Determination  Date,  then,  within
twenty (20) days thereafter, they shall designate a third reputable,  qualified,
licensed real estate  broker with at least ten (10) years  experience in midtown
New York County office leasing,  having an office in midtown New York County and
familiar  with the rentals then being  charged in the Building and in comparable
buildings (the "Independent Broker").  Upon the failure of Landlord's Broker and
Tenant's Broker to agree upon the designation of the  Independent  Broker,  then
the  Independent  Broker shall be appointed by a Justice of the Supreme Court of
the  State of New York upon ten (10) days  notice,  or by an other  court in New
York  County  having  jurisdiction  and  exercising  functions  similar to those
exercised by the Supreme Court of the State of New York.  Concurrently with such
appointment,  Landlord's Broker and Tenant's Broker  respectively shall submit a
letter to the Independent  Broker,  with a copy to Landlord and Tenant,  setting
forth such  broker's  estimate of the fair  market rent of the demised  premises
(respectively, "Landlord's Broker's Letter" and "Tenant's Broker's Letter").

         (ii) If the fair market rent set forth in  Landlord's  Broker's  Letter
and Tenant's  Broker's Letter differ by less than $2.50 per rentable square foot
per annum,  then the fair market rent shall not be determined by the Independent
Broker, and the Fixed Rent payable by Tenant for the Extension Term shall be the
average of the fair  market  rent set forth in  Landlord's  Broker's  Letter and
Tenant's  Broker's  Letter.  If the fair  market  rent set  forth in  Landlord's
Broker's  Letter  and  Tenant's  Broker's  Letter  differ by more than $2.50 per
rentable  square foot per annum,  the  Independent  Broker  shall  conduct  such
investigations  and hearings as he may deem appropriate and shall,  within sixty
(60) days after the date of his designation,  choose either the rental set forth
in Landlord's  Broker's Letter or that set forth in Tenant's  Broker's Letter to
be the fair market  rent and such  choice  shall be binding  upon  Landlord  and
Tenant.  Landlord  and  Tenant  shall  each  pay the fees  and  expenses  of its
respective  broker.  The fees and  expenses of the  Independent  Broker shall be
shared equally by Landlord and Tenant.

         (D) In the event Landlord or Tenant  initiates the arbitration  process
and as of the  commencement  date of the  Extension  Term the amount of the fair
market rent has not been determined, Tenant shall continue to pay the Fixed Rent
and additional rent in effect under this lease for the last month of the initial
Term (without  giving effect to any temporary  abatement  thereof) and when such
determination has been made, an appropriate  retroactive adjustment in the Fixed
Rent shall be made as of the commencement date of the Extension Term.

         (E)  All  of the  same  terms,  conditions,  covenants  and  agreements
contained  in this lease are to  continue  in full  force and effect  during the
Extension Term, including, without limitation, Article 36 hereof, except (i) the
Fixed Rent shall be determined  pursuant to Paragraph (B) of this Article,  (ii)
the Base Tax Year for the  Extension  Term will be the last full tax fiscal year
in the initial term,  (iii) Tenant will have no other or further right to extend
or renew the Term,  (iv) Tenant  agrees to accept the demised  premises in their
condition existing as of the commencement date of the Extension Term, subject to
any  obligations  under this lease  then  existing  and which have not then been
complied with by Landlord,  (v) Exhibit B and Articles  35(G), 52 and 53 will be
deemed deleted and there is to be no Landlord's Contribution or rent concession,
credit or abatement.

         (F) If  Tenant  does not  duly  and  timely  give an  Extension  Notice
pursuant to the  provisions of Paragraph  (A) hereof,  this Article will have no
force or effect  and be deemed  deleted  from this  lease and  Tenant's  options
deemed waived.

         (G) If this lease is extended for the Extension Term, then Landlord and
Tenant agree to execute,  acknowledge  and deliver an instrument  confirming the
exercise of  Tenant's  right to extend the Term,  the last day of the  Extension
Term and  setting  forth the  Fixed  Rent for the  Extension  Term,  as  finally
determined,  but  failure  to do so will not affect  the  respective  rights and
obligations of the parties.

         (H) If Tenant  duly and timely  exercises  its right to extend the Term
for the Extension  Term pursuant to this Article,  the phrases "the term of this
lease" or "the term  hereof"  or "the  Term," as used in this  lease,  are to be
construed to include, when practicable, the Extension Term.

52.      Landlord's Contribution

         Following  Landlord's  approval of Tenant's Plans and prior to Tenant's
commencement  of Tenant's  Work,  Tenant shall  provide  Landlord  with true and
complete  copies of all  contracts  covering  or  related to  Tenant's  Work and
Reimbursable Costs (as hereinafter defined).

         (A)  Subject  to the terms and  conditions  set forth  below,  Landlord
agrees to reimburse  Tenant up to a maximum amount of  $576,030.00  ("Landlord's
Contribution") for costs ("Reimbursable Costs") incurred by Tenant for leasehold
improvements  made in and to the demised  premises  within the first year of the
Term as part of Tenant's Work. Up to but not exceeding  fifteen (15%) percent of
Landlord's   Contribution   may  be  utilized  for   ordinary   and   reasonable
out-of-pocket  costs and fees of Tenant's  architect,  engineer and construction
manager  (provided  that  each of them are  independent  and not  related  to or
employees of Tenant or any of its affiliated or related entities),  filing fees,
moving costs and built-in  equipment and fixtures which Tenant does not have the
right to remove at the expiration or sooner  termination  of the Term.  Landlord
agrees to disburse from time to time, but not more often than once in any thirty
(30) day  period,  within ten (10)  business  days of  receipt of each  Tenant's
request, that portion of Landlord's  Contribution equal to ninety (90%) per cent
of the  amount  set  forth  in  Tenant's  requisition  for  Reimbursable  Costs,
provided,  however,  that Landlord will not be obligated to make any advance if,
and for so long as,  Tenant is in  default  under this  lease  after  receipt of
written  notice.  Landlord  will also not be obligated to make any advance until
receipt of a request  therefor  from Tenant and the  submission by Tenant of the
following:

                  (i) A  certificate  signed by Tenant  and  Tenant's  architect
dated not more than ten (10) days prior to such  request  setting  forth (a) the
attached list contains all of the  contractors,  subcontractors  and materialmen
who  furnished  labor,  supplies and  materials to the demised  premises and the
aggregate amount of monies that each contractor,  subcontractor  and materialman
received up to the date of Tenant's request,  (b) that the sum then requested is
justly due to persons who have rendered services or furnished  materials for the
work therein  specified,  and giving a brief  description  of such  services and
materials  and the  several  amounts  due to each of  said  persons  in  respect
thereof,  and stating that no part of such expenditure  contained in the current
requisition,  was the basis, in any previous or then pending prior request,  for
the receipt of Landlord's  Contribution  or has been made out of the proceeds of
Landlord's  Contribution  received by Tenant, (c) that except for the amount, if
any, stated pursuant to the foregoing  subdivision (i)(b) in such certificate to
be due to the date of Tenant's  request for services or  materials,  there is no
outstanding indebtedness known to the persons signing such certificate, which is
then due and  payable  for labor,  wages,  materials,  supplies  or  services in
connection with Tenant's Work which,  if unpaid,  might  immediately  become the
basis of a vendors, mechanic's,  laborer's or materialmen's statutory or similar
lien upon such work or upon the land and  building  or any part  thereof or upon
Tenant's leasehold interest,  (d) that the work described in the certificate has
been completed  substantially  in accordance with the Tenant's  Plans,  (e) that
there has not been filed with respect to the demised premises or the building or
any  part  thereof  or  any  improvements  thereon,  any  vendor's,  mechanic's,
laborer's,  materialmen's or other like liens arising out of Tenant's Work which
has not been bonded or  discharged  of record,  and (f) that Tenant has complied
with all of the  conditions  set forth in  Articles 3 and 44 and the  Alteration
Rules of this lease; and

                  (ii)  Landlord  agrees to  disburse  five (5%)  percent of the
remaining  ten (10%) percent  balance of the portion of Landlord's  Contribution
for which Tenant has submitted payment requests upon (a) substantial  completion
of Tenant's Work in accordance  with Tenant's Plans and a certificate  signed by
Tenant and Tenant's architect certifying thereto has been delivered to Landlord,
and (b) Landlord's receipt of original,  duly executed and acknowledged releases
of liens,  paid  receipts or such other proof of payment as Landlord  reasonably
requires for all work done and materials supplied.

                  (iii) Landlord  agrees to disburse the remaining five (5%) per
cent  balance of the portion of  Landlord's  Contribution  for which  Tenant has
submitted payment requests upon full compliance by Tenant with the provisions of
subdivisions  (x) and (y) of Article 3, except that final  approval from the New
York City Fire Department  will not be required  provided Tenant has applied for
such final approval and diligently  pursues the same until obtained and Tenant's
architect has furnished a written  certificate  to Landlord  stating that to the
best of his knowledge all of Tenant's Work has been completed in full compliance
with the requirements of the New York City Fire Department.

         (B)  It  is   expressly   understood   and  agreed  that  Tenant  shall
expeditiously complete, at its sole cost and expense,  Tenant's Work, whether or
not  Landlord's   Contribution   is  sufficient  to  fund  such  completion  and
notwithstanding  the provisions of subdivisions  (ii) and (iii) of Paragraph (B)
of this  Article.  Any costs to complete  Tenant's  Work in excess of Landlord's
Contribution shall be the sole responsibility and obligation of Tenant.

         (C) If  Landlord  shall  fail to  disburse  to Tenant  any  portion  of
Landlord's  Contribution  to which  Tenant is  entitled  when due as a result of
Tenant's full  compliance  with the foregoing  provisions of this Article,  then
Tenant may give Landlord  notice of such failure and if Landlord  shall continue
to fail to make  such  disbursement  to Tenant  within  twenty  (20) days  after
Landlord's  receipt of notice,  then  Tenant  shall have the right to offset the
amount of such  disbursement  against  the Fixed Rent and  additional  rent next
becoming due under this lease.  Notwithstanding the foregoing,  Tenant shall not
have such offset right with respect to any portion of such  reimbursement  as to
which  Landlord shall give Tenant notice that Landlord  disputes  Tenant's claim
with respect thereto unless Landlord  continues to fail to reimburse  Tenant for
ten (10) business  days after Tenant has obtained and docketed a final  judgment
therefor.

53.      Landlord's Work

     (A) Landlord agrees to commence  diligently to perform the work required to
be  performed  by  Landlord  pursuant to Exhibit B annexed  hereto  (hereinafter
called  "Landlord's  Work") at Landlord's  cost and expense  except as otherwise
provided  in Exhibit B, in  building  standard  manner,  which shall be good and
workmanlike  and  expeditiously   performed  in  compliance  with  Law.  If  (i)
Landlord's  performance,  or failure to perform,  the balance of Landlord's Work
after  the  Commencement  Date,  or (ii) the  existence  of a  violation  in the
Building after the  Commencement  Date,  (a) that was not caused by Tenant,  its
agents, contractors or employees, or (b) that is not permitted by this lease, is
the sole cause of a demonstrable delay in the substantial completion of Tenant's
Work with  respect to the demised  premises,  then Tenant shall be entitled to a
day- for-day  extension of the  applicable  rent  abatement  period set forth in
Article 35(G).

         (B) The  provisions  of this Article 53 are  expressly  made subject to
Article  26(A)  hereof  but the  Commencement  Date  shall not be deemed to have
occurred  until  Landlord has in fact  complied  with the  provisions of Article
30(B)(ii).

