EXHIBIT 13

<TABLE>
<CAPTION>

FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations

Years ended November 3, 1995,  November 4, 1994 and November 5, 1993 
(Thousands of dollars except per share data)

                                                                  1995                   1994                 1993
                                                        ----------------------      ---------------       -------------
<S>                                                     <C>                              <C>                 <C>   
Net sales                                               $             240,797              242,775             180,114
Cost of sales                                                         185,822              172,300             127,020
                                                        ----------------------      ---------------       -------------

       Gross profit                                                    54,975               70,475              53,094

Selling, general and administrative expenses                           68,002               58,294              47,372
Factory conversion expenses                                                 -                    -               4,000
                                                        ----------------------      ---------------       -------------
       Operating income (loss)                                       (13,027)               12,181               1,722

Other income (expense):
       Interest expense                                               (4,627)              (2,479)             (2,175)
       Interest income                                                    901                  723                 723
       Foreign currency transaction gains (losses)                        512                  449               (151)
       Gain (loss) on sale of assets                                      756                  (6)                 320
       Other, net                                                         209                  237                 (3)
                                                        ----------------------      ---------------       -------------
                                                                      (2,249)              (1,076)             (1,286)
                                                        ----------------------      ---------------       -------------

Income (loss) before income taxes                                    (15,276)               11,105                 436

Income tax provision (benefit)                                        (2,335)                  300                 304
                                                        ----------------------      ---------------       -------------

Net income (loss)                                       $            (12,941)               10,805                 132
                                                        ======================      ===============       =============

Net income (loss) per share                             $              (1.28)                  1.16                 .02      
                                                        ======================      ===============       =============

Weighted average shares of common stock
     (all periods) and common stock equivalents
     (income periods only) outstanding                             10,122,308           9,321,761            7,781,193 
                                                        ======================      ===============       =============

<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>



<PAGE>




<TABLE>
<CAPTION>

FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets

November 3, 1995 and November 4, 1994 (Thousands of dollars)

                                                                          1995             1994
                                                                    --------------      -----------
<S>                                                                 <C>                    <C>  
ASSETS
Current assets:
     Cash                                                           $       3,657            2,372
     Trade receivables, net of allowance
         of $720 in 1995 and $662 in 1994                                  39,824           36,931
     Inventories:
          Raw materials                                                    13,391           11,847
          Work in process                                                  14,429           16,949
          Finished goods                                                   44,943           46,628
                                                                    --------------      -----------
                 Total inventories                                         72,763           75,424
     Other current assets                                                  11,667            9,192
                                                                    --------------      -----------

                 Total current assets                                     127,911          123,919

Note receivable                                                             5,600            5,910
Property, plant and equipment, net                                         33,363           22,872
Other non-current assets                                                    6,953            5,350
                                                                    --------------      -----------
                                                                    $     173,827          158,051
                                                                    ==============      ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Short-term debt                                                $      44,779           18,184
     Current installments of long-term debt                                 2,407              874
     Trade payables                                                        17,644           22,306
     Accrued compensation                                                   3,900            5,178
     Other current liabilities                                             10,173            9,993
                                                                    --------------      -----------

                  Total current liabilities                                78,903           56,535

Long-term debt, excluding current installments                             12,568            5,170
Other non-current liabilities                                               3,136            3,103

Commitments and contingencies (Note 8)
Deferred gain on sale of building                                           5,250            7,282

Shareholders' equity:
     Common stock, no par value, $.01 stated
          value, 20,000,000 shares authorized; issued
          10,181,601 in 1995 and 10,116,616 in 1994                        46,024           46,018
     Additional paid-in capital                                            29,425           28,497
     Cumulative foreign currency
          translation adjustment                                          (1,295)          (1,066)
     Minimum pension liability adjustment                                 (1,635)          (1,880)
     Retained earnings                                                      1,560           14,501
                                                                    --------------      -----------
                                                                           74,079           86,070

     Less: Treasury stock, 36,275 shares, at cost                             109              109
                                                                    --------------      -----------
                 Total shareholders' equity                                73,970           85,961
                                                                    --------------      -----------
                                                                    $     173,827          158,051
                                                                    ==============      ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>


<PAGE>


<TABLE>
<CAPTION>
Part 1 of Shareholder Equity Table

FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity

Years ended November 3, 1995, November 4, 1994 and November 5, 1993
(Thousands of dollars except share data)                                                  Cumulative
                                                                                           Foreign
                                                                        Additional         Currency
                                                Common Stock             Paid-in         Translation
                                   --------------------------------
                                      Shares             Amount          Capital          Adjustment
                                   --------------     -------------    ---------------   -------------
<S>                                   <C>             <C>               <C>                <C>  
Balance, November 6, 1992              7,921,917      $     31,688      $    20,265        $  (1,892)
     Net income                                -                 -                -                 -
     Foreign currency translation
          adjustment                           -                 -                -             (589)
     Minimum pension liability                 
          adjustment                           -                 -                -                 -
     Exercise of stock options
          and other                       85,983               509               24                 -
     Sale of treasury stock                    -                 -          (8,117)                 -
     Reclassification upon change
          to no par common stock               -            12,172         (12,172)                 -
                                   --------------     -------------    -------------     -------------

Balance, November 5, 1993              8,007,900            44,369                -           (2,481)
     Net income                                -                 -                -                 -
     Foreign currency translation
         adjustment                            -                 -                -             1,415
     Minimum pension liability
         adjustment                            -                 -                -                 -
     Exercise of stock options
         and other                       318,716             1,631              532                 -
     Sale of common stock              1,790,000                18           27,172                 -
     Tax effect of employee gains
          on exercise of stock 
          options                              -                 -              793                 -
                                   --------------     -------------    -------------     -------------

Balance, November 4, 1994             10,116,616            46,018           28,497           (1,066)
     Net loss                                  -                 -                -                 -
     Foreign currency translation
         adjustment                            -                 -                -             (229)
     Minimum pension liability                                    
         adjustment                            -                 -                -                 -
     Exercise of stock options                                                                      -
          and other                       64,985                 6              928                 -
                                   --------------     -------------    -------------     -------------

Balance, November 3, 1995             10,181,601       $    46,024      $    29,425       $   (1,295)
                                   ==============     =============    =============     =============
</TABLE>


<PAGE>


<TABLE>
<CAPTION>
Part 2 of Shareholders' Equity Table

FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity

Years ended November 3, 1995,  November 4, 1994 and November 5, 1993  
(Thousands of dollars except share data)

                                     Minimum
                                     Pension
                                    Liability        Retained                 Treasury Stock
                                                                   -----------------------------
                                   Adjustment        Earnings        Shares           Amount
                                   ------------    ------------    -----------     -------------
<S>                                  <C>             <C>             <C>            <C>    
Balance, November 6, 1992            $   (524)       $   3,564        655,275       $    14,091

     Net income                              -             132              -                 -
     Foreign currency translation
          adjustment                         -               -              -                 -
     Minimum pension liability                               -              -                 -
          adjustment                   (1,526)               -              -                 -
     Exercise of stock options
          and other                          -               -              -                 -
     Sale of treasury stock                  -               -      (619,000)          (13,982)
     Reclassification upon change
          to no par common stock             -               -              -                 -
                                   ------------    ------------    -----------     -------------

Balance, November 5, 1993              (2,050)           3,696         36,275               109
     Net income                              -          10,805              -                 -
     Foreign currency translation
         adjustment                          -               -              -                 -
     Minimum pension liability
         adjustment                        170               -              -                 -
     Exercise of stock options               
         and other                           -               -              -                 -
     Sale of common stock                    -               -              -                 -
     Tax effect of employee gains
          on exercise of stock options       -               -              -                 -
                                   ------------    ------------    -----------     -------------

Balance, November 4, 1994              (1,880)          14,501         36,275               109
     Net loss                                -        (12,941)              -                 -
     Foreign currency translation
         adjustment                          -               -              -                 -
     Minimum pension liability                                       
         adjustment                        245               -              -                 -
     Exercise of stock options                                                            
         and other                           -               -              -                 -
                                   ------------    ------------    -----------     -------------

Balance, November 3, 1995           $  (1,635)      $    1,560         36,275               109
                                   ============    ============    ===========     =============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows

Years ended November 3, 1995,  November 4, 1994 and November 5, 1993  
(Thousands of dollars)
                                                                          1995            1994           1993
                                                                  -----------------    -----------    -----------
<S>                                                                <C>                   <C>            <C>                  
Cash flows from (used in) operating activities:
     Net income (loss)                                             $      (12,941)         10,805            132
     Adjustments to reconcile net income (loss)
        to net cash from (used in)
        operating activities:
           Depreciation and amortization                                     4,020          2,966          2,686
           Amortization of deferred gain
                on building sale                                           (2,032)        (2,032)        (2,032)
           Deferred income taxes                                           (1,934)        (2,322)              -
           Gain on sale of assets                                            (756)              6          (320)

     Decrease (increase) in:
           Trade receivables, net                                          (2,893)        (4,473)        (7,258)
           Inventories                                                       2,661       (21,030)       (13,883)
           Other current assets                                            (1,016)        (1,840)          (797)
     Increase (decrease) in:
           Trade payables                                                  (4,662)          1,982          5,736
           Other                                                           (1,098)          5,158          (294)
                                                                  -----------------    -----------    -----------
                 Net cash used in operating activities                    (20,651)       (10,780)       (16,030)
                                                                  -----------------    -----------    -----------

