EXHIBIT 13 - ANNUAL REPORT
<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations

Years ended November 3, 1996,  November 3, 1995 and November 4, 1994  (Thousands
of dollars except per share data)
<CAPTION>
<S>                                                    <C>                              <C>                  <C>
                                                                 1996                   1995                 1994
                                                        --------------------     ----------------    ------------------
Net sales                                               $           247,598              240,797               242,775
Cost of sales                                                       183,540              185,822               172,300
                                                        --------------------     ----------------    ------------------
       Gross profit                                                  64,058               54,975                70,475
Selling, general and administrative expenses                         62,189               68,002                58,294
                                                            ----------------     ----------------    ------------------
       Operating income (loss)                                        1,869             (13,027)                12,181
Other income (expense):
       Interest expense                                             (4,065)              (4,627)               (2,479)
       Interest income                                                  834                  901                   723
       Foreign currency transaction gains                               374                  512                   449
       Gain (loss) on sale of assets                                 10,041                  756                   (6)
       Other, net                                                       684                  209                   237
                                                        --------------------     ----------------    ------------------
                                                                      7,868              (2,249)               (1,076)
                                                        --------------------     ----------------    ------------------
Income (loss) before income taxes                                     9,737             (15,276)                11,105
Income tax provision (benefit)                                        2,981              (2,335)                   300
                                                        --------------------     ----------------    ------------------
Net income (loss)                                       $             6,756             (12,941)                10,805
                                                        ====================     ================    ==================
Net income (loss) per share                             $               .66               (1.28)                  1.16
                                                        ====================     ================    ==================
Weighted average shares of common stock
     (all periods) and common stock equivalents
     (income periods only) outstanding                           10,195,133           10,122,308             9,321,761
                                                        ====================     ================    ==================
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets

November 3, 1996 and November 3, 1995 (Thousands of dollars except share data)
<CAPTION>
<S>                                                                <C>                  <C>
                                                                          1996             1995
                                                                    --------------      -----------
ASSETS
Current assets:
     Cash                                                           $       3,777            3,657
     Trade receivables, net of allowance
         of $662 in 1996 and $720 in 1995                                  41,671           39,824
     Inventories:
          Raw materials                                                    11,404           13,391
          Work in process                                                  15,251           14,429
          Finished goods                                                   35,378           44,943
                                                                    --------------      -----------
                 Total inventories                                         62,033           72,763
     Other current assets                                                  10,857           11,667
                                                                    --------------      -----------
                 Total current assets                                     118,338          127,911
Note receivable                                                             5,260            5,600
Property, plant and equipment, net                                         25,370           33,363
Other non-current assets                                                    4,895            6,953
                                                                    --------------      -----------
                                                                    $     153,863          173,827
                                                                    ==============      ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Short-term debt                                                $      20,744           44,779
     Current installments of long-term debt                                 1,288            2,407
     Trade payables                                                        24,038           17,644
     Accrued compensation                                                   3,101            3,900
     Other current liabilities                                             10,636           10,173
                                                                    --------------      -----------
                  Total current liabilities                                59,807           78,903
Long-term debt, excluding current installments                              4,706           12,568
Other non-current liabilities                                               3,992            3,136

Commitments and contingencies

Deferred gain on sale of building                                           3,218            5,250

Shareholders' equity:
     Common stock, no par value, $.01 stated
          value, 20,000,000 shares authorized; issued
          10,209,246 in 1996 and 10,181,601 in 1995                        46,024           46,024
     Additional paid-in capital                                            29,894           29,425
     Cumulative foreign currency
          translation adjustment                                            (742)          (1,295)
     Minimum pension liability adjustment                                 (1,243)          (1,635)
     Retained earnings                                                      8,316            1,560
                                                                    --------------      -----------
                                                                           82,249           74,079

     Less: Treasury stock, 36,275 shares, at cost                             109              109
                                                                    --------------      -----------
                 Total shareholders' equity                                82,140           73,970
                                                                    --------------      -----------
                                                                    $     153,863          173,827
                                                                    ==============      ===========
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>

Part  I  of  Consolidated   Statements  of  Shareholders'   Equity  Table  FARAH
INCORPORATED AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity
<CAPTION>

Years ended November 3, 1996,  November 3, 1995 and November 4, 1994  (Thousands
of dollars except share data)
<S>                                                    <C>             <C>              <C>               <C>

                                                                                                          Cumulative
                                                                                                            Foreign
                                                              Common Stock               Additional         Currency
                                                  ---------------------------------       Paid-in         Translation
                                                       Shares            Amount            Capital          Adjustment
                                                  ---------------   ---------------    ---------------   ---------------

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)

     Net income                                                -                -                 -                   -
     Foreign currency translation adjustment                   -                -                 -                 553
     Minimum pension liability adjustment                      -                -                 -                   -
     Exercise of stock options and other                  27,645                -               469                   -
                                                  ---------------   ---------------    ---------------   ---------------
Balance, November 3, 1996                             10,209,246       $   46,024       $    29,894       $       (742)
                                                  ===============   ===============    ===============   ===============
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Part  II  of  Consolidated   Statements  of  Shareholders'  Equity  Table  FARAH
INCORPORATED AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity
<CAPTION>

Years ended November 3, 1996,  November 3, 1995 and November 4, 1994  (Thousands
of dollars except share data)
<S>                                                 <C>              <C>                    <C>         <C>
                                                     Minimum
                                                     Pension                                  Treasury Stock
                                                    Liability           Retained       ------------------------------
                                                    Adjustment          Earnings          Shares          Amount
                                                  ----------------   --------------    -------------   --------------

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
     Net income                                                -            6,756                -                -
     Foreign currency translation adjustment                   -                -                -                -
     Minimum pension liability adjustment                    392                -                -                -
     Exercise of stock options and other                       -                -                -                -
                                                  ----------------   --------------    -------------   --------------
Balance, November 3, 1996                           $    (1,243)      $     8,316           36,275     $         109
                                                  ================   ==============    =============   ==============
</TABLE>
See accompanying notes to consolidated financial statements.

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

Years ended November 3, 1996,  November 3, 1995 and November 4, 1994  (Thousands
of dollars)
<S>                                                               <C>                    <C>            <C>
                                                                          1996            1995           1994
                                                                  -----------------    -----------    -----------
Cash flows from (used in) operating activities:
     Net income (loss)                                             $         6,756       (12,941)         10,805
     Adjustments to reconcile net income (loss)
        to net cash from (used in)
        operating activities:
           Depreciation and amortization                                     5,434          4,020          2,966
           Amortization of deferred gain on building sale                  (2,032)        (2,032)        (2,032)
           Amortization of deferred gain on subsidiary sale                (2,538)              -              -
           Deferred income taxes                                             1,654        (1,934)        (2,322)
           Gain on sale of assets                                         (10,041)          (756)              6
     Decrease (increase) in:
           Trade receivables, net                                          (1,847)        (2,893)        (4,473)
           Inventories                                                      10,730          2,661       (21,030)
           Other current assets                                              1,931        (1,016)        (1,840)
     Increase (decrease) in:
           Trade payables                                                    6,394        (4,662)          1,982
           Other                                                             (990)        (1,098)          5,158
                                                                  -----------------    -----------    -----------
                 Net cash from (used in) operating activities               15,451       (20,651)       (10,780)
                                                                  -----------------    -----------    -----------
Cash flows from (used in) investing activities:
     Purchases of property, plant and equipment                            (4,397)       (11,756)        (8,822)
     Proceeds from disposition of property, plant
           and equipment                                                    22,689          1,785             36
                                                                  -----------------    -----------    -----------
                 Net cash from (used in) investing activities               18,292        (9,971)        (8,786)
                                                                  -----------------    -----------    -----------
Cash flows from (used in) financing activities:
     Net increase (decrease) in short-term debt                           (24,035)         26,771        (7,791)
     Proceeds from issuance of long-term debt                                    4          6,426          1,058
     Repayment of long-term debt                                           (9,371)        (1,284)        (3,650)
     Proceeds from sale of common stock                                         19            934         29,352
     Other                                                                   (793)          (711)          (453)
                                                                  -----------------    -----------    -----------
                 Net cash from (used in) financing activities             (34,176)         32,136         18,516
                                                                  -----------------    -----------    -----------
Foreign currency translation adjustment                                        553          (229)          1,415
                                                                  -----------------    -----------    -----------
Net increase in cash                                                           120          1,285            365
Cash, beginning of year                                                      3,657          2,372          2,007
                                                                  -----------------    -----------    -----------
Cash, end of year                                                  $         3,777          3,657          2,372
                                                                  =================    ===========    ===========
Supplemental cash flow disclosures:
    Interest paid                                                  $         4,449          4,116          2,416
    Income taxes paid                                                        1,019          1,625            457
    Assets acquired through direct financing
        loans or capital leases                                                726          3,923          3,243
    Exchange of debentures                                                       -              -          1,673
</TABLE>
See accompanying notes to consolidated financial statements.



<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 3, 1996, November 3, 1995 and November 4, 1994


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,  coats,  shirts and  women's  slacks.  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 1996
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.

CASH EQUIVALENTS

         Cash  equivalents  include demand  deposits and short-term  investments
with  original  maturities  of three  months or less.  The  Company  had no cash
equivalents at November 3, 1996 and November 3, 1995.