         (C)  Landlord  hereby  confirms  that  Landlord  intends to upgrade the
public lobby on the ground  floor and the elevator  cabs in the Building but not
during the time periods set forth for Landlord's Work.

54.      Building Directory

         (A) So long as this  lease  shall be in full force and  effect,  Tenant
shall be permitted up to twelve (12)  listings on the  directory in the lobby of
the building.  Additional  and changes in listings shall be at Tenant's cost but
not to exceed Landlord's out-of-pocket costs.

     (B) The listing of any party's name other than Tenant's shall neither grant
such party any right or interest in this lease  and/or the demised  premises nor
constitute  Landlord's  consent to any assignment or sublease to or occupancy by
such party.

55.      Signage

         Tenant, at Tenant's sole cost and expense, shall have the right, during
the Term,  to furnish and install  signage on the wall of the elevator  lobby on
the floor  containing  the  demised  premises  and on the  entrance  door to the
demised  premises,  subject to the following  terms and  conditions.  Said signs
shall be dignified in  appearance  and  non-illuminated  and shall be subject to
Landlord's prior written  approval as to size,  type, color and style.  Prior to
the installation  and display of such sign,  Tenant shall submit to Landlord for
Landlord's approval, details of the size, type, color and style of such proposed
signs.  Tenant, at Tenant's expense,  shall at all times comply with all present
and future Laws,  rules and regulations of Landlord and any and all governmental
and public authorities applicable to such signs.  Landlord's approval under this
Article  shall not be  unreasonably  withheld or delayed.  Tenant  shall pay the
entire cost of such signage and the entire cost of the  installation,  cleaning,
maintenance, repair and replacement thereof and the entire cost of all necessary
permits therefor.  Upon the expiration or other termination of the Term, Tenant,
at Tenant's  expense,  shall promptly  remove such signage and repair all damage
and injury caused by such removal.

                         (SIGNATURES ON FOLLOWING PAGE)

                  IN WITNESS  WHEREOF,  Landlord  and Tenant  have  respectively
signed and sealed this lease as of the day and year first above written.


Witness for Landlord:                        498 SEVENTH, LLC


/s/Maria E. Sierra                           By:Peter S. Duncan


                                             By:/s/ Peter S. Duncan    



Witness for Tenant:                FORSTMANN & CO., INC.


/s/Robert H. Regan                              By:/s/Rodney J. Peckham 
                                                President

                                          Federal Identification No.58-1651326

STATE OF NEW YORK                   )
                                    ) SS.:
COUNTY OF NEW YORK                  )


                  On the 15th day of September, 1998, before me personally came
Rodney J. Peckham,  to me known,  who, being by me duly sworn,  did depose and
say that he resides at No. 560 West 43rd Street #44E NYC 10036 that he
is the Exec. Vice President of Forstmann & Co., Inc., the corporation  described
in and which  executed  the  foregoing  instrument;  and that he signed his name
thereto by authority of the board of directors of said corporation.


                                              /s/Miriam W. Hermann
                                             -----------------------------

                        RULES AND REGULATIONS ATTACHED TO
                          AND MADE A PART OF THIS LEASE
                         IN ACCORDANCE WITH ARTICLE 32.

         1. The sidewalks,  entrances,  driveways,  passages, courts, elevators,
vestibules,  stairways, corridors or halls shall not be obstructed or encumbered
by any tenant or used for any purpose  other than for ingress or egress from the
demised  premises and for delivery of merchandise  and equipment in a prompt and
efficient manner using elevators and passageways designated for such delivery by
Landlord.  There  shall not be used in any space,  or in the public  hall of the
Building,  either by any  tenant or by  jobbers  or  others in the  delivery  or
receipt of merchandise, any hand trucks, except those equipped with rubber tires
and sideguards.

         2. The water and wash closets and plumbing  fixtures  shall not be used
for any purposes  other than those for which they were  designed or  constructed
and no sweepings,  rubbish,  rags,  acids or other substances shall be deposited
therein, and the expense of any breakage, stoppage, or damage resulting from the
violation  of this  rule  shall be borne by the  tenant  who,  or whose  clerks,
agents, employees or visitors, shall have caused it.

         3. No carpet,  rug or other  article shall be hung or shaken out of any
window of the Building, and no tenant shall sweep or throw or permit to be swept
or thrown from the demised premises any dirt or other substances into any of the
corridors,  halls, or elevators,  or out of the doors or windows or stairways of
the Building. No tenant shall use, keep or permit to be used or kept any foul or
noxious  gas or  substance  in the  demised  premises,  or permit or suffer  the
demised  premises to be occupied or used in a manner  offensive or objectionable
to Landlord or other occupants of the Building by reason of noise,  odors and/or
vibrations,  or interfere in any way with other tenants or those having business
therein,  nor shall any  animals  be kept in or about the  Building.  Smoking or
carrying  lighted  cigars or  cigarettes  in the public areas of the Building is
prohibited.

         4. No awnings or other  projections  shall be  attached  to the outside
walls of the Building without the prior written consent of Landlord.

         5.  No  sign,  advertisement,   notice  or  other  lettering  shall  be
exhibited,  inscribed,  painted  or  affixed  by any  tenant  on any part of the
outside of the demised  premises or the Building or on the inside of the demised
premises  if the same is visible  from the outside of the  premises  without the
prior  written  consent of  Landlord,  except  that the name of such  tenant may
appear on the entrance  door of the  premises.  In the event of the violation of
the foregoing by any tenant, Landlord may remove the same without any liability,
and may  charge  the  expense  incurred  by such  removal  to Tenant or  tenants
violating  this rule.  Interior  signs on doors shall be  inscribed,  painted or
affixed for each Tenant by Landlord at the expense of such Tenant,  and shall be
of a size, color and style acceptable to Landlord.

         6. No tenant  shall in any way deface any part of the demised  premises
or the  Building.  No boring,  cutting or stringing of wires shall be permitted,
except as provided in Article 3. No tenant shall lay linoleum,  or other similar
floor covering,  so that the same shall come in direct contact with the floor of
the  demised  premises,  and, if linoleum  or other  similar  floor  covering is
desired to be used, an  interlining  of builder's  deadening felt shall be first
affixed to the floor, by a paste or other material, soluble in water, the use of
cement or other similar adhesive material being expressly prohibited.

         7. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any  tenant,  nor shall any  changes be made in existing
locks or mechanism thereof unless Landlord is provided with a key thereto except
that Tenant shall be permitted to install its own security system in the demised
premises subject to all the terms and conditions of this lease including without
limitation  Articles 3 and 44. Each tenant  must,  upon the  termination  of its
tenancy,  restore to  Landlord  all keys of stores,  offices  and toilet  rooms,
either furnished to, or otherwise  procured by, such tenant, and in the event of
the loss of any keys so  furnished,  such tenant  shall pay to Landlord the cost
thereof.

         8. Freight, furniture, business equipment, merchandise and bulky matter
of any  description  shall be delivered to and removed from the premises only on
the freight elevators and through the service entrances and corridors,  and only
during hours and in a manner reasonably approved by Landlord.  Landlord reserves
the right to inspect all freight to be brought  into the Building and to exclude
from the Building all freight which violates any of these Rules and  Regulations
or the lease.

         9. Canvassing, soliciting and peddling in the Building is prohibited.

         10.  Landlord  reserves the right to exclude from the Building  between
the hours of 6 p.m.  and 8 a.m.  and at all hours on Sundays and legal  holidays
all  persons  who do not  present a pass to the  Building  signed  by  Landlord.
Landlord  will furnish  passes to persons for whom any Tenant  requests  same in
writing.  Each tenant shall be responsible  for all persons for whom it requests
such pass and shall be liable to Landlord for all acts of such person.

         11.  Landlord  shall have the right to prohibit any  advertising by any
tenant  containing  the name or  address  of the  Building  which in  Landlord's
opinion tends to impair the reputation of the Building or its  desirability as a
Building  for offices,  and,  upon written  notice from  Landlord,  Tenant shall
refrain from or discontinue such advertising.

         12. Tenant shall not bring or permit to be brought or kept in or on the
demised  premises,  any inflammable,  combustible or explosive fluid,  material,
chemical or substance  (except for lawful quantities of normal office supplies),
or cause or permit any odors of cooking or other  processes,  or any  unusual or
other objectionable odors to permeate in or emanate from the demised premises.

         13. If the Building  contains central air conditioning and ventilation,
Tenant agrees to keep all windows  closed at all times and to abide by all rules
and  regulations  issued by Landlord  with respect to such  services.  If Tenant
requires air  conditioning  or ventilation  after the usual hours,  Tenant shall
give notice in writing to the Building  superintendent prior to 3:00 p.m. in the
case of services  required on week days, and prior to 3:00 p.m. on the day prior
in the case of after hours service required on weekends or on holidays.

         14. Tenant shall not move any safe, heavy  machinery,  heavy equipment,
bulky matter,  or fixtures into or out of the Building without  Landlord's prior
written consent. If such safe,  machinery,  equipment,  bulky matter or fixtures
requires special  handling,  all work in connection  therewith shall comply with
the  Administrative  Code  of the  City  of New  York  and all  other  laws  and
regulations  applicable  thereto and shall be done during such hours as Landlord
may reasonably designate.
                                    EXHIBIT B




                  1. Demolish existing  installation  (including  removal of all
obsolete pipes and conduits) and leave premises in broom clean condition.

                  2. Furnish Tenant an ACP-5 covering the demised premises.

                  3.  Construct  demising  walls  for the  demised  premises  in
accordance with New York City code requirements.

                  4.  Identify and tag all existing  building  system  conduits,
pipes, risers or vertical conduits servicing the demised premises.

                  5. Cut back sprinkler  system to the main valve in the demised
premises.

                  6.  Remove  all  obsolete  existing  low  voltage  cabling  or
telephone wires within the demised premises.

                  7. Remove sprinkler ladder if permitted by New York City code.
Remove abandoned piping across common corridor.

                  8.  Remove  existing  knife  switch in the  demised  premises.
Install fire stopping and fire proofing at all locations in the demised premises
required  by code - fireproof  all metal  decking in the  demised  premises,  if
required  by code.  Patch all holes in slab in the  demised  premises  which are
beyond repair by standard flash patching.

                  9. Refurbish  existing  bathrooms on the floor  containing the
demised premises  including  replacement of cracked,  damaged and missing floor,
wall and ceiling tiles, cracked, damaged and missing mirrors, damaged partitions
and  ceilings  and  damaged,  broken and  missing  fixtures  and  hardware,  and
repainting of the entire bathroom, including electrostatic painting of all stall
partitions  and doors.  Landlord  shall  perform the foregoing as well as making
common  area  egress  and the  "Class E"  system  in  common  areas of the floor
containing  the demised  premises so as to comply with current ADA standards and
all current applicable federal, state and city building codes.

                  10.  Provide a sufficient  number of connection  points to the
Building's life safety systems,  either on the 17th floor or on adjacent floors,
as required by code for Tenant to connect Tenant's required life safety devices.
Landlord  shall be  responsible  for the cost of  re-programming  the  "Class E"
system to accommodate Tenant's connections.

                  11. Repair or replace if needed freight elevator doors within
the demised  premises.  Sheetrock  over the freight  elevator not  servicing the
demised  premises and  electronically  lock out service of said  elevator to the
demised premises.

                  12.  Provide one (1) building  standard  radiator for each bay
window in the demised premises with new building  standard  automatic valves and
traps. Initially clean exterior of all windows in the demised premises.