Cash flows from (used in) investing activities:
     Purchases of property, plant and equipment                           (11,756)        (8,822)        (5,951)
     Proceeds from disposition of property, plant
           and equipment                                                     1,785             36            436
                                                                  -----------------    -----------    -----------
                 Net cash used in investing activities                     (9,971)        (8,786)        (5,515)
                                                                  -----------------    -----------    -----------

Cash flows from (used in) financing activities:
     Net increase (decrease) in short-term debt                             26,771        (7,791)         15,673
     Proceeds from issuance of long-term debt                                6,426          1,058            604
     Repayment of long-term debt                                           (1,284)        (3,650)          (487)
     Proceeds from sale of common stock                                        934         29,352          5,881
     Other                                                                   (711)          (453)            836
                                                                  -----------------    -----------    -----------
                 Net cash from financing activities                         32,136         18,516         22,507
                                                                  -----------------    -----------    -----------

Foreign currency translation adjustment                                      (229)          1,415          (589)
                                                                  -----------------    -----------    -----------

Net increase in cash                                                         1,285            365            373
Cash, beginning of year                                                      2,372          2,007          1,634
                                                                  -----------------    -----------    -----------
Cash, end of year                                                  $         3,657          2,372          2,007
                                                                  =================    ===========    ===========

Supplemental cash flow disclosures:
    Interest paid                                                  $         4,116          2,416          3,636
    Income taxes paid                                                        1,625            457            878
    Assets acquired through direct financing
        loans or capital leases                                              3,923          3,243            852
    Exchange of debentures                                                       -          1,673              -
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>

FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 3, 1995, November 4, 1994 and November 5, 1993


1.  Summary of Significant Accounting Policies

NATURE OF OPERATIONS

         Farah Incorporated is a multinational apparel marketer and manufacturer
headquartered in the United States. The company's principal business is the sale
of men's and boys' pants and coats.  The  principal  markets  for the  company's
products  are  retail  customers  in the  United  States,  Europe  and the South
Pacific.

PRINCIPLES OF PRESENTATION

         The  consolidated  financial  statements  include the accounts of Farah
Incorporated (the "Parent  Company") and its subsidiaries  (the "Company").  All
significant  intercompany  transactions  have been eliminated in  consolidation.
Certain  prior year  amounts  have been  reclassified  to conform  with the 1995
presentation. The Parent Company's assets consist of investments in and advances
to  subsidiaries.  The Parent  Company does not have any  significant  amount of
separate  debt,  credit  facilities  or other  liabilities,  except for the 8.5%
convertible subordinated debentures discussed in Note 3.

         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,
including  allowances  for  inventory  markdown  and  valuation  allowances  for
deferred  taxes.  Such estimates and  assumptions  also affect the 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.

INVENTORIES

         Inventories are stated at the lower of first-in,  first-out (FIFO) cost
or market and include  purchased  materials,  manufacturing  labor and overhead.
Market is based upon estimated selling price less costs to sell.

PROPERTY, PLANT AND EQUIPMENT

         Property,  plant and  equipment are recorded at cost.  Depreciation  is
provided by the straight-line method over the estimated useful lives (Note 2) of
the related classes of assets.

         Maintenance  and  repairs  are  charged  to expense  as  incurred,  and
renewals and betterments are capitalized.  The cost and accumulated depreciation
of assets  retired or  otherwise  disposed are removed  from the  accounts,  and
generally the resulting  gains and losses are included in  operations.  Gains on
assets sold and leased back are  recognized  over the initial lease term, net of
any obligations required by the lease agreements.
See Note 8 for further discussion.

INTANGIBLE ASSETS

         At  November  3, 1995 and  November  4, 1994,  intangible  assets  were
$1,508,000 and $1,550,000,  respectively,  and consisted  primarily of goodwill,
trademarks and other intangible assets.  Most intangible assets are amortized on
a  straight-line  basis over their  estimated  useful lives ranging from 2 to 30
years. Amortization approximated $283,000 in 1995, $260,000 in 1994 and $200,000
in 1993.

REVENUE RECOGNITION

         Revenues are recognized upon shipment of product.


<PAGE>


FOREIGN CURRENCIES

         The Company translates its asset and liability accounts  denominated in
foreign  currencies  at the  exchange  rate in effect  at the end of the  fiscal
period.  Income and expense  accounts are translated at average  rates.  Foreign
currency "translation" gains and losses are not included in operations,  but are
reflected  as a  separate  item  in  the  shareholders'  equity  section  of the
Consolidated Balance Sheets. Foreign currency "transaction" gains and losses are
included in the Consolidated Statements of Operations.

INCOME TAXES

         Deferred  income taxes reflect the tax effect of temporary  differences
between the amount of assets and liabilities  recognized for financial reporting
and tax purposes and are measured by applying  currently  enacted tax laws.  The
effect on deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

INCOME (LOSS) PER SHARE

         Income  per  share in 1994 and  1993 is based on the  weighted  average
number of shares and common stock  equivalents  outstanding.  Stock  options are
included as common stock  equivalents  under the treasury  stock  method,  where
dilutive.  Additional dilution from the 8.5% convertible subordinated debentures
(Note 3),  which are not common stock  equivalents,  is not  material.  Loss per
share in 1995 is based on the weighted average number of shares outstanding.

FACTORY CONVERSION EXPENSES

         In response to the success of the Company's  Savane(R)  casual  product
line,  the Company  embarked on a program to convert large portions of its Costa
Rican and Mexican  factories  from dress to casual in the third quarter of 1993.
Such conversion  required the  rearrangement,  modification or re-engineering of
certain  existing  equipment,  as well  as the  installation  of new  equipment.
Certain  other  costs were also  incurred as a result of the  conversion.  These
included testing and setup of equipment,  retraining costs for employees,  labor
costs  associated  with  local  statutes,   additional  U.S.  import  duties  on
temporarily  higher  costs and  additional  costs  resulting  from  customs  and
practices in the countries where the Company  operates.  Total costs  associated
with the factory  conversion  were  approximately  $4,000,000 and such amount is
reported  in the  caption  "Factory  Conversion  Expenses"  in the  Consolidated
Statements of Operations.

<PAGE>


2.  Property, Plant and Equipment

<TABLE>
<CAPTION>
Property, plant and equipment is comprised of the following:

                                                 Estimated useful        Thousands of dollars
                                                                      ---------------------------
                                                   lives (years)          1995          1994
                                                 -------------------  -------------  ------------

       <S>                                             <C>            <C>                 <C>   
       Factory machinery and equipment                  9-12          $     34,463        25,507
       Buildings                                       20-50                 6,376         3,552
       Building improvements                            3-20                 5,720         4,448
       Other fixtures and equipment                     3-20                14,386        12,706
       Land                                                                    395           528
       Construction in progress                                              1,248         4,609
                                                                      -------------  ------------
              Total property, plant and equipment                           62,588        51,350
       Less accumulated depreciation                                        29,225        28,478
                                                                      -------------  ------------
               Net property, plant and equipment                      $     33,363        22,872
                                                                      =============  ============

</TABLE>

         In  October  1995,  the  Company  sold a  building,  land  and  factory
equipment  located in San Jose,  Costa Rica. Total net proceeds were $2,130,000,
including a receivable of approximately  $544,000. The transaction resulted in a
gain of approximately $986,000 of which approximately $750,000 was recognized in
1995.

         Depreciation  expense  approximated  $3,737,000 in 1995,  $2,706,000 in
1994 and $2,486,000 in 1993.

         In March 1995,  Statement of Financial  Accounting  Standards  No. 121,
"Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed  of", was issued.  Adoption is required  for fiscal years  beginning
after  December 15, 1995. The Company does not believe that the adoption of this
statement will have a significant impact on the Company.

3.  Debt and Liquidity

SHORT-TERM DEBT

         The Company's  primary Credit  Agreement  provides up to $50,000,000 of
credit through July 1, 1997, for the Company's  United States and United Kingdom
operations for either  borrowings or letters of credit.  Availability  under the
Credit  Agreement is limited by formulas  derived from accounts  receivable  and
inventory.  The Credit Agreement is secured by substantially all assets of Farah
U.S.A.,  Farah U.K.  Limited and Value  Slacks and is  guaranteed  by its parent
company and each of Farah  U.S.A.'s  domestic  affiliates.  Such  guarantees are
secured  by  substantially  all of the  assets of the  related  affiliates.  The
interest rate is prime (8 3/4% at November 3, 1995) plus 1% for  borrowings  and
1/6% per month for  letters of  credit.  An unused  credit  line fee of 1/2% per
annum is  charged on the unused  portion  of the line when  borrowings  decrease
below $17,500,000.  As of November 3, 1995, usage under the Credit Agreement was
$44,774,000  (including  letters of credit of $1,000,000)  and the excess credit
line available was $5,226,000. The Credit Agreement restricts certain additional
indebtedness and requires the maintenance of minimum tangible net worth, minimum
working  capital and maximum  capital  expenditures.  As of November 3, 1995 the
Company was in compliance with all covenants. The Credit Agreement prohibits the
payment  of  dividends  by the  Company,  and  except  for debt  service  of the
Company's  8.5%  convertible  subordinated  debentures,   the  Credit  Agreement
restricts the subsidiaries from transferring substantially all net assets to the
Parent Company through intercompany loans, advances or dividends.