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, 1996 and  November  3, 1995,  intangible  assets  were
$1,427,000 and $1,508,000,  respectively,  and consisted  primarily of goodwill,
trademarks and other intangible  assets.  Intangible  assets are carried at cost
less  accumulated  amortization.  Most  intangible  assets  are  amortized  on a
straight-line  basis over their  estimated  useful  lives  ranging  from 2 to 30
years.  Amortization expense approximated $353,000 in 1996, $283,000 in 1995 and
$260,000 in 1994.

REVENUE RECOGNITION

         Revenue is recognized upon shipment of product.

ADVERTISING AND PROMOTION COSTS

         Advertising  and  promotion  costs are  expensed in the year  incurred.
Advertising expense  approximated  $10,629,000 in 1996,  $17,003,000 in 1995 and
$13,000,000 in 1994.

FOREIGN CURRENCIES

         Foreign entities whose functional currency is the U.S. dollar translate
monetary  assets and  liabilities at year-end  exchange  rates and  non-monetary
items are  translated  at  historical  rates.  Income and expense  accounts  are
translated  at  the  average  rates  in  effect  during  the  year,  except  for
depreciation  which is  translated at  historical  rates.  Gains and losses from
changes in exchange rates are recognized in  consolidated  income in the year of
occurrence.  Foreign  entities whose  functional  currency is the local currency
translate  net  assets at  year-end  rates and income and  expense  accounts  at
average  exchange  rates.  Adjustments  resulting  from these  translations  are
reflected  in  the  Shareholders'  equity  section  titled  "Cumulative  foreign
currency translation adjustment."

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. Future
tax benefits,  such as net operating loss  carryforwards,  are recognized to the
extent that realization of such benefits is more likely than not.

INCOME (LOSS) PER SHARE

         Income  per  share in 1996 and  1994 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.

2.  Property, Plant and Equipment
<TABLE>
<CAPTION>
Property, plant and equipment is comprised of the following:


<S>                                              <C>                      <C>           <C>

                                                                           Thousands of dollars
                                                 Estimated usefu      --------------------------
                                                   lives (years)          1996          1995
                                                 -------------------  -------------  -----------
       Factory machinery and equipment                  9-12              $ 28,213        34,463
       Buildings                                       20-50                 5,479         6,001
       Building improvements                            3-20                 4,373         5,720
       Other fixtures and equipment                     3-20                16,100        14,386
       Land                                                                    770           770
       Construction in progress                                                937         1,248
                                                                      -------------  ------------
              Total property, plant and                                     55,872        62,588
       equipment
       Less accumulated depreciation                                        30,502        29,225
                                                                      -------------  ------------
               Net property, plant and equipment                          $ 25,370        33,363
                                                                      =============  ============
</TABLE>

         In June 1996, the Company sold its facility  located in Piedras Negras,
Mexico for a purchase price of approximately  $22,200,000 in cash. Proceeds from
the  sale,  net of  expenses,  were  used to retire a  long-term  capital  lease
obligation of  approximately  $7,200,000 plus other long-term  obligations.  The
balance  of  the  proceeds  of  approximately  $13,800,000  was  applied  to the
Company's  Credit  Agreement.  The  transaction  resulted in a deferred  gain of
approximately  $4,046,000 of which  approximately  $2,538,000  was recognized in
1996.

         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.
The  transaction  resulted  in  a  gain  of  approximately   $986,000  of  which
approximately $750,000 was recognized in 1995 and $236,000 in 1996.

     Depreciation  expense approximated  $5,081,000 in 1996,  $3,737,000 in 1995
and $2,706,000 in 1994.

         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. The Company elected to adopt this pronouncement for
its fiscal year that began  November 4, 1995. The adoption of this statement did
not 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, 1998, 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 collateralized 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 collateralized by substantially all of the assets of the related affiliates.
The interest  rate is prime (8 1/4% at November 3, 1996) 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, 1996, usage under the Credit Agreement was
$23,045,000  (including  letters of credit of $2,610,000)  and the excess credit
line  available  was  $26,955,000.   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, 1996,  the Company was in  compliance  with the minimum  working  capital and
minimum  tangible  net worth  covenants.  The  Company's  Farah  U.S.A.  capital
expenditures,  however,  exceeded the covenant limit by approximately  $285,000.
The Company's  lender waived this covenant for fiscal 1996. 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.
<TABLE>
<CAPTION>

         The  following  table  reflects  short-term  debt balances and interest
rates in 1996, 1995 and 1994:
          <S>                                 <C>           <C>         <C>
                                                     Thousands of dollars
                                            ------------------------------------
                                               1996         1995        1994
                                            -----------   ----------  ----------
         Average outstanding balance          $ 31,473       36,842      23,268
         Maximum month-end
              balance outstanding             $ 41,816       47,338      39,995
         Weighted average interest rate:
              During year                         9.4%         9.7%        9.0%
              Year-end                            9.2%         9.8%        8.7%
</TABLE>

LONG-TERM DEBT

         In 1996, the Company sold its Piedras Negras, Mexico facility. Proceeds
from  the  sale  were  used  to  retire  the  Company's  largest  capital  lease
obligation,  collateralized by property,  plant and equipment,  as well as other
small capital lease  obligations  related to equipment at the facility.  Capital
lease obligations retired in June 1996 approximated $7,700,000.
<TABLE>
<CAPTION>

         Long-term debt at year-end is as follows:
<S>                                                                            <C>            <C>
                                                                                Thousands of dollars
                                                                             -------------------------
                                                                                1996          1995
                                                                             ------------   ----------

Capital lease, collateralized by property, plant and equipment, 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

Collateralized  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                                 1,165        1,317

Various notes, collateralized by property, plant and equipment, bearing interest
    at rates ranging from 7.25% to 12.50%,due in
    monthly installments through 2005                                                554          548

Various obligations under other capital leases                                     2,612        3,690
                                                                             ------------   ----------
      Total long-term debt                                                         5,994       14,975
      Less current installments                                                    1,288        2,407
                                                                             ------------   ----------
          Net long-term debt                                                 $     4,706       12,568
                                                                             ============   ==========
</TABLE>
<TABLE>

Installments of long-term debt and capital lease obligations mature as follows:
<CAPTION>
                     <S>                          <C>             <C>
                                                       Thousands of dollars
                                                ---------------------------------
                                                  Long-term       Capital Lease
                                                     Debt          Obligations
                                                --------------   ----------------
                                      1997          $     274              1,239
                                      1998                254              1,131
                                      1999                251                423
                                      2000                200                117
                                      2001                182                  -
                           2002 and beyond              2,221                  -
                                                --------------   ----------------
                                                        3,382              2,910
                     Less interest portion                  -                298
                                                ==============   ================
                                                $       3,382              2,612
                                                ==============   ================
</TABLE>

         The Company  believes that its borrowing  availability  from its Credit
Agreement,  its ability to access other capital markets,  if necessary,  and its
projected cash from operations will be sufficient to meet anticipated  liquidity
requirements for fiscal 1997.

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.

5.  Employee and Director Stock Options and Awards

         The Company  has  several  stock-based  compensation  plans,  which are
described below. The Company applies APB Opinion 25 and related  Interpretations
in accounting for its  stock-based  compensation  plans.  In 1995, the Financial
Accounting  Standards Board issued Statement of Financial  Accounting  Standards
No. 123 "Accounting for Stock-Based  Compensation"  ("SFAS 123") which, if fully
adopted  by the  Company,  would  change  the  methods  the  Company  applies in
recognizing the cost of its stock-based compensation plans. Adoption of the cost
recognition  provisions  of SFAS 123 is optional and the Company has decided not
to elect these  provisions.  However,  pro forma  disclosures  as if the Company
adopted these cost recognition  provisions in 1995 are required for fiscal years
beginning  after  December  15, 1995.  The Company has elected to provide  these
disclosures for its fiscal year which began on November 4, 1995.

STOCK OPTION PLAN

         The  current  stock  option plan is the Farah  Incorporated  1991 Stock
Option and  Restricted  Stock Plan (the "1991 Plan").  Under the 1991 Plan,  the
Company is authorized to issue up to 1,225,000  shares of common stock  pursuant
to stock options (or, as described  below, as shares of restricted  stock).  The
Company is  authorized  under the 1991 Plan to grant stock  options as incentive
stock options  (intended to qualify  under  Section 422 of the Internal  Revenue
Code of 1986, as amended)  and/or as options that are not intended to qualify as
incentive stock options.

         The 1991 Plan  provides  that the  exercise  price of any stock  option
shall be  determined  by the Stock  Option  and  Compensation  Committee  in its
discretion.  All options  granted have an exercise  price equal to the per share
fair market value as of the date of the grant. All stock options granted in 1995
have a term of ten years and vest at the rate of fifty percent (50%) per year on
each  anniversary of the date of grant,  commencing on the first  anniversary of
the date of grant. The options granted in 1996 have a term of approximately  ten
years,  are 50%  vested  on the  date of  grant,  and  fully  vest on the  first
anniversary of the date of grant.

         The Company  granted 489,000 options in 1996 and 7,000 options in 1995.
In accordance with APB 25, the Company has not recognized any compensation  cost
for the stock options granted in 1995 and 1996.