                   13.  Create  two (2) air  conditioning  rooms in the  demised
premises, including fire/smoke dampers, if required, and containing new building
standard  water cooled air  conditioning  package  units of up to 45 tons in the
aggregate ("base building air  conditioning").  Tenant to be responsible for all
air conditioning ductwork and distribution.

                  14.  Replace doors and hardware for two (2) fire stairs within
the demised premises.

                  Landlord  agrees  to use its  best  efforts  to  substantially
complete  items 9 through 14 of this  Exhibit B within sixty (60) days after the
Commencement Date.

                  Landlord  and  Tenant  agree to  cooperate  with each other in
coordinating  the balance of  Landlord's  Work after the  Commencement  Date and
Tenant's Work.

                   Notwithstanding  anything to the  contrary  contained in this
lease  including  but not limited to Articles 23 and 53 hereof and Exhibit B, it
is understood and agreed that Landlord will at Landlord's expense (unless caused
by the fault of Tenant,  its  contractors,  subcontractors  or agents)  obtain a
temporary  certificate  of occupancy and  ultimately a permanent  certificate of
occupancy covering the demised premises  permitting the use set forth in Article
2A hereof,  provided,  however,  it is understood,  acknowledged and agreed that
Landlord will not be able to obtain (nor shall  Landlord have any liability as a
result thereof) the temporary  certificate of occupancy  unless and until Tenant
completes  Tenant's Work in accordance with all the terms and conditions of this
lease  and  obtains   sign-offs  from  all   governmental   authorities   having
jurisdiction  thereof  and  furnishes  the  same to  Landlord.  At such  time as
Landlord receives notice from Tenant that Tenant has so completed  Tenant's Work
and delivers such  sign-offs to Landlord,  Landlord shall promptly apply for the
temporary  certificate of occupancy covering the demised premises and diligently
pursue the same.  At such time as  Landlord  is legally  entitled to apply for a
permanent  certificate  of occupancy,  Landlord will promptly apply for the same
and  diligently  pursue  obtaining the issuance  thereof.  Tenant  covenants and
agrees to cooperate with Landlord in connection  with all of the  foregoing.  In
the event that a  violation  occurs  resulting  in a fine  solely as a result of
Tenant's  occupancy of the demised premises without  Landlord's  having obtained
the temporary  certificate of occupancy when required  pursuant to the foregoing
provisions  and not as a result of the acts or omissions of Tenant or the manner
of use as opposed to mere  occupancy  for offices by Tenant,  Landlord  shall be
responsible for the payment of such fine.

                                    EXHIBIT F



Dear :

                  Regarding the proposed  alteration  indicated by your provided
plan for Filing with the Building  department,  Landlord  approves same only for
the purpose of required approval under the lease and for Filing purposes. Please
be advised that the following  provisions  apply to this and future approvals of
final construction plans when provided.

                  1. All costs and expenses in connection with or arising out of
the performance of the work shall be borne by Tenant. At no time shall Tenant do
or  permit,  anything  to be done  whereby  our  property  may be subject to any
mechanics'  or other  liens or  encumbrances  arising  out of the work;  and our
consent herein shall not be deemed to constitute any consent or permission to do
anything  which may  create or be the  basis of any lien or charge  against  the
estate of the Landlord in the demised  premises or the real estate of which they
are a part.

                  2. All materials as well as methods and processes  used in the
performance  of the work shall conform to the standards of the building,  and it
is assured that your contractor is entirely  familiar with such  requirements or
that he will familiarize himself therewith.

                   3. Tenant will perform this work in a safe and lawful  manner
complying with applicable laws and all requirements and regulations of municipal
and  other  governmental  or  duly  constituted  bodies  exercising   authority,
including but not limited to required  compliance with the applicable  Americans
with Disabilities Act of 1990.

                  4. Tenant will hereby  indemnify  and agree to defend and hold
us harmless  from and against any and all suits,  claims,  violations,  actions,
loss, cost arising from or relating to or in connection with any personal injury
or  property  damage  caused in the  performance  of this work by you,  and your
employees,  agents,  servants of contractors engaged by you; and you will repair
or  replace,  or at our  election  reimburse  us for  the  cost of  repairs,  or
replacing any portion of the building or item of  equipment,  or any of our real
or personal  property so damaged,  lost or destroyed in the  performance of this
work.

                  5. Workmen's  Compensation,  Comprehensive  Liability,  Bodily
Injury and Property Damage  Insurance in at least the amount of  $10,000,000.00,
Combined  Single Limit (CSL) with  companies  and on forms  satisfactory  to us,
shall be provided  and at all times  maintained  by Tenant and your  contractors
engaged in the per formance of the work,  and before  proceeding  with the work,
certificates of such insurance  shall be submitted to us and, if requested,  the
original policies thereof.

                  6. We shall have no responsibility for, or in connection with,
the work and you will remedy at your expense, and be responsible for any and all
defects in all such work that may appear during or after the completion  thereof
whether the same shall affect premises in particular or any part of the building
in general.

                   7.  Landlord or its agents shall not be  responsible  for any
disturbances or deficiency  created in the air conditioning or other mechanical,
electrical  or  structural  facilities  within the  building  as a result of the
alteration  unless due to a pre-existing  defect or system  inadequacy.  If such
disturbances   or  deficiencies   result,   it  shall  be  the  tenant's  entire
responsibility to correct the resulting conditions,  and to restore the services
to the complete satisfaction of the Landlord, its Architect and Engineers.

                   8. (a)  Tenant's  contractors  shall comply with the rules of
the building and the manner of handling materials, equipment and debris to avoid
conflict and interference with building operation.

                        (b) The  delivery of  materials  and  equipment  must be
            arranged to avoid any  inconvenience and annoyance to other Tenants.
            Cleaning   must  be   controlled  to  prevent  dirt  and  dust  from
            infiltrating into adjacent Tenant or mechanical areas.

                  9. We expressly  reserve the right to revoke this consent upon
three (3) days  notice to you in the event of the  breach of any of the terms or
conditions hereof that is not cured with such three-day period.

                  10. Any cost incurred by Landlord  pursuant to this  agreement
shall be payable by tenant as additional rent as and when billed.

                  11. Submit all permits prior to starting work, approved plans,
electrical approvals, and final inspections for our records.

                  12.  Submit  final  approval  by  Building  Department,   Fire
Department and Architect's Write-offs for the work.

                  13. In the event of any inconsistency  between this letter and
the lease, the lease shall prevail.

                  Please  sign and return  one (1) copy to our  office  prior to
commencement of work.

                                             Very truly yours,

                                             498 SEVENTH, LLC



                                             By:_________________________


ACCEPTED & AGREED TO:



By:__________________________

Date:________________________

                                    EXHIBIT G





[Name and Address
of Landlord]


                  Re:  Irrevocable Clean Letter of Credit


Gentlemen:

         By order of our client,  _____________________________,  we hereby open
our clean  irrevocable  Letter of Credit No. _______ in your favor for an amount
not to exceed in the aggregate $______US Dollars effective immediately.

         Funds under this credit are  available  to you against your sight draft
drawn on us mentioning thereon our Credit No. __.

         This  Letter  of Credit  shall  expire  one year from the date  hereof;
provided, however, that it is a condition of this Letter of Credit that it shall
be deemed automatically extended, from time to time, without amendment,  for one
year from the expiry date  hereof and from each and every  future  expiry  date,
unless at least sixty (60) days prior to any expiry date we shall  notify you by
registered  mail that we elect not to consider this Letter of Credit renewed for
any such additional period.

         This Letter of Credit is  transferable  and may be  transferred  one or
more  times.  However,  no transfer  shall be  effective  unless  advice of such
transfer is received by us in the form attached signed by you.

         We  hereby  agree  with you  that all  drafts  drawn or  negotiated  in
compliance  with the terms of this  Letter of Credit  will be duly and  promptly
honored  upon   presentment  and  delivery  of  your  draft  to  our  office  at
___________________ if negotiated on or prior to the expiry date as the same may
from time to time be extended.

         Except as otherwise  specified herein, this Letter of Credit is subject
to the Uniform  Customs and Practice for  Documentary  Credits (1993  Revision),
International Chamber of Commerce Publication No.
500.

                                             Very truly yours,

                                             (Name of Bank)

                                             By: ____________________


                                   EXHIBIT G-1





Re:  Credit                                 Issued by



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


Gentlemen:

         For value received, the undersigned  beneficiary  irrevocably transfers
to:


------------------------------------------------------------
                (Name of Second Beneficiary)

------------------------------------------------------------
                        (Address)

                   all rights of the  undersigned  beneficiary to draw under the
above Letter of Credit in its entirety.

                   By this transfer,  all rights of the undersigned  beneficiary
in such  letter of Credit  are  transferred  to the second  beneficiary  and the
second beneficiary shall have the sole rights as beneficiary thereof,  including
sole rights relating to any amendments  whether increases or extensions or other
amendments and whether now existing or hereafter  made. All amendments are to be
advised direct to the second beneficiary  without necessity of any consent of or
notice of the undersigned beneficiary.

         The advice of such  Letter of Credit is returned  herewith,  and we ask
you to endorse the assignment on the reverse  thereof and forward it directly to
the second beneficiary with your customary notice of transfer.

         Enclosed  is   remittance  of  $100.00  in  payment  of  your  transfer
commission  and in addition  thereto we agree to pay you on demand any  expenses
that may be incurred by you in connection with this transfer.

                                                     Yours very truly,

SIGNATURE AUTHENTICATED

         (Bank)                                      Signature of Beneficiary

(Authorized Signature)

                                    EXHIBIT H

                         Seventeenth (17th) Floor Rights




         1.       CHARLES ALAN, INC. has options to extend the term of its lease
                  covering Suite 1709, each option to be exercised upon not less
                  than 180 days notice,  and each for a period of two (2) years,
                  the first  commencing  February  1, 2001  through  January 31,
                  2003,  and the  second  commencing  February  1, 2003  through
                  January 31, 2005.

         2.       CLAIRTEX CORP. has the right to lease Suite 1700 for a period
                  of approximately  ten (10) years commencing  February 1, 2000
                  or such  earlier  date as the  space  may  become  vacant  or
                  available. -ii-


<PAGE>
                                                                Exhibit 10.10(b)

                            FIRST AMENDMENT OF LEASE



                  AGREEMENT made as of this 30th day of December,  1998, between
498 SEVENTH,  LLC, a New York limited  liability  company,  having an office c/o
George  Comfort & Sons,  Inc. at No. 200 Madison  Avenue,  Borough of Manhattan,
City,  County  and  State  of  New  York  10016  (hereinafter   referred  to  as
"Landlord"),  and  FORSTMANN & CO.,  INC.,  a  corporation  duly  organized  and
existing under the laws of the State of Georgia, qualified to do business in the
State of New York and  having a place of  business  at No.  1155  Avenue  of the
Americas,  Borough  of  Manhattan,  City,  County  and  State of New York  10036
(hereinafter referred to as "Tenant").