<PAGE>
<TABLE>
<CAPTION>

         The  following  table  reflects  short-term  debt balances and interest
rates in 1995, 1994 and 1993:


                                                    Thousands of dollars
                                            ------------------------------------
                                               1995         1994        1993
                                            -----------   ----------  ----------
         <S>                                 <C>             <C>         <C>
         
         Average outstanding balance         $  36,842       23,268      22,868
         Maximum month-end
              balance outstanding               47,338       39,995      25,680
         Weighted average interest rate:
              During year                         9.7%         9.0%        8.7%
              Year-end                            9.8%         8.7%        8.3%
</TABLE>

LONG-TERM DEBT


         In 1995, the Company  entered into a capital lease to acquire  laundry,
finishing,  sewing and cutting  equipment  in Mexico,  Costa Rica and the United
States.  As of November 3, 1995, the  outstanding  lease balance was $7,757,000.
The lease  bears  interest  at LIBOR (5 7/8% at  November 3, 1995) plus 3 3/16%.
Scheduled  lease payments are due in 20 quarterly  installments,  with the first
payment due December 1, 1995. The lease  contains  certain  financial  covenants
including  minimum current ratio,  tangible net worth,  debt to net worth,  cash
flow and  capital  expenditures.  In  addition,  the lease  contains an earnings
before  interest and taxes (EBIT)  covenant  calling for minimum EBIT in 1996 of
$200,000 in the first quarter,  $1,100,000 in the second quarter,  $1,900,000 in
the third quarter and $2,000,000 in the fourth quarter.  The lease also requires
the Company to maintain certain levels of liquidity. As of November 3, 1995, the
Company was in compliance with all covenants.

         Both the lease and the Credit Agreement contain  provisions which allow
a default under either agreement to cause a default of both agreements.

<TABLE>
<CAPTION>
         Long-term debt at year-end is as follows:
                                                   Thousands of dollars
                                                -------------------------
                                                    1995          1994
                                                ------------   ----------

<S>                                               <C>                <C>    
Capital lease, secured by fixed assets,
  bearing interest at LIBOR plus 3 3/16%,
  due in 20 quarterly installments, with 
  a 15% balloon payment in 2000                   $  7,757              -

8.5% convertible subordinated debentures 
  due February 1, 2004, convertible into 
  the Company's common stock at $15.2375
  per share                                          1,663           1,663

Secured loan for aircraft purchase bearing 
  interest at 8.4%, fixed through June 22, 
  1998, then at prime plus 1% through
  June 2004, due in monthly installments             1,317           1,469

Various notes, secured by fixed assets,  
  bearing interest at rates ranging from
  7.25% to 10.77%, due in monthly
  installments through 2005                            548             395

Various obligations under other capital 
  leases                                             3,690           2,517
                                               ------------      ----------
      Total long-term debt                          14,975           6,044
      Less current installments                      2,407             874
                                               ------------      ----------
          Net long-term debt                    $   12,568           5,170
                                               ============      ==========
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

Installments of long-term debt and capital lease obligations mature as follows:

                               Thousands of Dollars
                         ---------------------------------
                           Long-term       Capital Lease
                              Debt          Obligations
                         --------------   ----------------
<S>                        <C>                  <C> 
                 1996      $    304              3,111
                 1997           228              3,033
                 1998           212              2,981
                 1999           206              2,189
                 2000           196              3,020
      2001 and beyond         2,382                  -
                        --------------   ----------------
                              3,528             14,334
Less interest portion             -              2,887
                        ==============   ================
                           $  3,528             11,447
                        ==============   ================
</TABLE>
         The Company  believes that its borrowing  availability  from its Credit
Agreement and its  projected  cash from  operations  will be adequate for fiscal
1996 anticipated liquidity requirements.  In the event that liquidity shortfalls
occur due to the  continuing  impact of  softness  at retail,  unforeseen  sales
shortfalls  or  other  reasons,  it may be  necessary  for the  Company  to seek
alternative  sources of financing.  This may be in the form of additional  debt,
equity or a combination thereof.






<PAGE>


4.  Shareholders' Equity

         In 1994, the Company  completed the offering of 2,990,000 shares of its
common  stock at a price of $16.375  per  share.  Of the total  shares  offered,
1,790,000  shares were sold by the Company with the remaining  1,200,000  shares
sold by Marciano  Investments,  Inc. and affiliates  ("Marciano").  Marciano had
originally  purchased  the  shares in 1992.  Net  proceeds  from the sale to the
Company  were  approximately  $27,200,000,   of  which  substantially  all  were
allocated to additional paid-in capital.

         In 1993, the Company's  shareholders approved a change in the par value
of the Company's common stock from $4.00 per share to no par value. As a result,
the Company's  additional paid-in capital account was reclassified to the common
stock account  during the second  quarter of 1993.  In addition,  during 1994, a
resolution  was adopted by the Company  making the stated value of the Company's
common  stock $.01 per share.  Proceeds in excess of the stated value for equity
transactions are allocated to additional paid-in capital.

5.  Employee, Executive and Director Stock Options and Awards

         The Company  has granted  options to certain  employees  and  directors
pursuant to employee and nonemployee director stock option plans to purchase the
Company's  common stock at amounts not less than the market price on the date of
the grant.

         During 1994 and 1993, 104,000 and 80,000 shares,  respectively,  of the
Company's common stock were awarded to certain  officers and directors  pursuant
to the stock  option and  restricted  stock plan.  The awards vest over  varying
periods  ending in 1998,  of which 62,666 shares vested and were issued in 1995,
46,169  shares  vested and were issued in 1994 and 12,500 shares vested and were
issued in 1993. The Company  recognizes the expense related to these awards over
the period of service called for by the vesting provision of the awards.
<TABLE>
<CAPTION>
         The following table summarizes activity for such options and awards for
the years ended November 3, 1995, November 4, 1994 and November 5, 1993:
                                                                                Options and Awards
                                                                                      Outstanding
                                                                       -------------------------------
                                                          Shares
                                                         Available
                                                         for Grant       Shares      Price Per Share
                                                        ------------   ------------  -----------------
             <S>                                          <C>            <C>            <C> 
             BALANCE, NOVEMBER 6, 1992                      172,002        581,844      $ 4.00 - 10.00
                  New shares authorized                      75,000              -
                  Granted                                 (187,000)        187,000           0 - 10.00
                  Exercised                                       -       (85,983)           0 - 10.00
                  Cancelled or terminated                    42,500       (44,924)        6.00 - 10.00
                                                       ------------   ------------

             BALANCE, NOVEMBER 5, 1993                      102,502        637,937           0 - 10.00
                  New shares authorized                     350,000              -
                  Granted                                 (296,500)        296,500           0 - 21.375
                  Exercised                                       -      (330,121)        4.00 - 10.00
                                                        ------------   ------------

             BALANCE NOVEMBER 4, 1994                       156,002        604,316           0 - 21.375
                  Granted                                  (16,000)         16,000       8.375 - 8.625
                  Exercised                                       -       (88,180)        4.00 - 7.50
                  Cancelled or terminated                    13,634       (13,834)        4.00 - 16.50
                                                        ------------   ------------
             BALANCE NOVEMBER 3, 1995                       153,636        518,302       $   0 - 21.375
                                                        ============   ============
<FN>
Included  above are 455,637  options  expiring 10 years after the date of grant.
Total options exercisable at November 3, 1995 were 448,637.
</FN>
</TABLE>
         In October 1995,  Statement of Financial  Accounting Standards No. 123,
"Accounting  for   Stock-Based   Compensation,"   was  issued.   The  disclosure
requirements of this statement are effective for financial statements for fiscal
years beginning after December 15, 1995. The Company intends to elect the option
allowing it to continue to apply the  accounting  provisions  of APB Opinion 25,
"Accounting for Stock Issued to Employees." With the Company's plan of adoption,
the impact will be limited to additional footnote disclosure.


<PAGE>
6.   Income Taxes
<TABLE>
<CAPTION>

         The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at November 3, 1995 and November 4, 1994 are
as follows:

                                                Thousands of dollars
                                                 1995          1994
                                              -----------   ------------
  <S>                                         <C>               <C> 
  DEFERRED TAX ASSETS:
     U.S. federal NOL carryforwards           $    4,477              -
     Foreign NOL carryforwards                       871            921
     Deferred gain                                 1,785          2,476
     Foreign tax credit carryforwards              1,897          1,740
     Other accrued expenses                        3,644          2,076
     Other prepaid assets                            276            461
                                              -----------   ------------
         Total deferred tax assets                12,950          7,674
                                              -----------   ------------
  DEFERRED TAX LIABILITIES:
     Tax in excess of financial statement
        depreciation and amortization              1,682            913
     Other accrued expenses                          490            331
                                              -----------   ------------
         Total deferred tax liabilities            2,172          1,244
                                              -----------   ------------

     Net deferred tax asset                       10,778          6,430
     Valuation allowance                         (6,576)        (4,108)
                                              -----------   ------------
        Deferred income tax asset, net             4,202          2,322
        Less current portion                     (1,747)          (886)
                                              -----------   ------------
        Long-term deferred income tax 
           asset, net                         $    2,455          1,436
                                              ===========   ============
</TABLE>
         As of November 3, 1995,  the  Company's  deferred tax assets  increased
primarily  due to the  Company's  net  operating  loss.  The Company  expects to
utilize a portion of this loss to generate a refund of approximately $1,056,000.
The future tax benefit of the  cumulative net operating loss is $4,477,000 as of
November 3, 1995.