NON-EMPLOYEE DIRECTOR STOCK OPTION PLANS

         The Company adopted two  non-employee  director stock option plans, the
Farah  Incorporated  1988 Stock Option Plan for  Non-Employee  Directors and the
Farah Incorporated 1996 Non-Employee  Directors Stock Option Plan (collectively,
the "Director Stock Option Plans").  Under the Director Stock Option Plans,  the
Company is authorized to issue up to 150,000 and 300,000  shares,  respectively,
of common stock pursuant to stock options (or, as described  below, as shares of
restricted  stock) to selected  directors.  The Company is authorized  under the
Director  Stock  Option Plans to grant only  non-qualified  stock  options.  The
Director  Stock Option Plans provide that the exercise price of any stock option
shall be the fair market value as of the date the option is granted.

         The  Company  granted  options  for 31,000 and 9,000  shares  under the
Director  Stock Option Plans in 1996 and 1995,  respectively.  Generally,  stock
options granted to directors on March 12, 1996 and March 14, 1995 have a term of
ten years and are fully vested as of the date of grant. Stock options granted on
September  30,  1996  have a term of five  years and vest at the rate of 50% per
year  on  each  anniversary  of the  date  of  grant,  commencing  on the  first
anniversary of the date of grant. In accordance with APB 25, the Company has not
recognized any compensation cost for the stock options granted in 1996 and 1995.
<TABLE>
<CAPTION>
         A summary of the status of the  Company's  stock options as of November
3, 1996,  November 3, 1995 and November 4, 1994 and the changes during the years
ended on those dates is presented below:
<S>                              <C>             <C>          <C>             <C>          <C>

                                    1996 Stock  Options          1995 Stock Options            1994 Stock Options
                              ----------------------------- ----------------------------  --------------------------
                                 Number of       Weighted      Number of      Weighted     Number of      Weighted
                                 Shares of       Average       Shares of      Average      Shares of      Average
                                 Underlying      Exercise     Underlying      Exercise     Underlying     Exercise
                                  Options         Prices        Options        Prices       Options        Prices
                               --------------- ------------- -------------- ------------- ------------- -------------
Outstanding at beginning
   of year                            455,637     $   10.87        478,985      $  10.68    $  570,437        6.62
Granted                               520,000          5.94         16,000          8.53       192,500       16.77
Exercised                             (3,500)          5.48       (25,514)          5.81     (283,952)        6.66
Forfeited                            (17,924)         11.08       (10,834)         11.02             -
Expired                               (4,500)          6.96        (3,000)          9.81             -
                               ---------------                -------------               ------------
Outstanding at end of year            949,713          8.21        455,637         10.87       478,985       10.68
                               ===============                =============               ============

Exercisable at end of year            678,463          9.07        448,637         10.91       345,735        9.60

Weighted-average fair
     market value of
     options granted
     during the year             $       2.66                     $   3.78                         N/A

</TABLE>
         The fair value of each stock option granted is estimated on the date of
grant  using  the   Black-Scholes   option-pricing   model  with  the  following
weighted-average  assumptions for grants in 1996 and 1995:  dividend yield of 0%
for both years; expected volatility of 51.3% for both years;  risk-free interest
rates  are  different  for each  grant and range  from  5.43% to 7.76%;  and the
expected  lives of options are different for each grant and range from 2.6 years
to 4.8 years.
 <TABLE>
 <CAPTION>
         The  following  table  provides a summary of  options  outstanding  and
exercisable at November 3, 1996:
<S>                      <C>               <C>                  <C>             <C>                <C>
                                        Options Outstanding                            Options Exercisable
                        --------------- -- --------------- -- --------------   -------------- -- --------------
                                              Weighted
                                              Average           Weighted                           Weighted
                                             Remaining           Average                            Average
 Range of Exercise          Number         Contract Life        Exercise          Number           Exercise
      Prices             Outstanding          (Years)             Price         Exercisable          Price
--------------------    ---------------    ---------------    --------------   --------------    --------------

$4.00 to $6.00                 366,500               8.92             $5.48          203,750             $5.38
$6.375 to $8.625               396,713               7.00              6.79          288,213              6.84
up to $21.375                  186,500               7.35             16.56          186,500             16.56
                        ---------------                                        --------------
$4.00 to $21.375               949,713               7.81              8.21          678,463              9.08
                        ===============                                        ==============
</TABLE>

RESTRICTED STOCK

         Restricted stock may be granted pursuant to the 1991 Plan.

         The Company may grant, as restricted  common stock, all or a portion of
the 1,225,000  shares of common stock reserved under the 1991 Plan.  During 1996
and 1995 there were no shares of restricted stock granted.

         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 1991 Plan. The awards vest over varying  periods ending in 1998, of which
37,665  shares  vested in 1996,  62,666  shares vested in 1995 and 46,169 shares
vested in 1994. The Company  recognizes the expense related to these awards over
the period of service called for by the vesting provision of the awards.

PRO FORMA NET INCOME (LOSS) AND NET INCOME (LOSS) PER COMMON SHARE

         Had the compensation  cost for the Company's  stock-based  compensation
plans been determined  consistent with SFAS 123, the Company's net income (loss)
and net income (loss) per common share for 1996 and 1995 would  approximate  the
pro forma amounts below (in thousands except per share data):
<TABLE>
          <S>                      <C>              <C>             <C>              <C>
                                   As Reported       Pro Forma      As Reported      Pro Forma
                                   November 3,      November 3,      November 3,     November 3,
                                      1996             1996             1995            1995
                                 --------------  ---------------  --------------- ----------------

          Net income (loss)        $    6,756             5,945         (12,941)       (12,973)
          Net income (loss)
             per common share      $      .66               .58           (1.28)         (1.28)
</TABLE>

         Pro forma  charges to expense for options  granted in 1996 and 1995 are
as follows:
<TABLE>
<S>                        <C>               <C>             <C>               <C>
                                                          Thousands of dollars
                           ------------- - ------------ --- --------------- -- -------------
                           1996 Annual        1995              Charge
                              Charge         Annual          Allocable to      Total Charge
                                             Charge          Future Years
                           -------------   ------------     ---------------    -------------

   1995 Stock options       $        15             43                   2         $     60
   1996 Stock options               918              -                 464            1,382
                           -------------   ------------     ---------------    -------------
   Total                     $      933             43                 466         $  1,442
                            ============   ============     ===============    =============
</TABLE>

         The effects of applying SFAS 123 in this pro forma  disclosure  are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995.

6.   Income Taxes

         The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at November 3, 1996 and November 3, 1995 are
as follows: <TABLE>
            <S>                                                        <C>              <C>
                                                                          Thousands of dollars
                                                                       --------------------------
                                                                          1996          1995
                                                                       -----------   ------------

            DEFERRED TAX ASSETS:
                U.S. federal NOL carryforwards                         $    2,062          4,477
                Foreign NOL carryforwards                                     771            871
                Deferred gain                                               1,871          1,785
                Foreign tax credit carryforwards                              451          1,897
                Other accrued expenses                                      3,563          3,644
                Other prepaid assets                                          235            276
                                                                       -----------   ------------
                      Total deferred tax assets                             8,953         12,950
                                                                       -----------   ------------

            DEFERRED TAX LIABILITIES:
                Tax in excess of financial statement
                   depreciation and amortization                            1,980          1,682
                Other accrued expenses                                        600            490
                                                                       -----------   ------------
                      Total deferred tax liabilities                        2,580          2,172
                                                                       -----------   ------------

                Net deferred tax asset                                      6,373         10,778
                Valuation allowance                                       (3,825)        (6,576)
                                                                       -----------   ------------
                       Deferred income tax asset, net                       2,548          4,202
                       Less current portion                               (2,548)        (1,747)
                                                                       -----------   ------------
                       Long-term deferred income tax asset, net        $        -          2,455
                                                                       ===========   ============
</TABLE>

         As of November 3, 1996,  the  decrease in the  Company's  deferred  tax
assets was primarily due to partial  utilization  of the Company's  domestic net
operating  loss from 1995 and to the expiration of foreign tax credits which had
been fully  reserved.  The Company is  undergoing a federal  examination  of its
United States tax returns for fiscal years 1994 and 1995,  and as of November 3,
1996,  it is uncertain  what the outcome of the audit will be and what impact it
will have on the Company's  domestic net  operating  loss and foreign tax credit
carryforwards.

         Realization  of the  deferred  tax asset  after  considering  reversing
taxable  differences  is dependent  upon the Company  generating  future taxable
income from operations in the respective  taxing  jurisdiction.  Management does
not  believe it is more likely than not the  Company  will  generate  sufficient
taxable  income  during the  carryforward  periods for  certain  portions of the
deferred  tax assets and,  accordingly,  has  provided a valuation  allowance of
$3,825,000 and $6,576,000 at November 3, 1996 and 1995, respectively.

         The net change in the  valuation  allowance  for deferred tax assets at
November 3, 1996 was a decrease of $2,751,000 due primarily to the expiration of
foreign tax credit carryforwards,  which had been fully reserved,  combined with
an increase in deferred tax  liabilities and a change in estimate of realization
of deferred tax assets.