                              W I T N E S S E T H:


                  WHEREAS, Landlord and Tenant heretofore entered into a certain
written  lease dated as of  September  15,  1998,  wherein and whereby  Landlord
leased to Tenant,  and Tenant hired from Landlord,  those certain premises known
as a portion of the seventeenth (17th) floor, as more particularly described and
as shown hatched on the plan annexed to said lease in the building  known as No.
498 Seventh Avenue,  in the Borough of Manhattan,  City, County and State of New
York,  for a term of ten (10)  years  and four (4)  months  to  commence  on the
Commencement  Date (as defined  therein) and to end on the  Expiration  Date (as
defined  therein)  (or until such term shall sooner cease and expire as provided
in said  lease),  at the rental and  additional  rental and upon the  covenants,
conditions, provisions, and agreements con tained in such lease, (which lease is
hereinafter referred to as the "Lease"); and

                 WHEREAS, Landlord and Tenant desire to modify the Lease only in
the respects hereinafter stated;

                  NOW,  THEREFORE,  in  consideration  of the  premises  and the
mutual covenants hereinafter contained,  the parties hereto by these presents do
covenant and agree as follows:


o All terms contained in this Agreement shall, for the purposes hereof, have the
same meanings  ascribed to them in the Lease unless otherwise defined herein. As
used herein,  the term "Lease" shall mean the Lease as amended by this Agreement
and as the same may be hereafter amended.

                  1. The Commencement  Date and the Expiration Date of the Lease
shall  conclusively  and for all  purposes  be deemed to be November 5, 1998 and
March 31, 2009, respectively.

                  2.  It  is  acknowledged   that  Landlord  has   substantially
completed all of  Landlord's  Work  originally  provided in the Lease to be done
prior to the  Commencement  Date and Tenant has  commenced  Tenant's Work in the
demised  premises.  With respect to Landlord's  Work provided in the Lease to be
done subsequent to the Commencement Date, the terms of the Lease shall prevail.

                  3. Article  12(B)(ii) of the Lease shall be modified by adding
the words "and  kilowatts of demand"  after the word "hours" and before the word
"recorded" therein.

                  4. If, within thirty (30) days after the Commencement Date (as
defined in Article  30(B)(ii) of the Lease),  Landlord  shall have failed to pay
the real estate  brokerage  commission due and payable to the Broker pursuant to
separate  agreement  between  Landlord  and the  Broker,  then Tenant may at its
option give Landlord  notice of such failure and if Landlord  shall  continue to
fail to make such payment within ten (10) days after Landlord's  receipt of such
notice,  then Tenant shall have the right to pay such due and unpaid  commission
on a pari passu basis to each firm constituting the Broker and offset the amount
of its payment  against the Fixed Rent next  becoming due under the Lease to the
extent  and  amount  that  Tenant   shall  have  in  fact   expended  and  paid.
Notwithstanding  the  foregoing,  Tenant shall not have such right of payment to
any portion of such  commission  as to which  Landlord  shall give Tenant notice
that Landlord disputes the Broker's claim with respect thereto.

                  5. Except as modified by this agreement, the Lease and all the
terms, covenants,  conditions,  provisions, and agreements thereof are hereby in
all respects ratified, confirmed, and approved.

                  6. This agreement  contains the entire  understanding  between
the parties with respect to the matter  contained  herein.  No  representations,
warranties,  covenants or agreements  have been made concerning or affecting the
subject matter of this agreement, except as are contained herein.

                  7. This  agreement may not be changed  orally,  but only by an
agreement in writing signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought.

                  8. This  agreement  shall be  binding  upon,  and inure to the
benefit  of  the  parties  hereto,   their  respective  legal   representatives,
successors  and,  except as otherwise  provided in the Lease as modified by this
agreement, their respective assigns.

                  9. The  submission  of this  agreement  to Tenant shall not be
construed as an offer,  nor shall  Tenant have any rights with  respect  hereto,
unless and until  Landlord and Tenant shall execute a copy of this agreement and
Landlord delivers a fully executed counterpart to Tenant.

                  IN WITNESS  WHEREOF,  the  parties  hereto  have  respectively
executed this agreement as of the day and year first above written.

                           498 SEVENTH, LLC
                           By:     C/L GROUP, LLC, its manager
                           By:  COMFORT 498, INC., its manager

                           By:/s/Peter S. Duncan 
                              President


                           FORSTMANN & CO., INC.


                           By:/s/ Rodney J. Peckham
                              Executive Vice President

STATE OF NEW YORK                   )
                                     ) SS.:
COUNTY OF NEW YORK                  )


On the 30th day of December,  1998, before me personally came Rodney J. Peckham,
to me known,  who, being by me duly sworn, did depose and say that he resides at
560 West 43rd Street,  Apartment #44E, New York, New York 10036,  that he is the
Executive Vice President of Forstmann & Co., Inc., the corporation  described in
and which executed the foregoing instrument; and that he signed his name thereto
by authority of the board of directors of said corporation.


                                  /s/Miriam W. Hermann
                                 --------------------------------
                                           Notary Public

<PAGE>
                                                                   Exhibit 10.11

                              EMPLOYMENT AGREEMENT

                  AGREEMENT, dated as of January 26, 1998, between FORSTMANN &
COMPANY, INC., a Georgia corporation (the "Company"), and BRIAN A. MOORSTEIN
("Executive").

                              W I T N E S S E T H:

                  WHEREAS,  the Company wishes to avail itself of the advice and
services of Executive in connection with its business,  and Executive  wishes to
be employed by the Company;

                  NOW,  THEREFORE,  in  consideration of the premises and of the
mutual agreements set forth herein, the parties agree as follows:

                  1.       Services.

                  1.1 Employment  and Term.  Subject to the terms and conditions
of this Agreement,  the Company agrees to employ Executive, and Executive agrees
to  serve  the  Company,  as its  President  and in  such  additional  executive
capacities as the Board of Directors of the Company may reasonably request.  The
term of this Agreement (the "Term") shall commence on the date of this Agreement
and shall  continue  through  January 26, 2000. On such date and each  following
January 26, the Term shall  automatically  be extended for one additional  year,
unless the Company  notifies  Executive not later than one year prior to January
26, 2000 or to any anniversary date thereof of its election not to so extend the
Term.

                  1.2 Duties. Executive shall perform such duties and shall have
such  responsibilities  as  normally  pertain  to the  offices  which he  holds.
Executive  shall  report  directly  to the Board of  Directors  of the  Company.
Executive  shall  perform his duties to the best of his ability and shall devote
substantially  all of his business  time,  efforts and attention to such duties,
subject to the  understanding  that he may have  various  investment  activities
which  may,  from time to time,  require  his  attention,  but  which  shall not
interfere with the performance of his duties to the Company.

                  1.3 Service for Subsidiaries.  At the request of the Company's
Board of Directors,  Executive shall also serve as an officer or director of any
subsidiary  which the Company may form.  Executive shall receive no compensation
for such service in addition to that provided in Section 2.

                  2.       Compensation.

                  2.1  Salary.  During the term of this  Agreement,  the Company
shall pay to  Executive  an annual  salary  of not less than  $265,000  in equal
semi-monthly installments.

                  2.2  Management  Incentive  Plan.  During the Term,  Executive
shall  participate  in the Company's  Management  Incentive  Plan as a "Group I"
participant  for as long as the  Company  maintains  such plan.  Nothing in this
Section 2.2 shall require the Company to continue  such plan for any  particular
period or shall limit the Company's right to modify such plan in any respect.

                  2.3 Stock Options.  Executive shall continue to participate in
the Company's  Executive Stock Option Plan (the "Option  Plan").  In addition to
the stock options previously granted to Executive, he shall be granted as of the
date hereof  options to purchase  12,000  shares of the  Company's  Common Stock
under the Option  Plan at an  exercise  price of $12.88 per share.  On the third
anniversary  date of this  Agreement and on each  anniversary  date  thereafter,
provided that Executive is still employed by the Company, he shall automatically
be granted an option to purchase an  additional  2,500  shares of the  Company's
Common Stock under the Option Plan.  Each option shall become  exercisable as to
one-third of the shares  subject to such option on the date of grant and on each
of the  first  two  anniversary  dates of the date of  grant.  Options  shall be
exercisable for a term of 10 years or until earlier  terminated,  as provided in
the Option Plan.

                  2.4 Benefit Plans.  Executive shall be entitled to participate
in all employee  fringe  benefit  plans and  policies  that the Company may make
available  to, or have in effect for, its senior  executives  from time to time,
including,  without  limitation,  health,  hospitalization and welfare benefits,
pension,  profit-sharing and similar plans,  incentive compensation plans, stock
option plans,  and savings,  investment,  retirement  and  supplemental  benefit
plans, in each case subject to the eligibility and other  provisions of any such
plan or  policy.  Nothing  in this  Section  2.4 shall  require  the  Company to
institute or make available to Executive any particular benefit plan or policy.

                  2.5  Expense  Reimbursement.  Executive  shall be  entitled to
reimbursement for all reasonable and necessary  travel,  entertainment and other
expenses which are incurred by him in the performance of his duties. The Company
shall  pay or  reimburse  Executive  such  expenses  on  presentation,  within a
reasonable time after such expenses are incurred, of an itemized account of such
expenses,  together with such vouchers or receipts for individual  expense items
as the  Company  may from time to time  require  under its normal  policies  and
procedures.

                  2.6  Vacation.  Executive  shall be entitled to paid  vacation
leave during each year in accordance  with such policies as the Company may have
in effect from time to time.

                  2.7  Parking.  During the Term,  the  Company  shall  pay,  or
reimburse  Executive  for, the  reasonable  cost of parking one  automobile in a
parking garage reasonably convenient to the Company's offices.

                  3.       Termination.

                  3.1  Termination  for Cause.  In the event of Executive's  (i)
continuing  gross neglect (after written  warning) or willful  misconduct in the
performance  of his  duties,  (ii)  material  breach of  Sections  4 or 5, (iii)
conviction  for a felony  or (iv)  drunkenness  or  illegal  use of drugs  which
interferes  with the  performance  of his duties under this  Agreement and which
continues  after written warning or (v) commission of acts  constituting  fraud,
gross dishonesty or harassment against the Company or any of its employees, this
Agreement and  Executive's  employment may be termi nated by the Company without
prior notice. In the event of such termination,  the Company shall pay Executive
any salary and expense reimbursement owed to him for periods through the date of
termi nation and shall have no other  liability to him  hereunder  other than as
required under applicable law.

                  3.2  Termination  on  Account  of  Death  or  Disability.   If
Executive dies, this Agreement shall terminate. If Executive, due to physical or
mental disability or incapacity,  is unable to substantially  perform his duties
hereunder  for a period of 90  consecutive  days or more, or for an aggregate of
six months in any 18-month period, the Company shall have the right to terminate
Executive's  employment hereunder on 45 days' prior written notice. If Executive
is able  to and re  commences  rendering  services  and  performing  his  duties
hereunder  within such 45-day notice period,  such notice shall be vitiated.  In
the  event  of  Executive's  death  or  disability,  Executive  or his  personal
representatives  shall be entitled to receive all earned but unpaid compensation
through  the  date  of  termination  of his  employment.  If this  Agreement  is
terminated on account of Executive's death or disability,  the Company shall pay
Executive or his personal  representatives  an amount equal to one year's salary
at its then current rate not later than the 45th day following such termination,
less any amounts  paid or payable to  Executive  under any policies of insurance
obtained by the Company.