         Pursuant to the  requirements  of  Statement  of  Financial  Accounting
Standards No. 109, "Accounting for Incomes Taxes," a valuation allowance must be
provided  when the deferred  income tax asset may not be  realized.  The Company
provided a valuation allowance against the entire November 5, 1993, net deferred
income tax asset. At November 3, 1995, the Company expects to realize future tax
benefits of approximately $4,200,000 related to net operating loss carryforwards
which can be used to  offset  future  earnings  within  the next 15  years.  The
changes in the valuation allowance for 1995 and 1994 are as follows:
<TABLE>

                                                                  Thousands of dollars
                                                                  --------- ---- ----------
                                                                     1995           1994
                                                                  ---------      ----------
<S>                                                               <C>              <C>
Increase (decrease) in valuation allowance of:
  NOL carryforwards and changes in temporary differences          $  4,348         (2,150)
  Change in estimate of realization of deferred income taxes       (1,880)         (2,322)
                                                                  ---------      ----------
                Increase (decrease) in valuation allowance        $  2,468         (4,472)
                                                                  ---------      ----------
                                                                 
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Income (loss)  before taxes and incomes  taxes in 1995,  1994 and 1993 are shown
below:

                                                                     Thousands of dollars
                                                       --------------- -- ------------- -- --------------
                                                             1995              1994             1993
                                                       ---------------    -------------    --------------
<S>                                                    <C>                     <C>               <C> 
INCOME (LOSS) BEFORE INCOME TAXES:
    Domestic operations                                $     (16,728)            9,415           (1,682)
    Foreign operations                                          1,452            1,690             2,118
                                                       ---------------    -------------    --------------
                 Total Consolidated                    $     (15,276)           11,105               436
                                                       ---------------    -------------    --------------

INCOME TAX PROVISION:
    Domestic operations
         Current                                       $      (1,087)           2,194                  -
         Deferred                                             (1,934)          (2,322)                 -
                                                       ---------------    -------------    --------------
             Total Domestic                                   (3,021)            (128)                 -

    Foreign operations
         Current                                                  686              428               304
         Deferred                                                   -                -                 -
                                                       ---------------    -------------    --------------
              Total Foreign                                       686              428               304
                                                       ---------------    -------------    --------------
                 Total Consolidated                    $      (2,335)              300               304
                                                       ---------------    -------------    -------------

The effective tax rate differs from the statutory U.S. federal tax rate as summarized below:

                                                                      Thousands of dollars
                                                       --------------- -- ------------- -- --------------
                                                            1995              1994             1993
                                                       ---------------    -------------    --------------

Expected income taxes at U.S. statutory rate           $      (5,194)            3,776               148
     Effect of differing tax rates in foreign                     
          countries                                                46              160                79
     Unrecognized deferred tax benefits                         2,633                -                 -
     U.S. taxes on dividends from foreign countries                93              143             1,100
     Recognition of previously unrecognized
         deferred tax benefits                                      -          (4,257)             (981)
     Other                                                         87              478              (42)
                                                       ---------------   --------------    --------------
Income taxes, as reported                              $      (2,335)              300               304
                                                       ---------------   --------------    --------------
</TABLE>

         At November 3, 1995, the Company's  foreign  subsidiaries have deferred
tax  assets  of  $871,000  due to net  operating  loss  carryforwards  that  are
available to offset future foreign taxable income. In addition,  the Company has
$1,897,000  of domestic tax credit  carryforwards  that are  available to offset
foreign income that could be taxable for U.S. purposes.  These credits expire in
1996 through 2000 if not used, with $1,436,000 due to expire in 1996.

         Certain  of  the  Company's  foreign  subsidiaries  have  undistributed
earnings of approximately $23,175,000 for U.S. tax purposes at November 3, 1995.
No U.S. tax has been provided on the undistributed  earnings because  management
intends to indefinitely  reinvest such earnings in the foreign  operations.  The
amount of the  unrecognized  deferred  tax  liability  for  these  undistributed
earnings is  approximately  $7,880,000 at November 3, 1995. If foreign  earnings
are  repatriated,  a limited  credit for foreign taxes paid may be taken against
the U.S. taxes on the repatriated earnings.

<PAGE>


7.  Employee Benefit Plans

         The Company has two retirement  plans: (1) a defined  contribution plan
established pursuant to Section 401(k) of the Internal Revenue Code which covers
all  non-union  U.S.  employees,  and (2) a defined  benefit  plan which  covers
substantially all bargaining unit employees and retirees.

         Under the defined  contribution  plan, each  participant may contribute
from 1% to 15% of his/her compensation.  The Company matches contributions up to
3% of the  participant's  compensation.  In 1995,  1994 and 1993,  the Company's
contribution  to the plan was  approximately  $444,000,  $413,000 and  $334,000,
respectively.

         Under the defined  benefit plan, the basic monthly pension payable to a
participant  upon  normal  retirement  equals the  product of the  participant's
deferred  monthly  retirement  income  times  the  number  of years of  credited
service.  Assets of the defined  benefit  plan are  invested  primarily  in U.S.
government obligations, corporate bonds and equity securities.

         The  Company's  policy is to fund accrued  pension cost when such costs
are deductible for tax purposes.  Net periodic  pension cost for the years ended
November 3, 1995,  November 4, 1994 and November 5, 1993, included the following
components:
<TABLE>
                                                                   Thousands of dollars
                                                        --------------------------------------------
                                                           1995            1994            1993
                                                        ------------    ------------   -------------
<S>                                                      <C>                  <C>             <C>    
Service cost-benefits earned during the period           $       47              50              35
Interest cost on projected benefit obligation                   577             528             511
Actual return on plan assets                                (1,514)           (286)           (381)
Net amortization and deferral                                 1,165            (35)            (39)
                                                        ------------    ------------   -------------
      Net periodic pension cost                          $      275             257             126
                                                        ============    ============   =============
</TABLE>

     The  following  table sets forth the funded  status at November 3, 1995 and
November 4, 1994, of the defined benefit plan:
<TABLE>

                                                                                Thousands of dollars
                                                                           ----------------------------
                                                                               1995           1994
                                                                           -------------  -------------
<S>                                                                        <C>                 <C>    
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION:
Vested benefit obligation                                                  $    (7,801)        (6,941)
Nonvested benefit obligation                                                      (150)          (102)
                                                                           -------------  -------------
      Accumulated benefit obligation                                       $    (7,951)        (7,043)
                                                                           -------------  -------------

Projected benefit obligation                                               $    (7,951)        (7,043)
Plan assets at market value                                                       6,888          5,284
                                                                           -------------  -------------
       Projected benefit obligation in excess of plan assets                    (1,063)        (1,759)
Unrecognized transition liability being recognized over
    average future service of plan participants                                     468            534
Unrecognized net loss from past experience different from
    that assumed and effects of changes in assumptions                            1,635          1,880
Adjustment required to recognize minimum liability                              (2,103)        (2,414)
                                                                           -------------  -------------

       Accrued pension expense                                             $    (1,063)        (1,759)
                                                                           =============  =============
</TABLE>

         In  determining  the  benefit  obligations  and  service  cost  of  the
Company's defined benefit plan, weighted average discount rates of 7.5% and 8.5%
were used in 1995 and 1994, respectively.  The expected long-term rate of return
on plan assets was 9.5% in both years.


<PAGE>


         Statements  of  Financial  Accounting  Standards  No. 106,  "Employer's
Accounting  for  Post-retirement  Benefits  and Other  Pensions,"  and No.  112,
"Employer's  Accounting  for Post  Employment  Benefits,"  were  required  to be
adopted in fiscal 1993 and 1994,  respectively.  The Company  generally does not
offer any post-retirement or post-employment benefits, and therefore, the effect
of adopting these statements had no impact on the Company.

8.  Commitments and Contingencies

         During 1988,  the Company  consummated a sale and leaseback of its main
El Paso,  Texas,  manufacturing  and office facility.  A portion of the sale was
paid by delivery of a $7,500,000  promissory  note to the Company,  secured by a
second mortgage on the property.  The balance of the note receivable at November
3, 1995 and November 4, 1994, was $5,910,000 and $6,193,000,  respectively.  The
promissory  note bears interest at 9.25% with principal and interest  payable in
monthly  installments  through  February 2007. In connection  with the sale, the
Company entered into a 10 year operating lease of the facility.  The Company has
pledged a  $2,500,000  certificate  of deposit as  security  for this  lease.  A
deferred  gain was  recognized on the sale,  of which  $5,250,000  remains to be
recognized through 1998.

         The Company and its  subsidiaries  occupy  certain  facilities  and use
certain  equipment  under  operating  leases which expire at various  dates from
fiscal 1996 to 2016.  The  following  is a summary by year of the  noncancelable
portion of future minimum lease payments under operating leases:
<TABLE>
                                                        Thousands
                                                           of
                                                         dollars
                                                      -------------
                                     <S>                     <C>

                                                1996    $    8,842
                                                1997         8,408
                                                1998         6,035
                                                1999         2,601
                                                2000         1,251
                                                Later        9,731
                                                years
                                                       ------------
                                     Lease payments*     $  36,868
                                                      =============
</TABLE>

         *Minimum  payments  have not been  reduced by minimum  sublease  rental
         income of $2,655,000 due in the future under noncancelable subleases.

         During 1992, the Company  entered into a 6 1/2 year operating  sublease
agreement for approximately one-half of its El Paso manufacturing  facility. The
following is a summary by year of the  noncancelable  portion of future  minimum
rental income:
                                                       Thousands
                                                       of dollars
                                                      ------------
                                             1996        $  1,028
                                             1997           1,028
                                             1998             599
                                                      ------------
                                            Total        $  2,655
                                                      ============

         Rental  expense for all  operating  leases for 1995,  1994 and 1993 was
$8,659,000,  $7,623,000 and $6,860,000,  respectively (net of sublease income of
approximately $1,015,000 in 1995 and $881,000 in 1994 and 1993).