Income (loss)  before taxes and incomes  taxes in 1996,  1995 and 1994 are shown
below:
<TABLE>
<S>                                                    <C>                    <C>                <C>

                                                                        Thousands of dollars
                                                       --------------- -- ------------- -- --------------
                                                            1996              1995             1994
                                                       ---------------    -------------    --------------
INCOME (LOSS) BEFORE INCOME TAXES:
    Domestic operations                                $        6,277         (16,728)             9,415
    Foreign operations                                          3,460            1,452             1,690
                                                       ---------------    -------------    --------------
                      Total Consolidated               $        9,737         (15,276)            11,105
                                                       ===============    =============    ==============
INCOME TAX PROVISION:
    Domestic operations
         Current                                       $          450          (1,087)             2,194
         Deferred                                               1,654          (1,934)           (2,322)
                                                       ---------------    -------------    --------------
             Total Domestic                                     2,104          (3,021)             (128)

    Foreign operations
         Current                                                  877              686               428
         Deferred                                                   -                -                 -
                                                       ---------------    -------------    --------------
              Total Foreign                                       877              686               428
                                                       ---------------    -------------    --------------
                       Total Consolidated               $       2,981          (2,335)               300
                                                       ===============    =============    ==============
</TABLE>

     The  effective  tax rate  differs  from the U.S.  statutory  rate of 34% as
summarized below:
<TABLE>
<S>                                                    <C>                    <C>              <C>
                                                                         Thousands of dollars
                                                       --------------- -- ------------- -- --------------
                                                            1996              1995             1994
                                                       ---------------    -------------    --------------

Expected income taxes at U.S. statutory rate           $        3,311          (5,194)             3,776
     Non-deductible expenses                                      212               87                21
     Permanent differences on assets sold                         172                -                 -
     Effect of differing tax rates in foreign
         countries                                               (91)               46               160
     Unrecognized deferred tax benefits                             -            2,633                 -
     U.S. taxes on dividends from foreign countries                 -               93               143
     Recognition of previously unrecognized
         deferred tax benefits                                  (761)                -           (4,257)
     Other                                                        138                -               457
                                                       ---------------    -------------    --------------
Income taxes, as reported                              $        2,981          (2,335)               300
                                                       ===============    =============    ==============
</TABLE>

         At November 3, 1996, the Company's  foreign  subsidiaries have deferred
tax assets of $771,000 from net operating loss  carryforwards that are available
indefinitely to offset future foreign taxable income. In addition at November 3,
1996,  the Company has  $451,000 in foreign tax credit  carryforwards  to offset
future foreign income repatriated and taxed in the U.S. These credits are due to
expire 1998 through 2000 if not used.The Company's domestic NOL of approximately
$6,100,000 expires in 2010.

         Certain  of  the  Company's  foreign   subsidiaries  had  undistributed
accumulated  earnings of  approximately  $25,076,000  for U.S.  tax  purposes at
November 3, 1996.  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  associated
with these  undistributed  earnings is  approximately  $8,526,000 at November 3,
1996. If foreign earnings are repatriated,  the U.S. tax on such earnings can be
offset, to a limited extent, with the foreign tax credits.

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 1996,  1995 and 1994,  the Company's
contribution  to the plan was  approximately  $306,000,  $444,000 and  $413,000,
respectively.

         Under the defined  benefit plan, the basic monthly pension payable to a
participant  upon  normal  retirement  equals the  product of the  participant's
monthly  benefit rate 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, 1996,  November 3, 1995 and November 4, 1994, included the following
components: <TABLE> <S> <C> <C> <C>
                                                                          Thousands of dollars
                                                        --------------------------------------------
                                                           1996            1995            1994
                                                        ------------    ------------   -------------
Service cost-benefits earned during the period           $       64              47              50
Interest cost on projected benefit obligation                   576             577             528
Actual return on plan assets                                  (786)         (1,514)           (286)
Net amortization and deferral                                   263           1,165            (35)
                                                        ------------    ------------   -------------
      Net periodic pension cost                          $      117             275             257
                                                        ============    ============   =============
</TABLE>

     The  following  table sets forth the funded  status at November 3, 1996 and
November 3, 1995, of the defined benefit plan:
<TABLE>
<S>                                                                          <C>              <C>

                                                                                Thousands of dollars
                                                                           ----------------------------
                                                                               1996           1995
                                                                           -------------  -------------
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION:
Vested benefit obligation                                                    $  (7,601)        (7,801)
 Nonvested benefit obligation                                                     (174)          (150)
                                                                           -------------  -------------
      Accumulated benefit obligation                                         $  (7,775)        (7,951)
                                                                           =============  =============

Projected benefit obligation                                                 $  (7,775)        (7,951)
Plan assets at market value                                                       7,437          6,888
                                                                           -------------  -------------
       Projected benefit obligation in excess of plan assets                      (338)        (1,063)
Unrecognized transition liability being recognized over
    average future service of plan participants                                     401            468
Unrecognized net loss from past experience different from
    that assumed and effects of changes in assumptions                            1,243          1,635
Adjustment required to recognize minimum liability                              (1,644)        (2,103)
                                                                           -------------  -------------

       Accrued pension expense                                                $   (338)        (1,063)
                                                                           =============  =============
</TABLE>

         In  determining  the  benefit  obligations  and  service  cost  of  the
Company's  defined benefit plan,  weighted  average  discount rates of 7.75% and
7.5% were used in 1996 and 1995,  respectively.  The expected  long-term rate of
return on plan assets was 9.5% in both years.

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,  collateralized
by a second  mortgage on the  property.  The balance of the note  receivable  at
November  3,  1996  and  November  3,  1995,  was  $5,600,000  and   $5,910,000,
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
$3,218,000 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 1997 to 2016.  The  following  is a summary by year of the  noncancelable
portion of future minimum lease payments under operating leases:

                                                       Thousands
                                                       of dollars
                                                     --------------
                                                1997    $    8,608
                                                1998         6,409
                                                1999         3,099
                                                2000         2,370
                                                2001         1,520
                                         Later years        12,816
                                                     -------------
                                     Lease payments*     $  34,822
                                                      =============

         *Minimum  payments  have not been  reduced by minimum  sublease  rental
         income of $2,132,000 due in the future under noncancelable subleases.

         The  Company  has  subleased  approximately  two-thirds  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
                                                      ------------
                                             1997      $    1,284
                                             1998             848
                                                      ------------
                                            Total      $    2,132
                                                      ============

         Rental  expense for all  operating  leases for 1996,  1995 and 1994 was
$8,162,000,  $8,659,000 and $7,623,000,  respectively (net of sublease income of
approximately $1,061,000 in 1996, $1,015,000 in 1995 and $881,000 in 1994).

         At  November  3,  1996,  the  Company  had   commitments   for  capital
expenditures of approximately $1,600,000.

         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 cash and trade accounts receivable.  The
Company  restricts  investment of cash to financial  institutions of high credit
standing.  In addition,  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's  customers are
not concentrated in any specific  geographic  region but are concentrated in the
retail industry.  In 1996 and 1995, one U.S. customer  accounted for $36,260,000
(14.6%) and $30,191,000  (12.5%),  respectively,  of the Company's  consolidated
sales.  In addition,  in 1996 another U.S.  customer  accounted for  $26,571,000
(10.7%) of consolidated  sales. In 1994, no one customer accounted for more than
10% of consolidated sales.

         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, results of operations or cash flows.

 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 trade receivables, the carrying amounts reported in the Consolidated Balance
Sheets  approximate  fair value  because  of the  short-term  maturity  of these
instruments.  The carrying values of the borrowings  under the Credit  Agreement
and the note  receivable  approximate  fair value,  as interest  rates for these
instruments approximate current market rates. The carrying amount and fair value
of  the  Company's   convertible   debentures  was  $1,663,000  and  $1,247,000,
respectively,  at November 3, 1996. At November 3, 1995, the carrying amount was
$1,663,000 and the fair value was $1,039,000.  The fair value of the convertible
debentures  was based upon quoted market prices at November 3, 1996 and November
3, 1995.

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,  boys' and
women's 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 1996, 1995 and 1994.  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.

<PAGE>
<TABLE>
        <S>                                        <C>                 <C>            <C>
                                                                 Thousands of dollars
                                                    -------------------------------------------
                                                       1996            1995           1994
                                                    ------------   -------------   ------------
        NET SALES:
        United States to unaffiliated customers     $   199,574         193,274        206,732
        Transfers between areas                               -             266            547
                                                    ------------   -------------   ------------
                  Total United States                   199,574         193,540        207,279
        Europe                                           30,677          32,033         24,119
        South Pacific                                    17,347          15,490         11,924
        Adjustments and eliminations                          -           (266)          (547)
                                                    ------------   -------------   ------------
                  Total                             $   247,598         240,797        242,775
                                                    ============   =============   ============

        OPERATING PROFIT (LOSS):
        United States                               $     1,981        (12,489)         12,535
        Europe                                                3             385            754
        South Pacific                                     2,626           1,549          1,418
        Adjustments and eliminations                          -               -           (67)
                                                    ------------   -------------   ------------
                  Total                                   4,610        (10,555)         14,640

        Net gain (loss) on sale of assets                10,041             755            (6)
        General corporate expenses                      (1,683)         (1,751)        (1,773)
        Interest expense, net                           (3,231)         (3,725)        (1,756)

                                                    ------------   -------------   ------------
              Income (loss) before income taxes     $     9,737        (15,276)         11,105
                                                    ============   =============   ============

        IDENTIFIABLE ASSETS:
        United States                               $   123,520         146,172        132,238
        Europe                                           16,552          17,326         16,342
        Far East and the South Pacific                   17,645          14,357         13,011
        Adjustments and eliminations                    (3,854)         (4,028)        (3,540)
                                                    ------------   -------------   ------------
                   Total                            $   153,863         173,827        158,051
                                                    ============   =============   ============

</TABLE>

         Approximately  66% and 28% of all product sold in the United  States in
1996 was  assembled  in Mexico and Costa Rica,  respectively,  in the  Company's
owned  facilities  or by  contractors.  Included in the  Company's  consolidated
balance  sheet at November  3, 1996 were net assets  located in Mexico and Costa
Rica totaling approximately $1,305,000 and $6,948,000, respectively.