                  3.3 Termination Without Cause in Certain Circumstances. If (i)
the  Company  elects  not to  extend  the Term on any  anniversary  date of this
Agreement as  contemplated  in the last sentence of Section 1.1 (which  election
shall  be  deemed  for  purposes  of this  Section  3.3 to be a  termination  of
Executive's  employment  without cause effective as of such anniversary date) or
(ii) a Change in  Control  (as  defined  below)  occurs  and,  within  two years
following such Change in Control, the Company terminates  Executive's employment
other than for cause pursuant to Section 3.1 or on account of Executive's  death
or disability pursuant to Section 3.2 (for this purpose, a material reduction in
Executive's  responsibilities,  title or authority or a change in his  reporting
responsibilities so that he no longer reports directly to the Company's Board of
Directors shall be deemed to be a termination  without cause), the Company shall
pay  Executive a  termination  award equal to 200% of  Executive's  then current
salary  pursuant  to Section  2.1.,  plus an amount  equal to the average of the
annual  incentive  bonuses  paid to  Executive  over the three  completed  years
preceding the date of termination.  Any such termination  award shall be payable
(A) if clause (i) of this Section 3.3 applies,  in two equal  installments equal
to 50% of the total  termination  award each,  with the first  installment to be
payable  not  later  than  three  days  following  the  date of  termination  of
Executive's  employment and the second  installment to be payable not later than
180 days  following the due date of the first  installment or (B) if clause (ii)
of this Section 3.3  applies,  in one lump sum payment not later than three days
following the date of  termination of  Executive's  employment.  Such payment or
payments shall be in lieu of any other severance or other payment or arrangement
in favor of  Executive  which is in  effect on the date of this  Agreement,  any
right to which Executive waives as of the date hereof.

                  For purposes of this  Agreement,  a "Change in Control"  means
the occurrence of any of the following events:

                  (a) a majority  of the  members of the Board at any time cease
for any reason  other  than due to death or  disability  to be persons  who were
members of the Board 24 months prior to such time (the  "Incumbent  Directors");
provided that any director  whose  election,  or nomination  for election by the
Company's  stockholders,  was  approved  by a vote of at least a majority of the
members of the Board then still in office who are Incumbent  Directors  shall be
treated as an Incumbent Director; or

                  (b) any "person,"  including a "group" (as such terms are used
in Sections  13(d) and 14(d) (2) of the Exchange Act, but excluding the Company,
its affiliates (that is, any subsidiary or parent corporation of the Company, as
such terms are used in Section  424 of the  Internal  Revenue  Code of 1986,  as
amended),  any employee benefit plan of the Company or any affiliate,  employees
of the Company or any  affiliate or any group of which any of the foregoing is a
member) is or becomes the "beneficial owner" (as defined in Rule 13(d) (3) under
the Exchange Act),  directly or indirectly,  including  without  limitation,  by
means of a tender or exchange offer,  of securities of the Company  representing
40% or more of the  combined  voting  power of the  Company's  then  outstanding
securities; or

                  (c) the stockholders of the Company shall approve a definitive
agreement (i) for the merger or other  business  combination of the Company with
or into another  corporation  immediately  following which merger or combination
(A) the stock of the surviving entity is not readily tradeable on an established
securities  market,  (B) a majority of the directors of the surviving entity are
persons  who (I) were not  directors  of the  Company  immediately  prior to the
merger and (II) are not  nominees or  representatives  of the Company or (C) any
"person,"  including  a "group"  (as such terms are used in  Sections  13(d) and
14(d) (2) of the Exchange Act, but excluding the Company,  its  Affiliates,  any
employee benefit plan of the Company or any Affiliate,  employees of the Company
or any  Affiliate or any group of which any of the  foregoing is a member) is or
becomes the "beneficial  owner" (as defined in Rule 13(d) (3) under the Exchange
Act), directly or indirectly,  of 40% or more of the securities of the surviving
entity or (ii) for the direct or indirect  sale or other  disposition  of all or
substantially all of the assets of the Company; or

                  (d)  any  other  event  or  transaction  that is  declared  by
resolution  of the Board to  constitute a Change in Control for purposes of this
Agreement.

Notwithstanding  the  foregoing,  a "Change in  Control"  shall not be deemed to
occur  in  the  event  the  Company  files  for   bankruptcy,   liquidation   or
reorganization under the United States Bankruptcy Code.

                  4.  Non-Competition.  During the Term,  Executive shall have a
duty to work only in the best  interests  of the Company and not to  appropriate
any of the Company's business opportunities for his personal gain or the gain of
another party, or attempt to do so.  Further,  during the Term and provided that
the Company is not then in material breach of its obligations hereunder, for six
months after the end of the Term,  Executive shall not, in any geographical area
in which the Company  conducts  business (or for such lesser area or such lesser
period  as may be  determined  by a  court  of  competent  jurisdiction  to be a
reasonable  limitation on the  competitive  activity of Executive),  directly or
indirectly:

                  (a)  engage,  for or on behalf of  himself or on behalf of any
person or entity other than the Company,  in the specific business then actively
conducted by the Company;

                  (b) solicit or attempt to solicit  business for services  then
offered by the Company  from any parties  who are  clients or  customers  of the
Company during the six months prior to termination of Executive's  employment or
to whom the Company makes proposals for services during such six months;

                  (c) solicit or attempt to solicit for any business endeavor 
any employee of the Company;

                  (d) interfere  with the Company or the conduct of its business
or  otherwise  divert  or  attempt  to  divert  from the  Company  any  business
whatsoever; or

                  (e)  render  any  services  as  a  joint  venturer,   partner,
consultant  or  otherwise  to, or have any interest as a  stockholder,  partner,
lender or  otherwise  in,  any person or entity  which is engaged in  activities
which, if performed by Executive, would violate this Section 4.

The foregoing shall not prevent  Executive from purchasing or owning up to 5% of
the  voting  secur  ities  of any  corporation,  the  securities  of  which  are
publicly-traded.  References  to the  Company  in this  Section 4 shall  also be
deemed to refer to its divisions and subsidiaries.

                  5.       Confidentiality.

                  (a) Executive  understands and acknowledges  that, as a result
of his employment with the Company, he shall necessarily become informed of, and
shall have  access  to,  confidential  information  of the  Company,  including,
without  limitation,  the contents of this Agreement,  trade secrets,  marketing
plans  and  information,   pricing   information,   identity  of  customers  and
prospective customers,  and that such information,  even though it may have been
or may be  developed  or  otherwise  acquired  by  Executive,  is the  exclusive
property of the Company to be held by  Executive  in a  fiduciary  capacity  and
solely for the Company's benefit. Executive shall not at any time, either during
or subsequent to his employment hereunder,  reveal, report, publish, transfer or
otherwise  disclose to any person,  Company or other entity,  or use, any of the
Company's  confidential   information  which  Executive,   in  the  exercise  of
reasonable diligence,  knows to be confidential,  without the written consent of
the members of the Company (other than  Executive),  except for use on behalf of
the Company in  connection  with its business,  and except for such  information
that legally and  legitimately  is or becomes of general  public  knowledge from
authorized sources other than Executive or which Executive is required by law to
disclose (but only to the extent required to be so disclosed).


                  (b) On the  termination of his employment with the Company for
any  reason,  Executive  shall  promptly  deliver to the  Company  all  manuals,
letters,  notes, notebooks,  reports and copies,  summaries or abstracts thereof
and all other materials,  including,  without  limitation,  those of a secret or
confidential  nature,  relating to the Company's business or affairs that are in
Executive's possession or control.

                  6. Remedies and  Survival.  Because the Company would not have
an adequate  remedy at law to protect its business and its interest in its trade
secrets,  proprietary or confidential  information and similar commercial assets
from any  breach of the  provisions  of  Sections 4 or 5, the  Company  shall be
entitled,  in the  event  of such a  breach  or  threatened  breach  thereof  by
Executive,  to injunctive  relief, in addition to such other remedies and relief
that  would be  available  to the  Company.  In the event of such a  breach,  in
addition to any other  remedies,  the Company  shall be entitled to receive from
Executive payment of, or reimbursement  for, its reasonable  attorneys' fees and
disbursements  incurred  in  successfully  enforcing  any  such  provision.  The
provisions  of  Sections  4 and 5 and  of  this  Section  6  shall  survive  any
termination of this Agreement.

                  7. Entire Agreement;  Amendments;  No Waivers.  This Agreement
sets forth the entire  understanding  of the parties with respect to its subject
matter and merges and supersedes all prior and contemporaneous understandings of
the parties with respect to its subject  matter.  No provision of this Agreement
may be waived or modified,  in whole or in part,  except by a writing  signed by
each of the  parties.  Failure of any party to  enforce  any  provision  of this
Agreement  shall not be  construed  as a waiver of its rights  under such or any
other  provision.  No waiver of any provi sion of this Agreement in any instance
shall be deemed to be a waiver of the same or any other  provision  in any other
instance.

                  8.   Communications.   All   notices,   consents   and   other
communications  given  under this  Agreement  shall be in  writing  and shall be
deemed  to have  been duly  given  (a) when  delivered  by hand or by Fedex or a
similar  overnight courier to, (b) five days after being deposited in any United
States  post  office  enclosed  in a postage  prepaid  registered  or  certified
envelope addressed to, or (c) when successfully transmitted by facsimile (with a
confirming  copy of such  communication  to be  sent as  provided  in (a) or (b)
above) to, the party for whom intended,  at the address or facsimile  number for
such party set forth below, or to such other address or facsimile  number as may
be furnished by such party by notice in the manner  provided  herein;  provided,
however,  that any  notice of change of  address or  facsimile  number  shall be
effective only upon receipt.

         If to the Company:                         If to Executive:

         Forstmann & Company, Inc.                  Mr. Brian A. Moorstein
         1155 Avenue of the Americas                164 Hudson Avenue
         New York, New York 10036-2711              Tenafly, New Jersey 07670
         Attention: Mr. Rodney J. Peckham           Fax No.  (201) 816-8186
         Fax No. (212) 642-6942

                  9. Successors and Assigns. This Agreement shall be binding on,
enforceable  against  and  inure  to the  benefit  of,  the  parties  and  their
respective  successors and permitted assigns,  and nothing herein is intended to
confer any right,  remedy or benefit upon any other person.  No party may assign
its rights or delegate its obligations under this personal Agreement without the
express written consent of the other party.

                  10.  Governing  Law. This  Agreement  shall in all respects be
governed by and construed in  accordance  with the laws of the State of New York
applicable to agreements  made and fully to be performed in such state,  without
giving effect to conflicts of law principles.

                  11.  Severability and Savings Clause. If any provision of this
Agreement  is held to be invalid or  unenforceable  by any court or  tribunal of
competent  jurisdiction,  the remainder of this Agreement  shall not be affected
thereby, and such provision shall be carried out as nearly as possible according
to  its   original   terms  and  intent  to   eliminate   such   invalidity   or
unenforceability.  In this  regard,  the parties  agree that the  provisions  of
Section 4, including,  without limitation, the scope of the territorial and time
restrictions, are reasonable and necessary to protect and preserve the Company's
legitimate  interests.  If the  provisions  of  Section 4 are held by a court of
competent  jurisdiction to be in any respect  unreasonable,  then such court may
reduce the  territory  or time to which it  pertains  or  otherwise  modify such
provisions  to the extent  necessary to render such  provisions  reasonable  and
enforceable.

                  12.  Counterparts.  This  Agreement  may  be  executed  in two
counterparts,  each of  which  shall be  deemed  an  original,  but all of which
together shall constitute one and the same instrument.

                  13.  Construction.  Headings  used in this  Agreement  are for
convenience only and shall not be used in the  interpretation of this Agreement.
References  to Sections are to the sections of this  Agreement.  As used herein,
the singular  includes the plural and the masculine,  feminine and neuter gender
each includes the others where the context so indicates.

                  IN  WITNESS  WHEREOF,  the  parties  have duly  executed  this
Agreement as of the date first set forth above.

                                         FORSTMANN & COMPANY, INC.