         At  November  3,  1995,  the  Company  had   commitments   for  capital
expenditures of approximately $551,000.

         Financial   instruments  which   potentially   expose  the  Company  to
concentrations  of credit risk, as defined by Statement of Financial  Accounting
Standards No. 105, consist primarily of trade accounts receivable. The Company's
customers  are  not  concentrated  in any  specific  geographic  region  but are
concentrated  in the  retail  industry.  In 1995,  one  customer  accounted  for
$30,191,000  (12.5%) of the Company's  consolidated  sales, and in 1993, another
customer  accounted for $22,407,000  (12.4%) of consolidated  sales. In 1994, no
one customer  accounted  for more than 10% of  consolidated  sales.  The Company
performs ongoing credit evaluations of its customers' financial  condition.  The
Company  establishes  an  allowance  for  doubtful  accounts  based upon factors
surrounding  the credit risk of specific  customers,  historic  trends and other
information.

         The  Company is  involved in certain  legal  proceedings  in the normal
course of business.  Based on advice of legal counsel,  management believes that
the  outcome  of such  litigation  will  not  materially  affect  the  Company's
consolidated financial position or results of operations.

 9.   Fair Values of Financial Instruments

         The  following  methods  and  assumptions  were used by the  Company in
estimating the fair value  disclosures for its financial  instruments.  For cash
and the  revolving  credit  agreement,  the  carrying  amounts  reported  in the
Consolidated  Balance Sheets approximate fair value. For the note receivable and
other secured  indebtedness,  the interest rates  approximate the current market
rates;  therefore,  the carrying amount  approximates  the fair value.  The fair
value of the  convertible  debentures  was based upon  quoted  market  prices at
November 3, 1995 and November 4, 1994.

         The  carrying  amounts  and  fair  values  of the  Company's  financial
instruments  at  November  3, 1995 and  November  4, 1994,  are as  follows  (in
thousands of dollars):
<TABLE>
                                                        November 3, 1995             November 4, 1994
                                                   ----------- -- ---------      ---------- --- ---------
                                                   Carrying       Fair           Carrying       Fair
                                                     Amount        Value          Amount         Value
                                                   -----------    ---------      ----------     ---------
       <S>                                         <C>              <C>             <C>           <C> 
       Cash                                        $    3,657        3,657           2,372         2,372
       Note Receivable                                  5,600        5,600           5,910         5,910
       Revolving Credit Agreement                      44,774       44,774          18,844        18,844
       Capital Lease                                    7,757        7,757               -             -
       Other Secured Indebtedness                       1,614        1,614           1,864         1,864
       Convertible Debentures                           1,663        1,039           1,663         1,311
</TABLE>
<PAGE>

10.  Geographic Segment Information

         The  Company is engaged in one  business  segment.  This  includes  the
design,  manufacture,  distribution  and sale of  men's,  young  men's and boys'
apparel in the United  States and  certain  foreign  countries,  principally  in
Europe and the South Pacific. The following table presents information regarding
geographic segments for 1995, 1994 and 1993. Transfers between the United States
and foreign areas are recorded at normal  selling  prices.  Operating  profit is
total revenue less operating expenses.  In computing  operating profit,  general
corporate expenses, interest expense and income taxes have been excluded.

<TABLE>

                                                               Thousands of dollars
                                                    -------------------------------------------
                                                       1995            1994           1993
                                                    ------------   -------------   ------------
        <S>                                         <C>                 <C>            <C>   
        NET SALES:
        United States to unaffiliated customers     $   193,274         206,732        151,017
        Transfers between areas                             266             547            480
                                                    ------------   -------------   ------------
                  Total United States                   193,540         207,279        151,497
        Europe                                           32,033          24,119         20,069
        South Pacific                                    15,490          11,924          9,028
        Adjustments and eliminations                      (266)           (547)          (480)
                                                    ------------   -------------   ------------
                  Total                             $   240,797         242,775        180,114
                                                    ============   =============   ============

        OPERATING PROFIT (LOSS):
        United States                               $  (12,489)          12,535          1,274
        Europe                                              385             754            602
        South Pacific                                     1,549           1,418          1,565
        Adjustments and eliminations                          -            (67)           (66)
                                                    ------------   -------------   ------------
                  Total                                (10,555)          14,640          3,375

        Net gain (loss) on sale of assets                   755             (6)            323
        General corporate expenses                      (1,751)         (1,773)        (1,810)
        Interest expense, net                           (3,725)         (1,756)        (1,452)
                                                    ------------   -------------   ------------
              Income (loss) before income taxes     $  (15,276)          11,105            436
                                                    ============   =============   ============

        IDENTIFIABLE ASSETS:
        United States                               $   146,172         132,238         97,811
        Europe                                           17,326          16,342         11,813
        Far East and the South Pacific                   14,357          13,011         11,842
        Adjustments and eliminations                    (4,028)         (3,540)        (2,575)
                                                    ------------   -------------   ------------
                   Total                            $   173,827         158,051        118,891
                                                    ============   =============   ============
</TABLE>

         Approximately  55% and 30% of all product sold in the United  States in
1995 was  assembled  in Mexico and Costa  Rica,  respectively.  Included  in the
Company's consolidated balance sheet at November 3, 1995 were net assets located
in Mexico and Costa Rica totaling  approximately  $17,030,000  and  $12,023,000,
respectively.



<PAGE>


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




TO THE SHAREHOLDERS OF FARAH INCORPORATED:

         We have audited the accompanying  consolidated  balance sheets of Farah
Incorporated (a Texas  corporation) and subsidiaries as of November 3, 1995, and
November  4,  1994,  and the  related  consolidated  statements  of  operations,
shareholders'  equity,  and cash flows for each of the years  ended  November 3,
1995, November 4, 1994, and November 5, 1993. These financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

         In our opinion,  the  financial  statements  referred to above  present
fairly, in all material  respects,  the financial position of Farah Incorporated
and  subsidiaries  as of November 3, 1995, and November 4, 1994, and the results
of their operations and their cash flows for each of the years ended November 3,
1995,  November 4, 1994,  and November 5, 1993,  in  conformity  with  generally
accepted accounting principles.





/s/ Arthur Andersen LLP

ARTHUR ANDERSEN LLP

Dallas, Texas
December 15, 1995



<PAGE>


         Quarterly unaudited information for fiscal 1995 compared to fiscal 1994
is as follows:
<TABLE>
                                                                       Thousands of dollars except share data
                                            ------------------------------------------------------------------------
                                            First            Second Quarter      Third Quarter      Fourth Quarter
                                            Quarter
                                            -------------    ----------------    ---------------    ----------------
<S>                                       <C>                     <C>                <C>                 <C>   
1995
Net sales                                 $       49,949              56,782             60,865              73,201
Gross profit                                      12,811              12,374             13,934              15,856
Net loss                                         (1,255)             (3,832)            (5,115)             (2,739)
Net loss per share                                 (.12)               (.38)              (.50)               (.27)
Weighted average shares of common
      stock outstanding                       10,096,111          10,125,186         10,131,027          10,136,908

1994
Net sales                                 $       51,270              66,170             61,169              64,166
Gross profit                                      15,384              19,468             18,479              17,144
Net income                                         2,011               3,530              3,732               1,532
Net income per share                                0.25                0.41               0.37                0.15
Weighted average shares
      of common stock and
      common stock equivalents
      outstanding                              8,204,472           8,704,973         10,191,141          10,189,305

<FN>
           In the  second  quarter  of 1994,  1,790,000  shares  were sold in an
          offering  by the  Company  (see Note 4 to the  consolidated  financial
          statements for more discussion).
</FN>
</TABLE>

COMMON STOCK

         There were  10,155,568  shares of the Company's  common  stock,  no par
value,  outstanding  as of January 12,  1996,  owned of record by  approximately
2,300  shareholders.  Trading  volume during fiscal 1995 averaged  approximately
38,000 shares per day. The common stock is listed on the New York Stock Exchange
which is its principal U.S. trading market (trading symbol:  FRA). The following
table sets forth the high and low sales  prices for the common  stock on the New
York Stock Exchange for each quarterly period during the last two fiscal years:
<TABLE>

                                                1995                            1994
                                 ---------------------------      ----------------------------
                                     High           Low              High             Low
                                 -------------  ------------      ------------    ------------
         <S>                        <C>               <C>           <C>                <C>
         1st Quarter                $       9         6 5/8         $  14 3/4           8 3/4
         2nd Quarter                    8 5/8         6 7/8            21 7/8          12 5/8
         3rd Quarter                    8 3/8             6            18 1/2          13 3/4
         4th Quarter                    8 1/8         6 1/4            16 1/8           8 1/4

</TABLE>
         The closing sales price of the  Company's  common stock on the New York
Stock Exchange as of January 12, 1996, was $5.00.

         As of  November  3, 1995,  there were  $1,663,000  aggregate  principal
amount of the Company's 8.5% convertible subordinated debentures due February 1,
2004, outstanding, owned of record by 28 holders.

         The Company has not paid any  dividends on its common stock since 1986.
The Company's U.S.  Credit  Agreement  prohibits the payment of dividends by the
Company.