11.      Related Party Transaction

         In 1996,  the Company  entered into a joint  venture  agreement to form
Global  Sourcing  Services,   Inc.,  a  Cayman  Islands   corporation   ("Global
Sourcing").  Global  Sourcing  is owned 50% by the  Company and the other 50% is
owned by an unrelated  corporation  controlled  by  individuals  involved in the
manufacturing  of  apparel  in Mexico.  The  purpose of the joint  venture is to
provide  production  sourcing  in Mexico for Farah  U.S.A.  Global  Sourcing  is
currently  negotiating a contract with a corporation in Mexico controlled by the
other joint venture partner. Christopher L. Carameros, a member of the Company's
Board of Directors,  has a 10% profits interest in the Mexican  corporation with
whom Global Sourcing  intends to contract.  During fiscal 1996, the Company paid
this Mexican  corporation  $154,000 for other production  sourcing.  In December
1996, the Company  guaranteed  approximately $1.3 million of indebtedness of the
Mexican  corporation  and Global  Sourcing,  the  proceeds of which were used to
acquire equipment to be used in providing production sourcing.

12.      Subsequent Events

         On January 5, 1997, a fire  occurred at the  Company's  leased  garment
manufacturing  plant in Galway,  Ireland.  Certain  inventory and  manufacturing
equipment were destroyed or damaged;  however,  the Company  believes that it is
fully insured for such losses.  It is anticipated that it will take a minimum of
six months to fully  restore  operations at the Galway  facility.  Losses may be
incurred related to the prolonged business interruption of this facility and its
related  impact  on the  Company's  other  manufacturing  facility  in  Ireland.
Accordingly,  management  is  currently  evaluating  whether it is  economically
feasible to continue its operations in Ireland. The Company is uncertain to what
extent  these  losses  are  covered  by  insurance.   Farah   Ireland   supplies
approximately  45% of the products sold by the Company's  Farah U.K.  subsidiary
whose annual sales approximated $30 million in fiscal year 1996. The Company has
moved quickly to begin replacing the loss of inventory and production during the
interruption  period with  outside  contractors,  however some loss of sales and
related profit margins at Farah U.K. are expected. While the exact amount of the
losses are not  determinable at this time, the Company believes that the pre-tax
write-off  to be  recorded in the 1997 first  quarter is not  expected to exceed
$2.5 million.

         On November 30, 1996, the Company  entered into a lease  agreement with
Santa  Teresa  Limited  Partnership  for  a  new  distribution  warehouse.   The
construction  of the new facility has an estimated  completion date of September
1997.  The lease  agreement  provides an option to purchase  the  warehouse  for
$6,700,000 if Industrial  Revenue Bond financing can be obtained.  Relocation to
the new  warehouse  is planned to be  completed  in the first  quarter of fiscal
1998. New shelving,  product  handling and other  equipment for the warehouse is
estimated to cost  approximately  $4,000,000,  most of which will be incurred in
fiscal 1997. <PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS




TO THE SHAREHOLDERS OF FARAH INCORPORATED:

         We have audited the  accompanying  consolidated  balance sheet of Farah
Incorporated (a Texas  corporation) and subsidiaries as of November 3, 1996, and
the related  consolidated  statements of operations,  shareholders'  equity, and
cash  flows  for  the  year  then  ended.  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 audit.

         We conducted our audit 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 audit provides 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, 1996, and the results of their operations and
their cash flows for the year then ended, in conformity with generally  accepted
accounting principles.


/s/ Coopers & Lybrand L.L.P.

Coopers & Lybrand L.L.P.

El Paso, Texas
December 18, 1996

<PAGE>


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




TO THE SHAREHOLDERS OF FARAH INCORPORATED:


         We have audited the  accompanying  consolidated  balance sheet of Farah
Incorporated (a Texas  corporation) and subsidiaries as of November 3, 1995, and
the related  consolidated  statements of operations,  shareholders'  equity, and
cash flows for each of the years ended  November  3, 1995 and  November 4, 1994.
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 the results of their operations and
their cash flows for each of the years ended  November  3, 1995 and  November 4,
1994 in conformity with generally accepted accounting principles.




/s/ Arthur Andersen LLP

ARTHUR ANDERSEN LLP


Dallas, Texas
December 15, 1995
<PAGE>
<TABLE>
<CAPTION>

         Quarterly unaudited information for fiscal 1996 compared to fiscal 1995
is as follows:
<S>                                      <C>                  <C>                 <C>                <C>
                                                                       Thousands of dollars except share data
                                            ------------------------------------------------------------------------
                                            First Quarter     Second Quarter      Third Quarter      Fourth Quarter
                                            -------------    ----------------    ---------------    ----------------

1996
Net sales                                 $       51,510              64,058             55,973              76,057
Gross profit                                      13,797              16,134             14,562              19,565
Net income (loss)                                  (989)               (176)              6,887               1,034
Net income (loss) per share                        (.10)               (.02)                .67                 .10
Weighted average shares
      of common stock and
      common stock equivalents
      outstanding                             10,149,070          10,161,647         10,235,374          10,234,442

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

</TABLE>

      In the third quarter of fiscal 1996, the Company sold its Piedras  Negras,
     Mexico  facility,  which  resulted in an  after-tax  gain of  approximately
     $6,900,000.

COMMON STOCK

         There were  10,235,371  shares of the Company's  common  stock,  no par
value,  outstanding  as of January 13,  1997,  owned of record by  approximately
2,200  shareholders.  Trading  volume during fiscal 1996 averaged  approximately
31,700 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>
          <S>                    <C>            <C>                <C>                <C>
                                                1996                            1995
                                 ---------------------------      ----------------------------
                                     High           Low              High             Low
                                 -------------  ------------      ------------    ------------

         1st Quarter             $    7  1/ 8       4  1/ 2                 9         6  5/ 8
         2nd Quarter                  6  3/ 8       4  1/ 2           8  5/ 8         6  7/ 8
         3rd Quarter                        9       5  3/ 4           8  3/ 8               6
         4th Quarter                  7  7/ 8       5  7/ 8           8  1/ 8         6  1/ 4
</TABLE>

         The closing sales price of the  Company's  common stock on the New York
Stock Exchange as of January 13, 1997, was $7.875.

         As of  November  3, 1996,  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 27 holders.

         The Company has not paid any  dividends on its common stock since 1986.
The  Company's  Credit  Agreement  prohibits  the  payment of  dividends  by the
Company.
<TABLE>
<CAPTION>

SELECTED FINANCIAL DATA
<S>                                      <C>                      <C>            <C>            <C>             <C>
                                                          Thousands of dollars, except share and per share data
                                          --------------------------------------------------------------------------------
                                                  1996             1995            1994          1993           1992
                                          -------------------  --------------  -------------  ------------  --------------
Summary of Operations:

Net sales                                 $          247,598         240,797        242,775       180,114         151,990
Cost of sales                                        183,540         185,822        172,300       127,020         113,509
Selling, general and
       administrative expenses                        62,189          68,002         58,294        47,372          41,915
Factory conversion expenses                                -               -              -         4,000               -
Operating income (loss)                                1,869        (13,027)         12,181         1,722         (3,434)
Other income (expense):
       Foreign currency transaction
            gains (losses)                               374             512            449         (151)           1,460
       Gain (loss) on sale of asset                   10,041             756            (6)           320               9
       Provision for Generra bankruptcy                    -               -                                      (6,146)
                                                                                          -             -
       Other, net                                        684             209            237           (3)           (149)
Interest expense, net                                (3,231)         (3,726)        (1,756)       (1,452)           (960)
Income (loss) before income taxes                      9,737        (15,276)         11,105           436         (9,220)
Income tax provision (benefit)                         2,981         (2,335)            300           304             369
Net income (loss)                                      6,756        (12,941)         10,805           132         (9,589)

Per Share Information:

Net income (loss)                         $              .66          (1.28)           1.16          0.02          (1.52)
Book value per share based on shares
       outstanding at balance sheet dates $             8.07            7.29           8.53          5.45            5.37
Shares outstanding                                10,172,971      10,145,326     10,080,341     7,971,625       7,266,642

Financial Position at Year-End:

Current assets                            $          118,338         127,911        123,919        95,325          71,808
Property, plant and equipment, net                    25,370          33,363         22,872        13,220          10,376
Other assets, non-current                             10,155          12,553         11,260        10,346          10,953
Total assets                                         153,863         173,827        158,051       118,891          93,137
Current liabilities                                   59,807          78,903         56,535        61,346          34,983
Long-term debt                                         4,706          12,568          5,170         1,179           4,452
Other liabilities                                      3,992           3,136          3,103         3,627           3,346
Deferred gain on sale of building                      3,218           5,250          7,282         9,314          11,346
Shareholders' equity                                  82,140          73,970         85,961        43,425          39,010
Total liabilities and shareholders' equity           153,863         173,827        158,051       118,891          93,137
Current ratio                                       2.0 to 1         1.6 to 1       2.2 to 1      1.5 to 1        2.1 to 1
</TABLE>