                                       By /s/ Rod J. Peckham
                                         -----------------------------------
                                          Rodney J. Peckham
                                          Executive Vice President

                                         /s/ Brian A. Moorstein
                                        ------------------------------------
                                        BRIAN A. MOORSTEIN


<PAGE>
                                                                  Exhibit 10.11

                              EMPLOYMENT AGREEMENT

                  AGREEMENT, dated as of January 26, 1998, between FORSTMANN &
COMPANY, INC., a Georgia corporation (the "Company"), and RODNEY J. PECKHAM
("Executive").

                              W I T N E S S E T H:

                  WHEREAS,  the Company wishes to avail itself of the advice and
services of Executive in connection with its business,  and Executive  wishes to
be employed by the Company;

                  NOW,  THEREFORE,  in  consideration of the premises and of the
mutual agreements set forth herein, the parties agree as follows:

                  1.       Services.

                  1.1 Employment  and Term.  Subject to the terms and conditions
of this Agreement,  the Company agrees to employ Executive, and Executive agrees
to serve the Company,  as its Executive Vice President  Finance,  Administration
and Strategic Planning, Secretary and Treasurer and in such additional executive
capacities as the Board of Directors of the Company may reasonably request.  The
term of this Agreement (the "Term") shall commence on the date of this Agreement
and shall  continue  through  January 26, 2000. On such date and each  following
January 26, the Term shall  automatically  be extended for one additional  year,
unless the Company  notifies  Executive not later than one year prior to January
26, 2000 or to any anniversary date thereof of its election not to so extend the
Term.

                  1.2 Duties. Executive shall perform such duties and shall have
such  responsibilities  as  normally  pertain  to the  offices  which he  holds.
Executive  shall  report  directly  to the Board of  Directors  of the  Company.
Executive  shall  perform his duties to the best of his ability and shall devote
substantially  all of his business  time,  efforts and attention to such duties,
subject to the  understanding  that he may have  various  investment  activities
which  may,  from time to time,  require  his  attention,  but  which  shall not
interfere with the performance of his duties to the Company.

                  1.3 Service for Subsidiaries.  At the request of the Company's
Board of Directors,  Executive shall also serve as an officer or director of any
subsidiary  which the Company may form.  Executive shall receive no compensation
for such service in addition to that provided in Section 2.

                  2.       Compensation.

                  2.1  Salary.  During the term of this  Agreement,  the Company
shall pay to  Executive  an annual  salary  of not less than  $265,000  in equal
semi-monthly installments.

                  2.2  Management  Incentive  Plan.  During the Term,  Executive
shall  participate  in the Company's  Management  Incentive  Plan as a "Group I"
participant  for as long as the  Company  maintains  such plan.  Nothing in this
Section 2.2 shall require the Company to continue  such plan for any  particular
period or shall limit the Company's right to modify such plan in any respect.

                  2.3 Stock Options.  Executive shall continue to participate in
the Company's  Executive Stock Option Plan (the "Option  Plan").  In addition to
the stock options previously granted to Executive, he shall be granted as of the
date hereof  options to purchase  12,000  shares of the  Company's  Common Stock
under the Option  Plan at an  exercise  price of $12.88 per share.  On the third
anniversary  date of this  Agreement and on each  anniversary  date  thereafter,
provided that Executive is still employed by the Company, he shall automatically
be granted an option to purchase an  additional  2,500  shares of the  Company's
Common Stock under the Option Plan.  Each option shall become  exercisable as to
one-third of the shares  subject to such option on the date of grant and on each
of the  first  two  anniversary  dates of the date of  grant.  Options  shall be
exercisable for a term of 10 years or until earlier  terminated,  as provided in
the Option Plan.

                  2.4 Benefit Plans.  Executive shall be entitled to participate
in all employee  fringe  benefit  plans and  policies  that the Company may make
available  to, or have in effect for, its senior  executives  from time to time,
including,  without  limitation,  health,  hospitalization and welfare benefits,
pension,  profit-sharing and similar plans,  incentive compensation plans, stock
option plans,  and savings,  investment,  retirement  and  supplemental  benefit
plans, in each case subject to the eligibility and other  provisions of any such
plan or  policy.  Nothing  in this  Section  2.4 shall  require  the  Company to
institute or make available to Executive any particular benefit plan or policy.

                  2.5  Expense  Reimbursement.  Executive  shall be  entitled to
reimbursement for all reasonable and necessary  travel,  entertainment and other
expenses which are incurred by him in the performance of his duties. The Company
shall  pay or  reimburse  Executive  such  expenses  on  presentation,  within a
reasonable time after such expenses are incurred, of an itemized account of such
expenses,  together with such vouchers or receipts for individual  expense items
as the  Company  may from time to time  require  under its normal  policies  and
procedures.

                  2.6  Vacation.  Executive  shall be entitled to paid  vacation
leave during each year in accordance  with such policies as the Company may have
in effect from time to time.

                  2.7  Parking.  During the Term,  the  Company  shall  pay,  or
reimburse  Executive  for, the  reasonable  cost of parking one  automobile in a
parking garage reasonably convenient to the Company's offices.

                  3.       Termination.

                  3.1  Termination  for Cause.  In the event of Executive's  (i)
continuing  gross neglect (after written  warning) or willful  misconduct in the
performance  of his  duties,  (ii)  material  breach of  Sections  4 or 5, (iii)
conviction  for a felony  or (iv)  drunkenness  or  illegal  use of drugs  which
interferes  with the  performance  of his duties under this  Agreement and which
continues  after written warning or (v) commission of acts  constituting  fraud,
gross dishonesty or harassment against the Company or any of its employees, this
Agreement and  Executive's  employment may be termi nated by the Company without
prior notice. In the event of such termination,  the Company shall pay Executive
any salary and expense reimbursement owed to him for periods through the date of
termi nation and shall have no other  liability to him  hereunder  other than as
required under applicable law.

                  3.2  Termination  on  Account  of  Death  or  Disability.   If
Executive dies, this Agreement shall terminate. If Executive, due to physical or
mental disability or incapacity,  is unable to substantially  perform his duties
hereunder  for a period of 90  consecutive  days or more, or for an aggregate of
six months in any 18-month period, the Company shall have the right to terminate
Executive's  employment hereunder on 45 days' prior written notice. If Executive
is able  to and re  commences  rendering  services  and  performing  his  duties
hereunder  within such 45-day notice period,  such notice shall be vitiated.  In
the  event  of  Executive's  death  or  disability,  Executive  or his  personal
representatives  shall be entitled to receive all earned but unpaid compensation
through  the  date  of  termination  of his  employment.  If this  Agreement  is
terminated on account of Executive's death or disability,  the Company shall pay
Executive or his personal  representatives  an amount equal to one year's salary
at its then current rate not later than the 45th day following such termination,
less any amounts  paid or payable to  Executive  under any policies of insurance
obtained by the Company.

                  3.3 Termination Without Cause in Certain Circumstances. If (i)
the  Company  elects  not to  extend  the Term on any  anniversary  date of this
Agreement as  contemplated  in the last sentence of Section 1.1 (which  election
shall  be  deemed  for  purposes  of this  Section  3.3 to be a  termination  of
Executive's  employment  without cause effective as of such anniversary date) or
(ii) a Change in  Control  (as  defined  below)  occurs  and,  within  two years
following such Change in Control, the Company terminates  Executive's employment
other than for cause pursuant to Section 3.1 or on account of Executive's  death
or disability pursuant to Section 3.2 (for this purpose, a material reduction in
Executive's  responsibilities,  title or authority or a change in his  reporting
responsibilities so that he no longer reports directly to the Company's Board of
Directors shall be deemed to be a termination  without cause), the Company shall
pay  Executive a  termination  award equal to 200% of  Executive's  then current
salary  pursuant  to Section  2.1.,  plus an amount  equal to the average of the
annual  incentive  bonuses  paid to  Executive  over the three  completed  years
preceding the date of termination.  Any such termination  award shall be payable
(A) if clause (i) of this Section 3.3 applies,  in two equal  installments equal
to 50% of the total  termination  award each,  with the first  installment to be
payable  not  later  than  three  days  following  the  date of  termination  of
Executive's  employment and the second  installment to be payable not later than
180 days  following the due date of the first  installment or (B) if clause (ii)
of this Section 3.3  applies,  in one lump sum payment not later than three days
following the date of  termination of  Executive's  employment.  Such payment or
payments shall be in lieu of any other severance or other payment or arrangement
in favor of  Executive  which is in  effect on the date of this  Agreement,  any
right to which Executive waives as of the date hereof.

                  For purposes of this  Agreement,  a "Change in Control"  means
the occurrence of any of the following events:

                  (a) a majority  of the  members of the Board at any time cease
for any reason  other  than due to death or  disability  to be persons  who were
members of the Board 24 months prior to such time (the  "Incumbent  Directors");
provided that any director  whose  election,  or nomination  for election by the
Company's  stockholders,  was  approved  by a vote of at least a majority of the
members of the Board then still in office who are Incumbent  Directors  shall be
treated as an Incumbent Director; or

                  (b) any "person,"  including a "group" (as such terms are used
in Sections  13(d) and 14(d) (2) of the Exchange Act, but excluding the Company,
its affiliates (that is, any subsidiary or parent corporation of the Company, as
such terms are used in Section  424 of the  Internal  Revenue  Code of 1986,  as
amended),  any employee benefit plan of the Company or any affiliate,  employees
of the Company or any  affiliate or any group of which any of the foregoing is a
member) is or becomes the "beneficial owner" (as defined in Rule 13(d) (3) under
the Exchange Act),  directly or indirectly,  including  without  limitation,  by
means of a tender or exchange offer,  of securities of the Company  representing
40% or more of the  combined  voting  power of the  Company's  then  outstanding
securities; or

                  (c) the stockholders of the Company shall approve a definitive
agreement (i) for the merger or other  business  combination of the Company with
or into another  corporation  immediately  following which merger or combination
(A) the stock of the surviving entity is not readily tradeable on an established
securities  market,  (B) a majority of the directors of the surviving entity are
persons  who (I) were not  directors  of the  Company  immediately  prior to the
merger and (II) are not  nominees or  representatives  of the Company or (C) any
"person,"  including  a "group"  (as such terms are used in  Sections  13(d) and
14(d) (2) of the Exchange Act, but excluding the Company,  its  Affiliates,  any
employee benefit plan of the Company or any Affiliate,  employees of the Company
or any  Affiliate or any group of which any of the  foregoing is a member) is or
becomes the "beneficial  owner" (as defined in Rule 13(d) (3) under the Exchange
Act), directly or indirectly,  of 40% or more of the securities of the surviving
entity or (ii) for the direct or indirect  sale or other  disposition  of all or
substantially all of the assets of the Company; or

                  (d)  any  other  event  or  transaction  that is  declared  by
resolution  of the Board to  constitute a Change in Control for purposes of this
Agreement.

Notwithstanding  the  foregoing,  a "Change in  Control"  shall not be deemed to
occur  in  the  event  the  Company  files  for   bankruptcy,   liquidation   or
reorganization under the United States Bankruptcy Code.