<PAGE>

<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA

                                                                            Thousands of Dollars
                                          --------------------------------------------------------------------------------
                                                  1995             1994            1993          1992           1991
                                          -------------------  --------------  -------------  ------------  --------------
Summary of Operations:
<S>                                       <C>                     <C>             <C>           <C>             <C>   
Net sales                                 $          240,797         242,775        180,114       151,990         151,202
Cost of sales                                        185,822         172,300        127,020       113,509         112,308
Selling, general and
       administrative expenses                        68,002          58,294         47,372        41,915          41,687
Factory conversion expenses                                -               -          4,000             -               -
Operating income (loss)                             (13,027)          12,181          1,722       (3,434)         (2,793)
Other income (expense):
       Foreign currency gains (losses)                   512             449          (151)         1,460           (832)
       Gains (losses) on asset sales                     756             (6)            320             9             127
       Provision for Generra bankruptcy                    -               -              -       (6,146)               -
       Other, net                                        209             237            (3)         (149)           (559)
Interest expense, net                                (3,726)         (1,756)        (1,452)         (960)         (1,145)
Income (loss) before income taxes                   (15,276)          11,105            436       (9,220)         (5,202)
Income tax provision (benefit)                       (2,335)             300            304           369             306
Net income (loss)                                   (12,941)          10,805            132       (9,589)         (5,508)

Per Share Information:

Net income (loss)                         $           (1.28)            1.16           0.02        (1.52)          (0.93)
Book value per share based on shares
       outstanding at balance sheet dates $             7.29            8.53           5.45          5.37            7.70
Shares outstanding                                10,145,326      10,080,341      7,971,625     7,266,642       5,957,789

Financial Position at Year-End:

Current assets                            $          127,911         123,919         95,325        71,808          79,583
Property, plant and equipment, net                    33,363          22,872         13,220        10,376          10,970
Other assets, non-current                             12,553          11,260         10,346        10,953          16,274
Total assets                                         173,827         158,051        118,891        93,137         106,827
Current liabilities                                   78,903          56,535         61,346        34,983          38,358
Long-term debt                                        12,568           5,170          1,179         4,452           5,192
Other liabilities                                      3,136           3,103          3,627         3,346           4,046
Deferred gain on sale of building                      5,250           7,282          9,314        11,346          13,378
Shareholders' equity                                  73,970          85,961         43,425        39,010          45,853
Total liabilities and shareholders' equity           173,827         158,051        118,891        93,137         106,827
Current ratio                                       1.6 to 1        2.2 to 1       1.5 to 1      2.1 to 1        2.1 to 1

</TABLE>

<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS
                    OF FINANCIAL CONDITION AND
                      RESULTS OF OPERATIONS



Results of Operations
<TABLE>
<CAPTION>
The following sets forth,  for the years  indicated,  certain  financial data as
percentages of net sales:
                                                               Fiscal Year Ended
                                                   ------------ -- ------------ -- -------------
                                                      1995            1994             1993
                                                   ------------    ------------    -------------
         <S>                                            <C>             <C>              <C>   
         Net sales:
              Farah U.S.A.                               73.5%           78.8%            75.9%
              Farah International                        19.7%           14.9%            16.2%
              Value Slacks                                6.8%            6.3%             7.9%
                                                   ------------    ------------    -------------
         Total net sales                                100.0%          100.0%           100.0%
         Cost of sales                                   77.2%           71.0%            70.5%
                                                   ------------    ------------    -------------
            Gross profit                                 22.8%           29.0%            29.5%
         Selling, general and
                 administrative expenses                 28.2%           24.0%            26.3%
         Factory conversion expenses                         -               -             2.2%
                                                   ------------    ------------    -------------
              Operating income (loss)                   (5.4%)            5.0%             1.0%
         Other expense, net                             (0.9%)          (0.4%)           (0.7%)
                                                   ------------    ------------    -------------
              Income (loss) before income
                      taxes                             (6.3%)            4.6%             0.3%
         Income tax benefit (expense)                     0.9%          (0.1%)           (0.2%)
                                                   ------------    ------------    -------------
              Net income (loss)                         (5.4%)            4.5%             0.1%
                                                   ------------    ------------    -------------
</TABLE>


1995 Sales Compared to 1994

         Sales  decreased  $1,978,000  or  .8%,  from  $242,775,000  in  1994 to
$240,797,000  in 1995.  The  decrease  was the  result  of a 7.5%  reduction  in
revenues in the Company's U.S.  subsidiary,  Farah U.S.A.  Farah  International,
comprised primarily of sales in the United Kingdom and Australia, recorded sales
growth of 32%. Sales at Farah  International  increased from $36,043,000 in 1994
to  $47,523,000  in 1995.  Value  Slacks,  the  Company's  factory  outlet store
division,  also  reported  an  increase  in sales  from  $15,326,000  in 1994 to
$16,239,000 in 1995, a 6.0% increase.

         Sales at Farah U.S.A. as a percent of consolidated sales decreased from
79% in 1994 to 73% in 1995.  Overall,  unit sales and the average  unit  selling
price decreased in 1995 from 1994 by approximately 3% and 5%, respectively.  The
following table demonstrates sales by product line:
<TABLE>
                                                    Thousands of dollars
                                                 ----------------------------
                                                    1995            1994
                                                 ------------    ------------
                      <S>                         <C>               <C> 

                      Savane(R)                   $ 107,559         114,395
                      Farah(R) and
                         Farah Clothing Co. (R)      27,145          47,239
                      John Henry(R)                  11,477          14,381
                      Private Label                  30,853          15,391
                                                 ------------    ------------
                                                  $ 177,034         191,406
                                                 ============    ============
</TABLE>

         The sales reduction was primarily in the Company's  branded product and
principally the result of: (1) increased market  penetration in the wrinkle free
casual pant market by the Company's competitors; (2) the soft retail market that
intensified  through  1995;  (3) lost  sales as a result  of the  effect  of the
startup of new laundry and  finishing  facilities  in Mexico and Costa Rica,  as
well as a new cutting room and cloth  warehouse in the United States;  and (4) a
continued  shift from Farah and Farah  Clothing Co. to Savane and other products
by certain  customers.  The  demand for the  Company's  private  label  products
steadily  increased because of the Company's unique and innovative  processes in
fabric  finishing,  together with the new laundry and finishing  facilities  and
competitive  pricing.  As discussed  above,  Farah U.S.A.'s overall average unit
selling  price in 1995 was 5% lower than in 1994.  The reduction was due to more
closeout  sales of branded  products and the higher  percentage of private label
products which carry a lower average unit selling price.

         Farah  International  accounted for 20% of the  Company's  consolidated
sales in 1995 and 15% in 1994.  Overall sales at Farah  International  increased
31.9% in 1995 compared to 1994. The Company's largest  international  subsidiary
in 1995 was Farah U.K. with sales of $31,042,000 followed by Farah Australia and
Farah New  Zealand  with  combined  sales of  $15,490,000.  Sales at Farah  U.K.
increased  by  $8,079,000  in 1995, a 35.2%  increase.  Unit sales at Farah U.K.
increased  by 28% while the average  unit  selling  price  increased  by 6%. The
increase  in unit  sales was due to higher  sales in all  categories,  including
Savane and Farah branded  products and private label products.  The average unit
selling price in British Pound Sterling  increased by 2%, while the average unit
selling price in equivalent U.S. Dollars increased by 6% due to the weakening of
the U.S.  Dollar.  Sales at Farah  Australia and Farah New Zealand  increased by
$3,566,000  primarily  due to higher sales of the Savane no wrinkle  product and
private label business.  Unit sales at Farah Australia and New Zealand increased
by 22% due to  increased  market  penetration.  In  addition,  the  U.S.  Dollar
weakened by 4% compared to the  Australian  Dollar in 1995 which  contributed to
the 6.7% increase in the average unit selling price in U.S. Dollar terms.

         Value Slacks  accounted for 7% of the Company's  consolidated  sales in
1995 and 6% in 1994.  As of the end of 1995,  Value  Slacks  operated  38 retail
stores in the U.S.,  and while it operated in Puerto Rico during 1995, it closed
its last stores in the fourth quarter of 1995. At the end of 1994,  Value Slacks
operated 26 U.S. and 7 Puerto Rican stores.  Sales in Value Slacks' U.S.  stores
increased by 26% in 1995 while  Puerto  Rican store sales  decreased by 45%. The
overall  average unit selling price  decreased by 2% in 1995;  however,  overall
unit sales  increased by 8%. The reduction in the average unit selling price was
due to growth in competition and the weakening  retail market in the U.S. During
1995, the Company closed 7 Puerto Rican stores and opened a net 12 new stores in
the U.S.

1994 Sales Compared to 1993

         Sales  increased from  $180,114,000  in 1993 to $242,775,000 in 1994, a
$62,661,000  increase (34.8%). The increase was led by a 40.0% increase at Farah
U.S.A., whose sales increased from $136,767,000 in 1993 to $191,406,000 in 1994.
Similarly,  Farah  International  recorded sales growth of 23.9%. Sales at Farah
International  increased from  $29,097,000 in 1993 to $36,043,000 in 1994. Value
Slacks also reported  increases in sales from $14,250,000 in 1993 to $15,326,000
in 1994, a 7.6% increase.