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


<TABLE>
<CAPTION>
Results of Operations

         The following  table sets forth certain  financial  data expressed as a
percentage of net sales, for the years indicated:

         <S>                                          <C>             <C>              <C>
                                                               Fiscal Year Ended
                                                   ------------ -- ------------ -- -------------
                                                      1996            1995             1994
                                                   ------------    ------------    -------------

         Net sales:
              Farah U.S.A.                               73.8%           73.5%            78.8%
              Farah International                        19.4%           19.7%            14.9%
              Value Slacks                                6.8%            6.8%             6.3%
                                                   ------------    ------------    -------------
         Total net sales                                100.0%          100.0%           100.0%
         Cost of sales                                   74.1%           77.2%            71.0%
                                                   ------------    ------------    -------------
              Gross profit                               25.9%           22.8%            29.0%
         Selling, general and
            administrative expenses                      25.1%           28.2%            24.0%
                                                   ------------    ------------    -------------
              Operating income (loss)                      .8%          (5.4%)             5.0%
         Other income (expense), net                      3.1%          (0.9%)           (0.4%)
                                                   ------------    ------------    -------------
              Income (loss) before income
                      taxes                               3.9%          (6.3%)             4.6%
         Income tax expense (benefit)                     1.2%          (0.9%)             0.1%
                                                   ------------    ------------    -------------
              Net income (loss)                           2.7%          (5.4%)             4.5%
                                                   ============    ============    =============
</TABLE>

1996 Sales Compared to 1995

         Consolidated  sales  increased  by  $6,801,000  or 2.8% in fiscal  1996
compared  to fiscal  1995.  Sales  increased  in all of the  Company's  business
groups, Farah U.S.A., Farah International and Value Slacks.

         Sales  at  Farah  U.S.A.   increased  by  $5,716,000   or  3.2%,   from
$177,035,000 in fiscal 1995 to $182,751,000 in fiscal 1996.  Units sales were up
4.7%,  while the average price per unit  decreased  1.4%.  The  following  table
reflects comparative sales by product line:

<TABLE>
                      <S>                          <C>                    <C>
                                                             Thousands of dollars
                                                      ------------------------------
                                                          1996             1995
                                                      -------------    -------------

                      Savane                        $      118,154          107,560
                      Farah and
                           Farah Clothing Co.               18,520           27,145
                      John Henry                             8,224           11,477
                      Private Label                         37,853           30,853
                                                      -------------    -------------
                                                    $      182,751          177,035
                                                      =============    =============
</TABLE>

         The Company's  largest label,  Savane,  experienced  increased sales of
approximately  10% for the  year.  The  increase  in sales  is a  result  of the
introduction of new lines and increases in existing product sales. During fiscal
1996, the Company introduced Deep Dye casuals and dress, womenswear,  and Savane
shirts. Sales of casual Savane men's product, which represented more than 67% of
the total Savane  business,  were comparable in fiscal 1995 and fiscal 1996. The
men's  dress  Savane  product  sales,  however,  increased  by more than 90% and
represented the major portion of the growth within the Savane label.  For fiscal
1996,  sales  of dress  Savane  products  represented  22% of the  total  Savane
business,  up from 13% in  fiscal  1995.  The  introduction  of the new Deep Dye
dress,  combined with improved sales of existing dress products,  contributed to
the overall increase in dress wear. The Company expects  continued  improvements
in the Savane dress category in 1997, as a result of the  introduction  of a new
upscale dress line called Savane  Elements.  This line will include dress slacks
with  coordinating  coats,  offering  a  sportswear  or dress  concept.  Initial
shipments of this product will be made in January 1997.

         Also  contributing to growth in the Savane label were the  introduction
of a limited line of women's  casual wear and men's shirts that began selling in
July and October of 1996, respectively.  The Company intends to pursue these new
programs by offering them to more customers and expanding the lines in 1997.

         Sales of  Farah,  including  Farah  Clothing  Company,  and John  Henry
products declined in 1996 compared to 1995 by 32% and 28%, respectively.  In the
recent past,  sales of these products  declined as more and more Savane products
were being sold. In response,  the Company  decided to  reposition  these labels
into  separate and  distinct  distribution  channels in order to fully  maximize
their  sales  potential.  That  process  was  completed  in the third and fourth
quarter  of 1996;  however,  up to that  time  sales  continued  to  decline  as
customers  phased out of their Farah and John Henry  programs.  During the third
quarter of 1996,  the Company began shipping the John Henry brand to Sears under
a new sales plan,  and since that time,  John Henry sales have  improved by more
than  50%  compared  to  the  same  period  last  year.  While  there  can be no
assurances,  the Company believes that sales of John Henry product will continue
to grow throughout 1997 as the Company  delivers more product to Sears and gains
additional  customers  in  this  marketing  segment.  To  complete  the  product
repositioning,  the Company began selling its Farah brand to a limited number of
stores of a major retailer in the mass merchandising distribution channel in the
1996 fourth quarter.  While no assurances can be provided,  the Company believes
that it will  continue to expand its Farah  branded sales volume with this major
retailer in 1997 as the Company delivers more product to additional stores.

         Sales of private label product  increased  approximately  23% in fiscal
1996 compared to 1995, and  represented 21% of Farah U.S.A.'s sales in 1996. The
private label business has continued to grow as a result of retailers  expanding
their lines to include more private label products and the  introduction  by the
Company of new programs,  including  expansion into womenswear,  boys and dress.
The Company intends to cautiously  pursue growth in private label sales while it
focuses heavily on improving its profit margins.

         Farah International, comprised primarily of sales in the United Kingdom
and Australia,  recorded sales growth of 1.1% from $47,523,000 in fiscal 1995 to
$48,024,000  in fiscal 1996.  Unit sales and the average price both increased by
 .5%. Sales at Farah Australia  increased by 13.5% as a result of increased sales
of Savane no wrinkle  product and  private  label  product.  Sales at Farah U.K.
decreased by 3.2%,  mainly as a result of the  strengthening  of the U.S. Dollar
compared to the British Pound Sterling. Sales were comparable in fiscal 1995 and
fiscal 1996 at Farah U.K., excluding the effects of the currency fluctuations.

         Value Slacks,  the Company's retail store division,  reported increased
sales  of 3.6%,  with  sales  increasing  from  $16,239,000  in  fiscal  1995 to
$16,823,000  in fiscal 1996.  The average sales price  increased by 13.4% during
the year as the mix of sales of first  quality  product  improved.  Unit  sales,
however were down by 8.7%, as competition in the retail outlet market increased.
There were a total of 39 stores in operation at the end of fiscal 1996  compared
to 38 stores at the end of fiscal 1995.  During  fiscal  1996,  three new stores
were opened, while two of the Company's less profitable locations were closed as
retail leases  expired.  Same store sales were down  approximately  3% in fiscal
1996 compared to fiscal 1995. Late in the fourth quarter, management implemented
a new  marketing  strategy to more  properly  align the  Company's  retail store
merchandise  and  displays  with  current  market  trends and to improve  future
operations.  These  changes  include  offering  a greater  mix of first  quality
product in a broader range of sizes and colors, and less closeouts or off-priced
goods to certain  stores,  a redesign of store layouts and the  introduction  of
electronic  order processing to reduce warehouse  inventory  levels.  Management
believes  that these  changes  will help to better  position  the Company in the
retail environment.

1995 Sales Compared to 1994

         Sales decreased  $1,978,000 or .8%, from $242,775,000 in fiscal 1994 to
$240,797,000  in fiscal 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
recorded  sales  growth  of 32%.  Sales at Farah  International  increased  from
$36,043,000  in fiscal 1994 to  $47,523,000  in fiscal  1995.  Value Slacks also
reported an increase in sales from  $15,326,000 in fiscal 1994 to $16,239,000 in
fiscal 1995, a 6.0% increase.

         Sales at Farah U.S.A. as a percent of consolidated sales decreased from
79% in fiscal 1994 to 73% in fiscal  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:


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

                      Savane                      $  107,560         114,395
                      Farah and
                           Farah Clothing Co.         27,145          47,239
                      John Henry                      11,477          14,381
                      Private Label                   30,853          15,391
                                                 ------------    ------------
                                                  $  177,035         191,406
                                                 ============    ============

         The sales reduction was primarily in the Company's  branded product and
principally  the result of: (1) increased  market  penetration in the no wrinkle
casual pant market by the Company's competitors; (2) the soft retail market that
intensified through fiscal 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 fiscal 1995 was 5% lower than in fiscal 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  fiscal  1995  and  15%  in  fiscal  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
fiscal 1995 and 6% in fiscal 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 fiscal
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.

1996 Gross Profit Compared to 1995

         Gross profit  increased by  $9,083,000 in fiscal 1996 over fiscal 1995.
The Company's gross profit as a percentage of consolidated  sales increased from
22.8% in fiscal 1995 to 25.9% in fiscal 1996. Gross profit as a percent of sales
increased  at Farah  U.S.A.  from  17.6%  in 1995 to  22.0%  in  1996,  and also
increased at Farah  International  from 33.0% in 1995 to 33.9% in 1996. At Value
Slacks, margins declined to 45.5% in 1996 from 50.5% in 1995.