                  4.  Non-Competition.  During the Term,  Executive shall have a
duty to work only in the best  interests  of the Company and not to  appropriate
any of the Company's business opportunities for his personal gain or the gain of
another party, or attempt to do so.  Further,  during the Term and provided that
the Company is not then in material breach of its obligations hereunder, for six
months after the end of the Term,  Executive shall not, in any geographical area
in which the Company  conducts  business (or for such lesser area or such lesser
period  as may be  determined  by a  court  of  competent  jurisdiction  to be a
reasonable  limitation on the  competitive  activity of Executive),  directly or
indirectly:
                  (a)  engage,  for or on behalf of  himself or on behalf of any
person or entity other than the Company,  in the specific business then actively
conducted by the Company;

                  (b) solicit or attempt to solicit  business for services  then
offered by the Company  from any parties  who are  clients or  customers  of the
Company during the six months prior to termination of Executive's  employment or
to whom the Company makes proposals for services during such six months;

                  (c)  solicit or attempt to solicit for any  business  endeavor
any employee of the Company;

                  (d) interfere  with the Company or the conduct of its business
or  otherwise  divert  or  attempt  to  divert  from the  Company  any  business
whatsoever; or

                  (e)  render  any  services  as  a  joint  venturer,   partner,
consultant  or  otherwise  to, or have any interest as a  stockholder,  partner,
lender or  otherwise  in,  any person or entity  which is engaged in  activities
which, if performed by Executive, would violate this Section 4.

The foregoing shall not prevent  Executive from purchasing or owning up to 5% of
the  voting  secur  ities  of any  corporation,  the  securities  of  which  are
publicly-traded.  References  to the  Company  in this  Section 4 shall  also be
deemed to refer to its divisions and subsidiaries.

                  5.       Confidentiality.

                  (a) Executive  understands and acknowledges  that, as a result
of his employment with the Company, he shall necessarily become informed of, and
shall have  access  to,  confidential  information  of the  Company,  including,
without  limitation,  the contents of this Agreement,  trade secrets,  marketing
plans  and  information,   pricing   information,   identity  of  customers  and
prospective customers,  and that such information,  even though it may have been
or may be  developed  or  otherwise  acquired  by  Executive,  is the  exclusive
property of the Company to be held by  Executive  in a  fiduciary  capacity  and
solely for the Company's benefit. Executive shall not at any time, either during
or subsequent to his employment hereunder,  reveal, report, publish, transfer or
otherwise  disclose to any person,  Company or other entity,  or use, any of the
Company's  confidential   information  which  Executive,   in  the  exercise  of
reasonable diligence,  knows to be confidential,  without the written consent of
the members of the Company (other than  Executive),  except for use on behalf of
the Company in  connection  with its business,  and except for such  information
that legally and  legitimately  is or becomes of general  public  knowledge from
authorized sources other than Executive or which Executive is required by law to
disclose (but only to the extent required to be so disclosed).

                  (b) On the  termination of his employment with the Company for
any  reason,  Executive  shall  promptly  deliver to the  Company  all  manuals,
letters,  notes, notebooks,  reports and copies,  summaries or abstracts thereof
and all other materials,  including,  without  limitation,  those of a secret or
confidential  nature,  relating to the Company's business or affairs that are in
Executive's possession or control.

                  6. Remedies and  Survival.  Because the Company would not have
an adequate  remedy at law to protect its business and its interest in its trade
secrets,  proprietary or confidential  information and similar commercial assets
from any  breach of the  provisions  of  Sections 4 or 5, the  Company  shall be
entitled,  in the  event  of such a  breach  or  threatened  breach  thereof  by
Executive,  to injunctive  relief, in addition to such other remedies and relief
that  would be  available  to the  Company.  In the event of such a  breach,  in
addition to any other  remedies,  the Company  shall be entitled to receive from
Executive payment of, or reimbursement  for, its reasonable  attorneys' fees and
disbursements  incurred  in  successfully  enforcing  any  such  provision.  The
provisions  of  Sections  4 and 5 and  of  this  Section  6  shall  survive  any
termination of this Agreement.

                  7. Entire Agreement;  Amendments;  No Waivers.  This Agreement
sets forth the entire  understanding  of the parties with respect to its subject
matter and merges and supersedes all prior and contemporaneous understandings of
the parties with respect to its subject  matter.  No provision of this Agreement
may be waived or modified,  in whole or in part,  except by a writing  signed by
each of the  parties.  Failure of any party to  enforce  any  provision  of this
Agreement  shall not be  construed  as a waiver of its rights  under such or any
other  provision.  No waiver of any provi sion of this Agreement in any instance
shall be deemed to be a waiver of the same or any other  provision  in any other
instance.

                  8.   Communications.   All   notices,   consents   and   other
communications  given  under this  Agreement  shall be in  writing  and shall be
deemed  to have  been duly  given  (a) when  delivered  by hand or by Fedex or a
similar  overnight courier to, (b) five days after being deposited in any United
States  post  office  enclosed  in a postage  prepaid  registered  or  certified
envelope addressed to, or (c) when successfully transmitted by facsimile (with a
confirming  copy of such  communication  to be  sent as  provided  in (a) or (b)
above) to, the party for whom intended,  at the address or facsimile  number for
such party set forth below, or to such other address or facsimile  number as may
be furnished by such party by notice in the manner  provided  herein;  provided,
however,  that any  notice of change of  address or  facsimile  number  shall be
effective only upon receipt.

         If to the Company:                       If to Executive:

         Forstmann & Company, Inc.                Mr. Rodney J. Peckham
         1155 Avenue of the Americas              560 West 43rd Street
         New York, New York 10036-2711            Apartment 44E
         Attention: Mr. Brian A. Moorstein        New York, New York 10036
         Fax No. (212) 642-6942                   Fax No.  (212)

                  9. Successors and Assigns. This Agreement shall be binding on,
enforceable  against  and  inure  to the  benefit  of,  the  parties  and  their
respective  successors and permitted assigns,  and nothing herein is intended to
confer any right,  remedy or benefit upon any other person.  No party may assign
its rights or delegate its obligations under this personal Agreement without the
express written consent of the other party.

                  10.  Governing  Law. This  Agreement  shall in all respects be
governed by and construed in  accordance  with the laws of the State of New York
applicable to agreements  made and fully to be performed in such state,  without
giving effect to conflicts of law principles.

                  11.  Severability and Savings Clause. If any provision of this
Agreement  is held to be invalid or  unenforceable  by any court or  tribunal of
competent  jurisdiction,  the remainder of this Agreement  shall not be affected
thereby, and such provision shall be carried out as nearly as possible according
to  its   original   terms  and  intent  to   eliminate   such   invalidity   or
unenforceability.  In this  regard,  the parties  agree that the  provisions  of
Section 4, including,  without limitation, the scope of the territorial and time
restrictions, are reasonable and necessary to protect and preserve the Company's
legitimate  interests.  If the  provisions  of  Section 4 are held by a court of
competent  jurisdiction to be in any respect  unreasonable,  then such court may
reduce the  territory  or time to which it  pertains  or  otherwise  modify such
provisions  to the extent  necessary to render such  provisions  reasonable  and
enforceable.

                  12.  Counterparts.  This  Agreement  may  be  executed  in two
counterparts,  each of  which  shall be  deemed  an  original,  but all of which
together shall constitute one and the same instrument.

                  13.  Construction.  Headings  used in this  Agreement  are for
convenience only and shall not be used in the  interpretation of this Agreement.
References  to Sections are to the sections of this  Agreement.  As used herein,
the singular  includes the plural and the masculine,  feminine and neuter gender
each includes the others where the context so indicates.

                  IN  WITNESS  WHEREOF,  the  parties  have duly  executed  this
Agreement as of the date first set forth above.

                                                      FORSTMANN & COMPANY, INC.


                                          By /s/Brian A. Moorstein
                                            -----------------------------------
                                            Brian A. Moorstein
                                            President

                                            /s/ Rodney J. Peckham
                                           ------------------------------------
                                            RODNEY J. PECKHAM


<PAGE>
                                                                   Exhibit 10.13

                           APPROVAL OF 1997 DIRECTORS
                                COMPENSATION PLAN

                  In October 1997, the Board of Directors of the Company adopted
the 1997 Directors  Compensation  Plan (the  "Directors  Plan"),  which is being
submitted and  recommended  to the  shareholders  for approval.  Approval of the
Directors Plan requires the affirmative  vote of a majority of all votes cast at
the Annual Meeting.  The following  description of the principal features of the
Directors Plan is qualified in its entirety by reference to the full text of the
Directors Plan, which is set forth in Exhibit A.

                  Purposes. The purposes of the Directors Plan are to enable the
Company to attract,  retain and motivate  the best  qualified  directors  and to
enhance  a  long-term  mutuality  of  interest  between  the  directors  and the
shareholders  by providing the directors with stock  ownership and granting them
options to purchase shares of the Common Stock.

                  Term. The Directors Plan became effective on December 19, 1997
and will  terminate on December  31,  2007,  unless  earlier  terminated  by the
shareholders of the Company.

                  Participants.  Directors  of the  Company  who  are  not  also
officers  or  employees  of the  Company or its  subsidiaries  are  eligible  to
participate in the Directors Plan (each a  "Participant").  Currently,  only the
two nominees for director are eligible to participate in the Directors Plan.

                  Directors Fees. Each  Participant will receive for services as
a director a payment of $3,000 for each fiscal  quarter  during each fiscal year
of the Company from 1998 through 2007,  subject to a prorated  adjustment if the
Participant  was not a  director  at the time of each  meeting  of the  Board of
Directors held during such fiscal quarter.  Each Participant will also receive a
$1,000 fee for each  meeting of the Board of Directors he or she attends in each
fiscal year from 1998 through 2007 in excess of six meetings  during such fiscal
year. Each  Participant who also serves as Chairperson of the Board of Directors
or of any committee thereof will also receive an additional fee of $375 for each
fiscal quarter of such fiscal years.

                  Shares  Subject  to the  Directors  Plan.  A total of  450,000
shares of the  Common  Stock  will be  available,  and have been  reserved,  for
issuance  under the Directors  Plan  pursuant to stock options  granted or to be
granted,  and share awards made or to be made,  under the  Directors  Plan.  The
Directors  Plan  provides  for the  automatic  grant of a fixed  number of stock
options  and the  automatic  making of share  awards  having a fixed fair market
value to each  Participant.  If any stock  option or share  award made under the
Directors Plan is canceled or forfeited,  the shares subject to the stock option
or share award will again be available for issuance under the Directors Plan.

                  Stock Options.  The Directors  Plan  authorizes the Company to
grant non-qualified  stock options,  but not incentive stock options (within the
meaning of Section 422 of the Code).  On the date that an  individual  becomes a
Participant,  he or she will  automatically  be  granted  an option to  purchase
12,000  shares  of  the  Common  Stock  (an  "Initial  Option").  On  the  third
anniversary  of such  initial  grant and on each  anniversary  date  thereafter,
provided that a Participant is still a director, he or she will automatically be
granted an option to  purchase  an  additional  2,500  shares.  Each option will
become  exercisable  as to one-third of the shares subject to such option on the
date of grant  and on each of the  first  two  anniversary  dates of the date of
grant.  Options  will be  exercisable  for a term of 10 years  or until  earlier
terminated, as described below.

                  The exercise  price of an option  granted  under the Directors
Plan will be the Fair  Market  Value of the  Common  Stock on the date of grant,
except that the  exercise  price of any Initial  Option will in no event be less
than  $12.88 per share.  The  exercise  price of an  option,  together  with any
required  taxes,  must be paid in full at the time of exercise  in cash,  by the
delivery  of shares of the Common  Stock  (subject to certain  conditions)  or a
combination of cash and shares.