         Farah U.S.A.  accounted for 79% of the Company's  consolidated sales in
1994 compared to 76% in 1993. Unit sales increased by  approximately  37%, while
the average unit selling price increased by approximately 2%.
The following table demonstrates sales by product line:
<TABLE>

                                                    Thousands of dollars
                                                 ----------------------------
                                                    1994            1993
                                                 ------------    ------------
                      <S>                         <C>                <C>   
                      Savane                      $  114,395          60,386
                      Farah and
                           Farah Clothing Co.         47,239          54,125
                      John Henry                      14,381          14,739
                      Private Label                   15,391           7,516
                                                 ------------    ------------
                                                  $  191,406         136,766
                                                 ============    ============
</TABLE>

         The substantial  growth in Farah U.S.A. sales in 1994 was primarily the
result of the market's  continued  acceptance of the  Company's  Savane brand of
casual  cotton no wrinkle  pants.  The growth  was  attributable  to a number of
factors,  including  the  shift in  consumer  preferences  toward a more  casual
lifestyle and the ease of care that no wrinkle products offer. In addition,  the
Company  offered several  innovative new fabric  treatments in 1994 and expanded
its Savane  products.  Sales of Farah and Farah  Clothing Co. were  primarily of
dress  product,  although  Farah  branded  sales  trended more toward  casual no
wrinkle  product in 1994.  The sales  decrease for Farah and Farah  Clothing Co.
products  was  caused  by a shift to  Savane  by  certain  customers  and by the
continued shift in consumer demand from dress to casual  products.  As discussed
above,  Farah U.S.A.'s  overall average unit selling price was 2% higher in 1994
than 1993.  The increase in the average unit selling price was due to the higher
Savane  unit sales,  offset  somewhat by a higher  percentage  of private  label
products which carry a lower average unit selling price.

         Farah  International  accounted for 15% of the  Company's  consolidated
sales in 1994 and 16% in 1993. While Farah  International  sales as a percent of
consolidated  sales  declined  by  1%,  overall  sales  in  Farah  International
increased  24% in  1994  compared  to  1993.  Farah  U.K.  sales  in  1994  were
$22,963,000  and were  followed by Farah  Australia  and Farah New Zealand  with
combined sales of  $11,924,000.  Sales at Farah U.K.  increased by $3,736,000 in
1994,  a 19%  increase.  Unit sales  increased  at Farah  U.K.  by 14% while the
average  unit  selling  price  increased  by 5%. The  increase in unit sales was
largely due to the  introduction  of new Farah branded  product,  higher private
label sales and the introduction of the Savane brand into the U.K.  market.  The
average unit selling price in British Pound Sterling  increased by 4%, while the
average unit selling price in equivalent U.S. Dollars increased by 5% due to the
weakening of the U.S.  Dollar.  Sales at Farah  Australia  and Farah New Zealand
increased by $2,896,000  primarily due to the customer  acceptance of the Savane
no wrinkle product and greater sales in the private label  business.  Unit sales
increased 21%, while the average unit selling price also increased  (principally
the result of the  weakening  of the U.S.  Dollar by 6% in 1994 as  compared  to
1993).

         Value Slacks sales as a percent of consolidated  sales decreased by 2%.
However, overall sales in Value Slacks increased 8% in 1994 compared to 1993. As
of the end of 1994,  Value  Slacks  operated 26 U.S.  stores and 7 Puerto  Rican
stores compared to 20 U.S. stores and 11 Puerto Rican stores at the end of 1993.
Sales in Value Slacks' U.S.  stores  increased by 28% in 1994 while Puerto Rican
store sales decreased by 23%. Overall,  the average unit selling price decreased
by 7% in 1994 and unit sales  increased by 15%.  The average unit selling  price
reduction was due primarily to the change in product mix in the U.S. stores and,
to a lesser extent, to more promotional activity in older locations precipitated
by greater competition. The unit sales increase came from the U.S. stores due to
more stores in 1994 compared to 1993. At the same time, unit sales at the Puerto
Rican stores were down due to fewer stores operating and less favorable economic
conditions.

1995 Gross Profit Compared to 1994

         Gross profit as a percent of sales was 22.8% in 1995  compared to 29.0%
in  1994.  Gross  profit  in  1995  was  18%  at  Farah  U.S.A.,  33%  at  Farah
International  and 51% at Value Slacks,  compared to 1994 gross profit of 26% at
Farah U.S.A., 35% at Farah International and 48% at Value Slacks.

         There were several  factors during fiscal 1995 that  contributed to the
lower gross profit margins in Farah U.S.A. As discussed  above,  the progressive
weakening  of the retail  market in 1995 had an adverse  impact on gross  profit
margins by forcing  the  Company to offer more  promotional  products at amounts
below its normal selling prices. In addition,  because the sales volume declined
and inventory  levels rose during the year, it became  necessary for the Company
to record additional  markdown  allowances.  Also, the breadth and complexity of
the Company's  product lines resulted in some excess  inventories and additional
markdowns.  As indicated  above, the Company more than doubled its private label
business which generally carries lower gross profit margins, contributing to the
reduction  in the overall  gross  profit  margin for Farah  U.S.A.  Transitional
issues  associated  with the start up of the new laundry,  finishing and cutting
facilities prevented the Company from delivering all of its orders, resulting in
higher  inventory  quantities  and  larger  markdowns  than  normal.  Additional
manufacturing  costs  were also  incurred  in the first  half of 1995 due to the
startup efforts of the new facilities.


         The decrease in gross  profit  percent at Farah  International  was due
primarily to lower  manufacturing  efficiencies  in the  Company's  Irish plants
during fiscal 1995.  In addition,  because of the softening of the retail market
in the U.K., the Company offered more promotional  prices than in 1994.  Similar
to the U.S., private label sales in Farah U.K. were a larger percentage of total
sales.  Such sales carry lower gross profit margins,  thereby  placing  downward
pressures on the Company's overall gross profit margin.

         The gross profit margin at Value Slacks  increased 2%. The increase was
largely  due to improved  margins at stores  located in Puerto  Rico,  where the
margin  increased  from 40% to 43%.  The gross  profit  margin  for U.S.  stores
remained stable at 52% compared to 1994. The increase in the gross profit margin
in Puerto Rico resulted from change in product mix.

1994 Gross Profit Compared to 1993

         Gross profit as a percent of sales was 29.0% in 1994  compared to 29.5%
in  1993.  Gross  profit  in  1994  was  26%  at  Farah  U.S.A.,  35%  at  Farah
International  and 48% at Value Slacks,  compared to 1993 gross profit of 27% at
Farah U.S.A., 37% at Farah International and 42% at Value Slacks.

         A number of factors  occurred during fiscal 1994 having both a positive
and negative impact on Farah U.S.A. gross profit margins. These resulted in 1994
gross  profit as a percent  of sales  being  slightly  lower  compared  to 1993.
Contributing  to an  increase in the gross  profit  margin was the 89% growth in
sales of Savane  branded  products in 1994  discussed  above.  Savane  generally
carried a higher gross profit percent than other Farah brands.  The Company also
continued to reconfigure its plants to more  efficiently sew the Savane product.
In addition,  production  levels  increased over 1993 because of the significant
increase in unit sales in 1994,  thus utilizing the Company's  factories at near
capacity  levels and increasing  gross profit  margins.  Gross profits were also
improved by the  enactment of the North  American Free Trade  Agreement  (NAFTA)
which  went into  effect in January  1994 and had the  effect of reduced  import
duties on products produced in Mexico.  The increase in the gross profit percent
was offset by an increase in the use of outside  contractors which are generally
more costly and an increase in lower gross margin private label sales.

         The decrease in gross profit percent at Farah International was largely
due to lower manufacturing efficiencies in the Company's Irish plants during the
second half of fiscal 1994.  The lower  efficiencies  were due to start up costs
associated  with hiring a substantial  number of new  production  employees.  In
addition,  there were more units sold at lower than standard  selling  prices in
Farah U.K.

         The increase in gross profit  percent at Value Slacks was primarily due
to the shift in stores  located in the United  States in 1994.  The gross profit
percent in the U.S.  stores  was 52% in 1994  compared  to 46% in 1993,  and the
gross profit percent in the Puerto Rican stores was 39% in 1994 and 35% in 1993.
The increase in both  instances  was due to fewer  markdowns  and higher  Savane
sales.  In addition,  during 1994 Value Slacks  implemented  a new  computerized
point of sale system which enabled  management to more  effectively  monitor and
utilize inventories which helped increase the gross profit percent.

1995 Selling, General and Administrative Expenses Compared to 1994

         Selling,  General and Administrative  expenses ("SG&A") as a percent of
sales  increased  by 4.2% from  24.0% in 1994 to 28.2% in 1995.  SG&A was 25% of
sales at  Farah  U.S.A.  compared  to 21% in  1994,  31% at Farah  International
compared to 32% in 1994, and 52% at Value Slacks compared to 50% in 1994.

         As  noted  above,  the  increase  in SG&A as a  percent  of  sales  was
primarily in the Farah U.S.A.  operations.  Advertising costs were approximately
$4,000,000  higher  than in 1994 and as a percent of sales  were 3% higher  than
1994. The Company committed to TV ad programs early in the season and was unable
to  reduce  such  programs  when it became  apparent  that the  Company  was not
achieving  projected  sales  volumes.  In  addition,   higher  computer  systems
implementation costs, combined with the effect of other fixed costs that did not
decrease in relation to the lower sales levels,  increased  SG&A as a percent of
sales.

         The  decrease  in SG&A as a  percent  of sales  at Farah  International
occurred due to the increase in sales without a proportionate increase in costs.
While selling expenses as a percent of sales remained relatively stable, general
and administrative  expenses as a percent of sales decreased from 15% in 1994 to
14% in 1995.