         Gross profit margins improved  considerably at Farah U.S.A. as a result
of a cost  containment  program  initiated in the latter part of 1995. A strict,
disciplined  production  plan was put into  place  that  focused  on  increasing
factory efficiencies,  reducing overhead, and improving first quality production
percentages,   factory   deliveries  and  work  in  process  turns.  There  were
significant reductions in the production work force, particularly in the U.S. as
the  Company  shifted  more  production  activities  to offshore  factories  and
contractors.  In addition, there was a shift in production product mix in Mexico
that had the effect of reducing  overall U.S.  import  duties.  Having  migrated
through the transitional startup costs of the new laundry, finishing and cutting
facilities experienced in 1995, the Company improved product quality and reduced
the number of irregulars and second quality  products in 1996. In addition,  the
Company  experienced  lower  costs as a result  of  further  devaluation  of the
Mexican  Peso,  although to a lesser  extent when compared to 1995. As discussed
later,  the Company sold its Piedras  Negras,  Mexico  facility in June 1996 and
entered into a long term supply  agreement  which has also helped to reduce unit
costs.  Finally,  the Company recorded fewer reserves for inventory markdowns in
1996 as the Company significantly reduced its inventory levels.

         At Farah  International,  gross profit margins were  comparable for the
first  half of the year,  showing  some  improvement  late in the  second  half.
Increased  sales of higher  margin  product  at Farah  Australia  combined  with
efforts to obtain a proper balance of owned  production and contract  production
have resulted in this slight improvement in margins.

         Gross profit  margins at Value  Slacks were down  compared to the prior
year,  as a result of higher  promotional  sales,  combined  with a lower mix of
irregulars and closeout  goods.  In addition,  during the fiscal 1996 second and
third quarters, margins were negatively impacted by below normal sales prices on
merchandise  sold  through a  "satellite  sales"  program in order to dispose of
excess inventories.

1995 Gross Profit Compared to 1994

         Gross profit as a percent of sales was 22.8% in fiscal 1995 compared to
29.0% in fiscal 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, contributing
to the 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.

1996 Selling, General and Administrative Expenses Compared to 1995

         Selling,  General and Administrative  expenses ("SG&A") as a percent of
sales  decreased from 28.2% in fiscal 1995 to 25.1% in fiscal 1996. The majority
of this  decrease  is  attributable  to lower  national  and  co-op  advertising
expenses at Farah U.S.A,  where SG&A as a percent of sales  decreased from 25.3%
in 1995 to 20.9% in fiscal 1996.  Management shifted its advertising strategy to
more  heavily  focus on print  media and point of sale  merchandise  and less on
national  television  campaigns.  Advertising through several national magazines
and other printed  material in 1996 resulted in significant cost reductions that
have allowed  increases in customer  store  display  tables and  fixturing.  The
Company  also  changed  the mix of its sales  force by  reducing  the  number of
salesmen and replacing them with  coordinators,  whose purpose is to ensure that
the  merchandise  and  promotional  materials are properly  displayed and assist
store personnel.  Also,  contributing to reductions in Farah U.S.A.'s SG&A costs
were reductions in personnel, professional fees and insurance.

         SG&A at Farah International  decreased from 31.0% to 29.7% as a percent
of sales in 1995 and 1996, respectively. Similar to Farah U.S.A., the reductions
were due to decreases in advertising, outside services and professional fees. At
Value Slacks,  SG&A costs as a percent of sales  increased from 52.3% in 1995 to
57.7% in 1996. The increase was largely due to reserves  established at year end
for the  planned  realignment  of store  operations,  increased  labor costs and
depreciation  expense  associated  with  opening  new  stores in the  U.S.,  and
increased  advertising  and other selling  costs related to the satellite  sales
program.

1995 Selling, General and Administrative Expenses Compared to 1994

         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.

         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.  In addition,  advertising,  labor
and certain other operating costs as a percent of sales are higher in the U.S.
than in Puerto Rico.

Other Income (Expense)
<TABLE>
<CAPTION>

         The following table illustrates the changes in interest expense, net of
interest  income,  over the past three fiscal years,  and the other  significant
items included in non-operating income and expense (in thousands):
               <S>                                            <C>   <C>       <C>        <C>
                                                                     1996       1995      1994
                                                                     ----       ----      ----

               Interest expense, net                          $      3,231     3,726      1,756
               Interest expense, net, as a percent of sales           1.3%      1.5%       0.7%
               Average debt                                         40,352    47,910     26,689
               Average interest rate                                  9.4%      9.7%       9.0%

               Gain (loss) on sale of assets                        10,041       756        (6)
               Foreign currency transaction gains                      374       512        449
</TABLE>

         As noted above, the largest item included in other income (expense) for
fiscal 1996 was gain on sale of assets.  Included in this line item is a pre-tax
gain of approximately  $9,300,000  realized on the sale of the Company's Piedras
Negras,  Mexico facility.  On June 7, 1996, the Company sold its Piedras Negras,
Mexico sewing and finishing  facility to Galey & Lord, Inc. for a purchase price
of approximately  $22,200,000 in cash.  Proceeds from the sale, net of expenses,
were  used to retire a  long-term  capital  lease  obligation  of  approximately
$7,200,000  plus other  long-term  obligations.  The balance of the  proceeds of
approximately $13,800,000 was applied to the Company's Credit Agreement.

         As discussed  below in "Liquidity and Capital  Resources,"  the Company
also  significantly  reduced its inventory levels. The proceeds from the sale of
the Piedras  Negras,  Mexico  facility and the  reductions in inventory were the
principal  factors  contributing  to the reduced  borrowings in 1996 and had the
effect of reducing net interest  expense for the year.  Interest  expense should
remain  relatively low in the first half of 1997,  increasing in the second half
of the year, as investments in capital  projects and joint venture  arrangements
are financed through the Company's Credit Agreement or other borrowings.

Income Tax Expense (Benefits)

         The Company's  effective  tax rate was 30.6% for fiscal 1996,  compared
with 15.3% and 2.7% in fiscal 1995 and fiscal 1994, respectively.  Taxes in 1996
resulted  mainly  from  the  gain on the  sale  of the  Piedras  Negras,  Mexico
facility, and from international  operations. As of November 3, 1996 the Company
had net deferred tax assets of approximately  $6,373,000,  partially offset by a
valuation  allowance of $3,825,000.  Realization of the remaining portion of the
net deferred tax asset is dependent upon future taxable income. The Company will
continue to evaluate  realizability  of its deferred tax assets and the need for
adjustments to the valuation  allowance  based on actual and expected  operating
performance,  executed or proposed tax strategies,  or other changes in facts or
circumstances as they arise.

Subsequent Event

         On January 5, 1997, a fire  occurred at the  Company's  leased  garment
manufacturing  plant in Galway,  Ireland.  Certain  inventory and  manufacturing
equipment were destroyed or damaged;  however,  the Company  believes that it is
fully insured for such losses.  It is anticipated that it will take a minimum of
six months to fully  restore  operations at the Galway  facility.  Losses may be
incurred related to the prolonged business interruption of this facility and its
related  impact  on the  Company's  other  manufacturing  facility  in  Ireland.
Accordingly,  management  is  currently  evaluating  whether it is  economically
feasible to continue its operations in Ireland. The Company is uncertain to what
extent  these  losses  are  covered  by  insurance.   Farah   Ireland   supplies
approximately  45% of the products sold by the Company's  Farah U.K.  subsidiary
whose annual sales approximated $30 million in fiscal year 1996. The Company has
moved quickly to begin replacing the loss of inventory and production during the
interruption  period with  outside  contractors,  however some loss of sales and
related profit margins at Farah U.K. are expected. While the exact amount of the
losses are not  determinable at this time, the Company believes that the pre-tax
write-off  to be  recorded in the 1997 first  quarter is not  expected to exceed
$2.5 million.

Liquidity and Capital Resources
<TABLE>
<CAPTION>

         Key statistics  demonstrating financial condition of the Company are as
follows:
           <S>                                                     <C>              <C>
                                                                    Thousands of dollars
                                                                   1996             1995
                                                                -----------       ---------
           Working capital                                          58,531          49,008
           Total debt                                               26,738          59,754
           Long-term debt                                            4,706          12,568
           Shareholders' equity                                     82,140          73,970
           Current ratio                                             2.0:1           1.6:1
           Long-term debt-to-equity                                  .06:1           .17:1
           Total debt-to-equity                                      .33:1           .81:1
           Days sales in accounts receivable                            59              57
           Inventory turnover                                          2.7             2.5

</TABLE>
         The improvement in the Company's working capital, as shown in the above
statistics, resulted mainly from cash flow of approximately $22,200,000 from the
sale of the Company's  Piedras Negras,  Mexico facility.  Proceeds from the sale
were used to reduce both short-term and long-term borrowings. Liquidity was also
improved by a substantial  reduction in inventories.  Inventory levels decreased
by $10,730,000 during fiscal 1996, a 15% decline.  The improvements in liquidity
and  working  capital  were  partially  offset  by the use of  cash to  purchase
property, plant and equipment of approximately $4,397,000.