                  For these  purposes  (and for  purposes  of the  share  awards
discussed  below),  "Fair Market  Value" is defined as the average  daily Market
Price of the Common Stock for the 20-day period  immediately  preceding the date
as of which Fair Market Value is being determined.  "Market Price" is defined as
the closing  price of the Common Stock on the principal  securities  exchange on
which it is traded. If the Common Stock is not traded on a securities  exchange,
but  is  reported  by the  National  Association  of  Securities  Dealers,  Inc.
Automated  Quotation  System and market  information  is  published on a regular
basis in The New York Times or The Wall Street  Journal,  then the Market  Price
will be deemed to be the  average of the  published  high and low sales price or
the published  daily bid and asked prices of the Common Stock,  as so published,
for the date as of which Market Price is being determined. If market information
is not so published on a regular  basis,  then Market Price will be deemed to be
the  average  of the high bid and low asked  prices of the  Common  Stock in the
over-the-counter  market  for the date as of  which  the  Market  Price is being
determined,  as reported  by the  National  Association  of  Securities  Dealers
Automated  Quotation  System,  or, if not so reported,  by a generally  accepted
reporting  service.  If the Common Stock is not then publicly traded, the Market
Price will be the fair value thereof as determined in good faith by the Board of
Directors.

                  Acceleration  of  Vesting.  If a  Participant  dies or becomes
permanently  disabled,  any stock option granted to such Participant will become
100% vested and may be exercised  by the  Participant  or his or her  designated
beneficiary  at any time prior to the expiration of the term of the stock option
or within one year following the  Participant's  death or permanent  disability,
whichever  period is shorter.  If a Participant  ceases to be a director for any
reason other than death or  permanent  disability,  any stock option  granted to
such Participant which is then 100% vested may be exercised at any time prior to
the  expiration  of the term of the stock option or the 90th day  following  the
Participant's termination of employment,  whichever period is shorter. All stock
options  which  are not  vested  as of the  date a  Participant  ceases  to be a
director  for any  reason  other  than  death or  permanent  disability  will be
forfeited.

                  In  addition,  in the event of a "change in control" any stock
option then held by a  Participant  will become 100% vested and may be exercised
by the Participant or his or her designated beneficiary at any time prior to the
expiration  of the stock  option or within 90 days after the change in  control,
whichever  period is shorter.  For purposes of the  Directors  Plan, a change in
control will be deemed to have  occurred if (i) any "person" or "group"  (within
the meaning of Section 13(d) or 14(d)(2) of the Securities  Exchange Act of 1934
and the rules  thereunder),  other than  affiliates of the Company,  becomes the
beneficial  owner of securities of the Company  representing  40% or more of the
combined voting power of the then outstanding  securities of the Company, (ii) a
majority of the Board of  Directors at any time ceases for any reason other than
death or disability to be composed of persons who were directors 24 months prior
to such time ("Incumbent Directors") or whose election to the Board of Directors
had been  approved by Incumbent  Directors or (iii) the  shareholders  approve a
definitive  agreement for (A) the sale of all or substantially all of the assets
of the Company or (B) the merger or other  business  combination of the Company,
pursuant  to  which  (1) the  stock  of the  surviving  company  is not  readily
tradeable in an established  securities  market, (2) a majority of the directors
of the  surviving  entity are  persons  who were not  directors  of the  Company
immediately  prior to the merger and are not  nominees  of the  Company or (C) a
"person" or "group" (as defined  above),  other than the Company or an affiliate
of the Company  becomes the  beneficial  owner of  securities  of the  surviving
entity  representing  40% or more  of the  combined  voting  power  of the  then
outstanding securities of the surviving entity.

                  Share Awards.  Each Participant will receive for services as a
director,  for each fiscal  quarter  during each fiscal year of the Company from
1998  through  2007,  an award of that  number  of shares  of the  Common  Stock
(rounded  to the  nearest  whole  number) as equals  $3,000  divided by the Fair
Market Value of a share of the Common Stock as of the last  business day of such
fiscal  quarter,  subject to a prorated  adjustment if the Participant was not a
director at the time of each meeting of the Board of Directors  held during such
fiscal quarter.

                  Pursuant to the Directors Plan, 239 shares of the Common Stock
were  awarded to Mr.  Kjorlien,  and 159 shares were  awarded to Mr.  Gregory in
respect of their services as directors  during the fiscal quarter of the Company
ended  November 2, 1997,  based on a Fair Market Value of $12.56 per share.  Mr.
Kjorlien was a director during all of such fiscal quarter, while Mr. Gregory was
appointed to the Board on September 15, 1997. Further,  217 shares of the Common
Stock  were  awarded  to each of the  directors  for the  fiscal  quarter of the
Company  ended  February  2, 1998  based on a Fair  Market  Value of $ 13.83 per
share, and 222 shares of the Company Stock were awarded to each director for the
fiscal quarter ended May 3, 1998 based on a Fair Market Value of $13.50.

                  Pursuant to the Directors Plan, a Participant may elect, on or
before  December 31 of any calendar year ending on or before  December 31, 2006,
to defer receipt of all or any part of any share award payable in respect of the
calendar year  following  the year in which such  election is made,  and to have
such amounts  credited to a stock account under the Directors Plan. In addition,
any person who  becomes a  Participant  during any  calendar  year  ending on or
before December 31, 2007 may elect,  not later than the 30th day after he or she
becomes a  Participant,  to defer payment of all or any part of his or her share
award payable with regard to the portion of such calendar  year  following  such
election.  A  deferral  election  will  continue  in effect  unless  and until a
Participant  revokes or modifies such election by written notice to the Company.
Any such revocation or modification  will become  effective as of the end of the
calendar  year in which such notice is given and only with  respect to any share
award in subsequent  calendar years.  Further,  a Participant who has revoked an
election  may file a new  election to defer share  awards in the  calendar  year
following the year in which such new election is filed.

                  Any share award which is  deferred  by a  Participant  will be
deemed  to be  invested  in a number of  notional  shares  of the  Common  Stock
("Units")  equal to the number of shares  the  Participant  would have  received
under the Plan had he or she not  elected to defer the share  award.  Whenever a
dividend other than a dividend payable in the form of shares of the Common Stock
is declared with respect to the shares, the number of Units in the Participant's
stock account under the Director's Plan will be increased by the number of Units
determined  by  dividing  (i) the  product  of (A) the  number  of  Units in the
Participant's  stock account on the related dividend record date,  multiplied by
(B) the amount of any cash  dividend  declared  by the Company on a share of the
Common Stock (or, in the case of any dividend  distributable  in property  other
than Shares, the per share value of such dividend,  as determined by the Company
for  purposes  of income tax  reporting)  by (ii) the Fair  Market  Value on the
related  dividend  payment  date.  In the case of any  dividend  declared on the
shares  which is payable in shares,  the  Participant's  stock  account  will be
increased by the number of Units equal to the product of (i) the number of Units
credited to the Participant's stock account on the related dividend record date,
multiplied  by (ii) the  number  of  shares  (including  any  fraction  thereof)
distributable as a dividend on a share. In the event of any change in the number
or kind of outstanding shares by reason of any recapitalization, reorganization,
merger,  consolidation,  stock split or any similar change affecting the shares,
other than a stock dividend as provided above,  the Board of Directors will make
an appropriate  adjustment in the number of Units credited to the  Participant's
stock  account.  Fractional  Units will be credited,  but will be rounded to the
nearest hundredth percentile, with amounts equal to or greater than .005 rounded
up and amounts less than .005 rounded down.

                  A Participant  may elect to receive  distribution of the value
of his or her stock account under the  Director's  Plan on termination of his or
her service as a director or earlier, in cash , in shares or in a combination of
cash and  shares.  Distributions  will begin  immediately  following  the date a
Participant ceases to be a director or on the first business day of any calendar
year  following  the  calendar  year in which  the  Participant  ceases  to be a
director and will be in one lump-sum payment or in such number of annual install
ments (not to exceed  ten) as a  Participant  may  designate.  If a  Participant
elects to receive  distributions  prior to his or her  ceasing to be a director,
such election must be made on or before June 30 of the year prior to the year in
which the distribution is to occur.

                  Transferability.  In general,  stock  options and share awards
granted  under  the  Directors  Plan are not  assignable  or  transferable  by a
Participant,   except  under  the  limited  circumstances  contemplated  by  the
Directors Plan.

                  Administration.  The  Directors  Plan provides that it will be
administered  by the Board of Directors.  Under the Directors Plan, the Board of
Directors has the sole authority, among other things, to grant awards, determine
terms,  conditions  and  limitations  applicable  to  awards,  establish  rules,
procedures, regulations and guidelines relating to the Directors Plan generally;
and to construe and  interpret the  Directors  Plan.  The Board of Directors may
not,  however,  have any discretion as to the selection of  Participants  or the
number of stock  options or share awards that may be granted under the Directors
Plan.  Further,  the  Directors  Plan may not be amended in a manner  that would
alter or impair any rights of any  Participant or any obligations of the Company
under any stock option or share award theretofore  granted in any manner adverse
to such Participant without the consent of such Participant.

                  The Directors  Plan  provides  that, if the Board of Directors
determines   that   any   stock   dividend,    extraordinary    cash   dividend,
recapitalization,  reorganization,  merger,  consolidation,  split-up, spin-off,
combination,  exchange of shares, warrants or rights offering to purchase Common
Stock at a price  substantially  below fair market value or other  similar event
affects the Common Stock such that an adjustment is required to preserve,  or to
prevent  enlargement of, the benefits or potential benefits made available under
the Directors Plan, the Board of Directors may make equitable adjustments in any
or all of (i) the number and kind of shares which  thereafter  may be awarded or
optioned and sold under the Directors  Plan, (ii) the number and kinds of shares
subject  to  outstanding  stock  options  and share  awards and (iii) the grant,
exercise or conversion price with respect to any of the foregoing. Additionally,
the Board may make  provisions  for a cash payment to a Participant  or a person
who has an outstanding stock option or share award.

                  Federal Income Tax Consequences.  Under current federal income
tax laws and regulations and judicial interpretations thereof, which are subject
to change at any time, the grant of a stock option under the Directors Plan will
create no tax consequences for the participant or the Company.  On exercise of a
non-qualified  stock option, a Participant must recognize  ordinary income in an
amount equal to the  difference  between the exercise  price and the fair market
value of the stock on the exercise  date. At such time, the Company will receive
a deduction for the same amount (assuming the applicable requirements of Section
162(m) of the Code have been met).

                  With respect to share  awards,  a Participant  must  recognize
ordinary  income in an amount  equal to the cash or the fair market value of the
shares of the Common Stock received,  when received.  The Company will receive a
deduction  for the  same  amount,  provided  that,  at the time  the  income  is
recognized,  a  Participant  either is not a covered  employee  or does not have
total  compensation  in excess of $1,000,000 for the year of recognition  (other
than compensation that otherwise meets the requirements of Section 162(m) of the
Code).  The tax treatment on disposition of shares  acquired under the Directors
Plan will depend on how long the shares have been held.

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

                  The  Board  of  Directors  believes  that  it is in  the  best
interests  of the  Company  and its  shareholders  that  the  Directors  Plan be
approved. The Board of Directors believes that the future success of the Company
will in large  part  depend on its  ability  to  attract,  retain  and  motivate
directors through,  among other things,  such incentive  compensation  programs.
Accordingly,  the  Board of  Directors  has  adopted,  and  recommends  that the
shareholders approve, the Directors Plan.
<PAGE>
                                                                     Exhibit 21
SUBSIDIARIES OF THE REGISTRANT

The only  subsidiary of the  registrant is Forstmann  Apparel,  Inc., a New York
corporation.