<PAGE>

         SG&A at Value Slacks as a percent of sales was 52% in 1995  compared to
50% in 1994. The higher percentage in 1995 resulted from higher costs associated
with the  closure  of  seven  Puerto  Rico  stores  and  certain  startup  costs
associated with opening new U.S.  stores.  In addition,  advertising,  labor and
certain other  operating costs as a percent of sales are higher in the U.S. than
in Puerto Rico.  Therefore,  with the shift towards only U.S.  stores,  the SG&A
percent is higher.

1994 Selling, General and Administrative Expenses Compared to 1993

         SG&A as a percent of sales was 24.0% in 1994 compared to 26.3% in 1993.
SG&A  was 21% of sales at Farah  U.S.A.  compared  to 23% in 1993,  32% at Farah
International compared to 33% in 1993 and 50% at Value Slacks compared to 45% in
1993.

         The decrease in SG&A as a percent of sales at Farah  U.S.A.  was mainly
attributable  to a revised  compensation  structure for salesmen and fixed costs
that did not  increase  in  relation  to  increased  sales  levels.  The Company
continued  its  national  television  advertising  campaign  initiated  in 1993;
however,  as a  percent  of sales,  advertising  decreased  in 1994 even  though
advertising  expenses  increased by over $2,900,000  compared to 1993.  Finally,
SG&A  associated  with private  label sales is lower than SG&A  associated  with
branded  sales,  and this also had the  effect  of  reducing  overall  SG&A as a
percent of sales.

         The  decrease  in SG&A as a  percent  of sales  at Farah  International
occurred  due to the  substantial  increase in sales with  little  change in its
general and administrative  expenses.  This reduction was partially offset by an
increase in advertising expenses in the U.K.

         The  increase  in SG&A as a percent of sales at Value  Slacks  resulted
from higher  expenses  associated with the closure of certain Puerto Rico stores
and higher advertising, salaries and wages, and certain other operating costs.

Other Income (Expense)
<TABLE>
<CAPTION>
         The following table illustrates the changes in interest expense, net of
interest income, over the past three fiscal years (in thousands):

                                                                1995        1994       1993
                                                                ----        ----       ----
               <S>                                           <C>             <C>        <C>    
               Interest expense, net                         $    3,726       1,756      1,452
               Interest expense, net, as a percent of sales        1.5%        0.7%       0.8%
               Average debt                                  $   47,910      26,689     23,394
               Average interest rate                               9.7%        9.0%       8.7%
</TABLE>
         The increase in net  interest  expense as a percent of sales in 1995 is
principally  due  to  increased  borrowing  to  fund  operating  losses,  higher
inventory levels and capital expenditures. The decrease in 1994 compared to 1993
was the result of lower  borrowings due to funds  generated  through the sale of
common  stock and  operating  profits.  This was  partially  offset by increased
borrowings to fund higher inventory levels.


     Included in other income in 1995 was a gain of $750,000  from the sale of a
factory and related equipment in Costa Rica.


Income Tax Expense (Benefits)

         The Company recorded a consolidated  income tax benefit at an effective
tax rate of 15.3% in 1995 which is less than the  statutory  tax rate of 34%. In
1995, tax benefits,  net of valuation  allowances of  approximately  $2,468,000,
were  recognized.  Furthermore,  at November 3, 1995,  the Company had  recorded
$4,202,000 of deferred tax assets on its balance sheet. A substantial portion of
the Company's tax benefits are associated with net operating loss  carryforwards
that arose in fiscal 1995 and  foreign  tax  credits.  The  realization  of such
assets is largely  dependent  upon the Company  being able to  generate  taxable
income in the future.  Although the Company reported a substantial loss in 1995,
the  Company  believes  it has taken  appropriate  actions  to reduce  costs and
provide an  opportunity  to generate  earnings  in the future.  Because of these
actions, the Company believes there is sufficient basis for the recording of tax
benefits in 1995.
<PAGE>

Liquidity and Capital Resources
<TABLE>
<CAPTION>
         Key statistics  demonstrating financial condition of the Company are as
follows:

                                                                    Thousands of dollars
                                                                  1995              1994
                                                              ------------      -----------
           <S>                                                <C>                   <C>   

           Working capital                                    $    49,008           67,384
           Total debt                                              59,754           24,228
           Long-term debt                                          12,568            5,170
           Shareholders' equity                                    73,970           85,961
           Current ratio                                            1.6:1            2.2:1
           Long-term debt-to-equity                                 .17:1            .06:1
           Total debt-to-equity                                     .81:1            .28:1
           Days sales in accounts receivable                           57               51
           Inventory turnover                                         2.5              2.7

</TABLE>

         The  change  in the  Company's  liquidity  demonstrated  by  the  above
statistics was due to two primary reasons. The first was the utilization of cash
flows to fund the pre-tax  loss of  $15,276,000.  The second was the use of cash
flows to purchase  $15,679,000  of property,  plant and equipment in conjunction
with  the  opening  of  three  new  manufacturing   facilities.  To  fund  these
activities, $26,771,000 of cash was generated from the Company's working capital
credit  facilities  and  $10,349,000  was  generated  from the  issuance  of new
long-term debt.

         Working capital decreased by $18,376,000 during 1995. Trade receivables
increased by $2,893,000 due to higher sales in the last month of the fiscal year
compared to 1994.  Inventories  decreased  by  $2,661,000  for the same  reason,
combined with a concerted effort to reduce U.S.  inventory levels in response to
a soft retail market. The U.S. inventory decrease was partially offset by higher
retail and  international  inventories.  Accounts  payable and accrued  expenses
decreased by $5,760,000 as a result of lower raw material  purchases late in the
year.

         The Company's  primary  Credit  Agreement,  which expires in July 1997,
provides up to $50,000,000 of credit.  Farah U.S.A., Value Slacks and Farah U.K.
are parties to the Credit Agreement.  Availability under the Credit Agreement is
limited by  formulas  derived  from  accounts  receivable,  inventory  and fixed
assets.  The Credit Agreement is secured by  substantially  all of the Company's
assets, except for certain fixed assets, and is guaranteed by Farah Incorporated
and each of Farah U.S.A.'s  domestic  affiliates.  As of November 3, 1995, usage
under the Credit  Agreement was $44,774,000 and available credit was $5,226,000.
The maximum credit  available to Farah U.K. is $5,000,000 and the maximum credit
that  may  be  used  related  to  inventory  is  $25,000,000.  In  months  where
receivables  are the lowest and  inventories  are the highest,  availability  of
credit under the Credit  Agreement is the lowest.  Typically,  the lowest months
for credit availability are January, February, July and August.

         There  are  three  financial  covenants  for  both  Farah  Incorporated
consolidated and Farah U.S.A. in the Credit Agreement:  minimum working capital,
minimum tangible net worth and maximum capital spending. As of November 3, 1995,
the Company was in compliance with all of these covenants.  The Credit Agreement
also prohibits the payment of dividends and,  except to service its  convertible
subordinated  debentures,   it  restricts  the  subsidiaries  from  transferring
substantially  all their net assets to the Parent Company,  Farah  Incorporated,
through  intercompany  loans,   advances  or  dividends.   See  Note  3  to  the
Consolidated Financial Statements for further discussion.
<PAGE>


         The  Company  also has a  $7,757,000  lease  which was used to  acquire
laundry,  finishing,  sewing and cutting equipment in Mexico, Costa Rica and the
United States.  The lease is secured by assets leased,  as well as certain other
fixed assets. The lease calls for quarterly principal  reductions for five years
and bears interest at LIBOR plus 3 3/16%. The lease contains  certain  quarterly
and yearly financial  covenants;  particularly,  an earnings before interest and
taxes (EBIT) covenant  calling for minimum EBIT in 1996 of $200,000 in the first
quarter,  $1,100,000 in the second quarter,  $1,900,000 in the third quarter and
$2,000,000  in the  fourth  quarter.  The lease  also  requires  the  Company to
maintain certain levels of liquidity. As of November 3, 1995, the Company was in
compliance with all covenants.  Both the primary Credit  Agreement and the lease
contain  provisions  which allow a default  under  either  agreement  to cause a
default of both agreements.

         In fiscal 1996, major liquidity  requirements  will be the financing of
anticipated  growth and  capital  expenditures.  The Company  believes  that its
borrowing  availability  from its Credit  Agreement and its cash from operations
will be adequate  for fiscal 1996  anticipated  liquidity  requirements.  In the
event that liquidity  shortfalls occur due to the continuing  impact of softness
at retail, unforeseen sales shortfalls or other reasons, it may be necessary for
the Company to seek alternative sources of financing. This may be in the form of
additional debt,  equity or a combination  thereof.  The Company expects to meet
its long-term  liquidity  requirements  through its previously  discussed Credit
Agreement or renewals thereof and through cash from operations.

         Capital  expenditures  for  fiscal  years  1995,  1994  and  1993  were
$15,679,000,  $12,065,000 and $6,800,000,  respectively. As of November 3, 1995,
material  commitments for capital  expenditures were approximately  $551,000 and
are  expected  to be  financed  primarily  by leases  and the  Credit  Agreement
discussed  above.  The Company expects that capital  expenditures in fiscal 1996
will not exceed  $6,500,000  and will be  primarily  for factory  machinery  and
information equipment and related software.

         Most of Farah  U.S.A.'s  major fabric  suppliers  provide 60-day terms,
subject to certain limits.  During fiscal 1995, the maximum  outstanding balance
at any month-end under these credit terms was $12,257,000.

         Inflation did not materially impact the Company in fiscal 1995, 1994 or
1993.