         Working capital  increased by $9,523,000 during the year. This increase
resulted  mainly from the decrease in  short-term  borrowings  of  approximately
$24,035,000,  offset partially by a reduction in inventory of $10,730,000 and an
increase  in  trade  payables  of   $6,394,000.   The  reduction  in  short-term
borrowings,  as previously  discussed,  resulted  mainly from the application of
proceeds  from the sale the  Company's  Piedras  Negras,  Mexico  facility.  The
decrease in  inventory  resulted  from higher  sales and  successful  efforts to
manage production levels to better match demand.  Trade payables  increased as a
result of higher raw material purchases near the end of the year and as a result
of an increase in liabilities to production contractors. In conjunction with the
sale of the Piedras Negras facility, the Company entered into a long term supply
agreement  whereby  the buyer of the  facility  will  continue to sew and finish
garments for the Company.  Since the sale of the  facility,  the  percentage  of
Farah U.S.A.  production from outside  contractors has increased from 33% at the
end of fiscal  1995,  to 62% at the end of fiscal 1996.  The Company  intends to
source growth in production  with outside  contractors and expansion of existing
facilities as discussed below.

         The Company's  primary  Credit  Agreement,  which expires July 1, 1998,
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 and inventory.  The Credit
Agreement is collateralized by substantially all of the Company's assets, except
for  certain  property,   plant  and  equipment,  and  is  guaranteed  by  Farah
Incorporated and each of Farah U.S.A.'s domestic  affiliates.  As of November 3,
1996,  usage under the Credit  Agreement was $23,045,000  (including  letters of
credit of $2,610,000) and available credit was  $26,955,000.  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 were  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, 1996,
the  Company was in  compliance  with the  minimum  working  capital and minimum
tangible net worth covenants.  The Company's Farah U.S.A. capital  expenditures,
however,  exceeded the covenant limit by approximately  $285,000.  The Company's
lender  waived this covenant for fiscal 1996.  Fiscal 1997 capital  expenditures
are also expected to exceed the current  covenant level in the Credit  Agreement
and Management is currently  negotiating an increase in this limit. In addition,
the Credit Agreement prohibits the payment of dividends by the Company.

         In fiscal 1997, major liquidity  requirements will be for the financing
of capital  expenditures,  estimated to approximate  $19,000,000.  Approximately
$7,000,000  will  be used  to  increase  current  production  capacity.  To help
preserve control over the Company's unique finishing processes,  it is currently
involved  in  negotiations   to  form  joint  ventures  with  existing   apparel
manufacturing companies in Mexico. As part of the joint venture agreements,  the
Company  will  share the cost to  upgrade  facilities  and  purchase  additional
laundry, pressing and sewing equipment.

          As with many  companies,  the Company is addressing and evaluating the
impact of the millennium  dating issue on its computer  systems.  In addition to
modifying  existing systems,  the Company is also considering the replacement of
its entire  order entry and  inventory  management  systems.  Should the Company
conclude  to replace  its  systems,  it expects  to incur an  estimated  cost of
$2,200,000 in fiscal 1997. In the event the system is not replaced,  the cost to
modify  existing  programs  to  address  the  dating  issue  will be  charged to
operations in the year incurred.

          The  Company's  lease  on  its  existing  corporate  headquarters  and
distribution  warehouse  expires in May 1998. As a result,  the Company plans to
relocate its corporate offices to another El Paso location in the second quarter
of fiscal  1997.  The new  facility  will be  leased  under an  operating  lease
agreement,  with estimated expenditures for leasehold improvements and furniture
and fixtures of $1,700,000. The Company will also be relocating its distribution
warehouse. The Company has entered into a lease for a facility to be constructed
with an  estimated  completion  date of  September  1997.  The  lease  agreement
provides an option to purchase  the  warehouse  for  $6,700,000,  if  Industrial
Revenue Bond  financing  can be  obtained.  Relocation  to the new  warehouse is
planned to be  completed  in the first  quarter of fiscal  1998.  New  shelving,
product  handling  and other  equipment  for the  warehouse is estimated to cost
approximately $4,000,000, of which most will be incurred in fiscal 1997.

         The Company is considering various long-term financing  arrangements to
fund the 1997 capital  spending  plans.  If such sources of long-term  financing
cannot be obtained,  capital  expenditures will be financed through the existing
Credit Agreement, cash from operations or capital lease obligations. The Company
believes its existing capital resources,  together with the financing  available
from the Credit  Agreement and its ability to access other capital  markets,  if
necessary,  will be  adequate to meet its  short-term  and  long-term  liquidity
requirements.

         Capital  expenditures  for  fiscal  years  1996,  1995  and  1994  were
$5,123,000,  $15,679,000 and $12,065,000,  respectively. As of November 3, 1996,
material commitments for capital expenditures were approximately $1,600,000.

         Most of Farah  U.S.A.'s  major fabric  suppliers  provide 60-day terms,
subject to certain limits.  During fiscal 1996, the maximum  outstanding balance
at any month-end under these credit terms was $14,054,000.

         Inflation did not materially impact the Company in fiscal 1996, 1995 or
1994.

Factors Affecting the Company's Business and Prospects

         Statements  in this Report that relate to future  results or events are
based on the Company's current expectations.  There are many factors that affect
the  Company's  business  and the results of its  operations  that may cause the
actual results of operations in future periods to differ  materially  from those
currently  expected or desired.  These  factors  include  general  economic  and
business  conditions  in the U.S.  and  abroad;  the level of demand for apparel
products;  the  intensity  of  competition  and the pricing  pressures  that may
result;  changes in labor and import and export regulations;  the ability of the
Company to timely and effectively manage production sourcing; the ability of the
Company to access the credit market to finance capital expenditures; the ability
of the  Company to manage its  inventory  levels to minimize  excess  inventory;
currency fluctuations; and the success of planned advertising.
<TABLE>

<CAPTION>

     OFFICERS
     <S>                                             <C>                                 <C>
     FARAH INCORPORATED                              FARAH U.S.A., INC.
     Richard C. Allender                             Michael R. Mitchell                  Dianna S. Benton
     President, Chairman of the Board                President                            Vice President - Credit
     Chief Executive Officer
                                                     Jackie L. Boatman                    Gilbert A. Martinez
     Timothy B. Page                                 Executive Vice President -           Vice President - Information Systems
     Executive Vice President                        Operations                           Chief Information Officer
     Chief Operating Officer
                                                     Gary J. Kernaghan                    Mary Esther Minjares
                                                     Senior Vice President -              Vice President -
                                                     Merchandising                        Product Replenishment
     Russell G. Gibson
     Executive Vice President,                       Franz A. Maccarrone                  Rodolfo A. Morales
     Chief Financial Officer,                        Senior Vice President -              Vice President -
     Treasurer and                                   Operations                           Research & Development
     Assistant Corporate Secretary

     Karen S. Castillo                               Edward P. Srsic, jr.                 Victor Ontiveros
     Corporate Secretary                             Senior Vice President -              Vice President - Sales Administration
                                                     Private Label

                                                     Jose A. Ramirez                      Polly H. Vaughn
     FARAH INTERNATIONAL, INC.                       Senior Vice President -              Vice President - Controller
                                                     Operations Administration
     Helmut H. Meinel
     Senior Vice President

     Donald Lewis
     Managing Director
     Farah (Australia) Pty, Ltd
     and Farah (New Zealand) Limited

     Eric A.R. Thornton
     Managing Director
     Farah Manufacturing (U.K.) Limited



     VALUE SLACKS

     Donald G. Carney
     President

     Mark H. Wright
     Vice President - Director of Stores

</TABLE>

Mailing Address
Farah Incorporated
P.O. Box 9519
El Paso, Texas  79985
Telephone:   915-593-4444


Transfer Agent and Registrar
Common Stock
Society National Bank
c/o Key Corp Shareholder Services, Inc.
1201 Elm Street, Suite 5050
Dallas, Texas  75221-2320
Toll Free Number:   800-527-7844
Questions and communications regarding
lost stock certificates,  change of address,  dividend checks,  consolidation of
accounts and transfer of certificates should be directed to the Transfer Agent.

Trustee and Paying Agent
8.5% Convertible Subordinated
Debentures due February 1, 2004
Texas Commerce Bank, N.A.
Corporate Trust
201 East Main
5th Floor
El Paso, Texas 79901
Telephone:  915-546-6528



FORM 10-K
A copy of the Company's annual report on Form 10-K, as filed with the Securities
and Exchange Commission,  will be furnished to any shareholder free of charge on
request to the Secretary of the Corporation.



CORPORATE DIRECTORY



DIRECTORS



Richard C. Allender (2, 4, 5)                   Sylvan Landau (2)
Chairman of the Board                           Executive Vice President
and Chief Executive Officer                     Retail Development
Farah Incorporated                              The Dallas Market Center


Clark L. Bullock (1, 3)                         Michael R. Mitchell (5)
Chairman of the Board and Chief Executive       President
Officer Shelter Rock Investors Services         Farah U.S.A., Inc.
Corporation

Christopher L. Carameros (4)                    Timothy B. Page (4)
Executive Vice President                        Executive Vice President
Cactus Apparel, Inc.                            Chief Operating Officer
                                                Farah Incorporated

John D. Curtis (1, 3)                           Charles J. Smith (1, 2, 3, 4)
President                                       Consultant
First Extended Service Corporation


(1)    Member of the Audit Committee
(2)    Member of the Nominating Committee
(3)    Member of the Stock Option and Compensation Committee
(4)    Member of the Executive Committee
(5)    Member of the Retirement and Employee Benefits Committee

<PAGE>