SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
    Mark One
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    -------
      X       THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
    -------
                   For the Fiscal Year Ended November 2, 1997
                                       OR
                TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
            OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                           Commission File No. 1-5400
                               FARAH INCORPORATED
             (Exact name of registrant as specified in its charter)

            Texas                                         74-1061146
(State or other jurisdiction of                         (I.R.S. Employer
incorporation or organization)                         Identification No.)

     4171 N. Mesa, Building D                                
     Suite 500, El Paso, Texas                              79902-1433
(Address of principal executive offices)                    (Zip Code)

    Registrant's telephone number, including area code:   (915) 496-7000
           Securities registered pursuant to Section 12(b) of the Act:
                                                     Name of each exchange
                  Title of each class                on which registered
             CommonStock, no par value             New York Stock Exchange

               Securities registered pursuant to Section 12(g) of
                                    the Act:
                     8.5% Convertible Subordinated Debenture
                              due February 1, 2004

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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No ___

     As of  January  9, 1998 there  were  outstanding  10,278,989  shares of the
registrant's  common stock,  no par value,  which is the only class of common or
voting stock of the registrant.  As of that date, the aggregate  market value of
the shares of common stock held by  non-affiliates  of the registrant  (based on
the closing price for the common stock on the New York Stock Exchange on January
9, 1998) was $52,982,574.

                       DOCUMENTS INCORPORATED BY REFERENCE
     Portions of the following  documents are incorporated by reference into the
indicated part or parts of this report:

               Proxy Statement Dated January 30, 1998 - Part III.
                  The Exhibit Index is on Page 58 of Form 10-K.


<PAGE>


                                TABLE OF CONTENTS


 Item                              Description                        Page

                                     PART I

1        Business                                                        3

2        Properties                                                     11

3        Legal Proceedings                                              11

4        Submission of Matters to a Vote of Security Holders            11

                                     PART II

5        Market for the Registrant's Common Equity and Related 
         Stockholder Matters                                            12

6        Selected Financial Data                                        13

7        Management's Discussion and Analysis of Financial
         Condition and Results of Operations                            14

8        Financial Statements and Supplementary Data                    26

9        Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure                            47

                                    PART III

10       Directors and Executive Officers of the Registrant             48

11       Executive Compensation                                         48

12       Security Ownership of Certain Beneficial Owners
         and Management                                                 48

13       Certain Relationships and Related Transactions                 48

                                     PART IV

14       Exhibits, Financial Statement Schedules and Reports on
         Form 8-K                                                       48


<PAGE>


                                     PART I

Item 1.  BUSINESS

General

         The Company, founded in 1920, is a leading manufacturer and marketer of
apparel for men and boys.  Beginning in fiscal 1996, a limited number of women's
products were added to the Company's product lines. The Company was incorporated
in Texas in 1947 as Farah  Manufacturing  Company,  Inc. The name of the Company
was changed to Farah Incorporated in 1987.

         The Company is organized as three distinct operating  divisions:  Farah
U.S.A., Inc. ("Farah U.S.A."), Farah International, Inc. ("Farah International")
and Savane Direct  Incorporated  ("Savane Direct," formerly Value Slacks,  Inc).
Farah U.S.A.  (76% of  consolidated  revenue for fiscal 1997)  manufactures  and
sells a variety of casual and dress apparel to retailers  throughout  the United
States.  Farah  International  (18% of  consolidated  revenue  for fiscal  1997)
manufactures  and sells  apparel in Europe and the South Pacific  region.  Farah
International's  primary  markets  are the  United  Kingdom,  Australia  and New
Zealand.  Savane Direct (6% of  consolidated  revenue for fiscal 1997)  operates
retail  stores that sell first  quality  apparel  manufactured  by the  Company,
close-outs  and seconds from Farah U.S.A.,  and a limited  amount of merchandise
purchased  from third  parties.  As of  November 2, 1997,  Savane  Direct had 36
retail stores, all located in the United States.

Products

         The Company  manufactures  and markets  high  quality,  medium  priced,
fashion apparel for men, boys and women.  The Company's  products include casual
slacks,  dress slacks, suit separates (matching pants and sportcoats that may be
mixed and matched to accommodate retail customer size preferences),  sportcoats,
shorts,  skirts and shirts.  The Company's products are sold under three primary
labels:  Savane(R),  Farah(R)  and  John  Henry(R).  In  addition,  the  Company
manufactures and sells private label products for certain customers.

         The Company  manufactures and markets apparel products with an array of
fabrics that emphasize comfort, fit and performance.  The "performance  fabrics"
maintain a fresh,  neat  appearance,  and are  primarily  100% cotton  fiber and
blended fabrics (polyester/rayon or polyester/wool). In fiscal 1995, the Company
co-developed  a process for dyeing  color-fast  fabrics for use in its garments.
The garments are treated with a soft-hand stain repellent finish. Depending upon
the fabric, it may be chemically  pre-treated by the fabric supplier or finished
by the Company to achieve soft, wrinkle-free and shrink-resistant  features. The
result is a garment  having a  longer-lasting,  fresher and cleaner  appearance.
Since the  process  was first  developed,  it has been  expanded  to  additional
product lines. These products can be found under the Deep Dye Savane label which
now represents the best selling label in the Company's  cotton slacks  business.
The  Company  also  sells  products  under the Farah and John  Henry  labels and
private label products using similar dyeing and wrinkle-resistant technologies.

         Additional information with respect to the Company's significant labels
is as follows:

         Savane - Both dress and casual products are sold under this label.  The
Company has positioned the Savane product as a high quality garment using better
fabrics and finer  workmanship.  Savane  product is sold primarily to department
stores. The major product lines included under this label are as follows:

                  Savane Casuals for Men and Boys - Savane Casuals include pants
         and shorts  for men and boys.  Savane  casual  pants are made from 100%
         cotton  fabrics and are treated with Deep Dye,  PROCESS  2000, or other
         similar  processes.  The Company  offers several  distinctly  different
         products in this  category.  Savane  Classic  Casuals offer  no-wrinkle
         softness  together  with soil and  stain-resistant  treatments.  Savane
         Softwash Casuals are manufactured  using softening agents which results
         in a soft  finish.  Savane Deep Dye Casuals were  introduced  in fiscal
         1996  and are  treated  with  the  Deep  Dye  process,  which  provides
         fade-resistant  features.  Savane  Deep Dye  Casuals  include  Deep Dye
         Fancies  which are patterned  goods made from 100% cotton.  Fancies are
         upscale  casual  slacks that have a  semi-dress  look,  are  moderately
         priced  and  have the  no-wrinkle,  easy  care  features.  The  Company
         recently  introduced  a new 100% cotton  stretch  casual  slack that is
         marketed  under  a  "comfort  stretch"  concept  and is  priced  in the
         mid-range  of casual wear.  The new slack has all the  qualities of the
         Company's  traditional  no-fade,  no-wrinkle  cotton slack; yet it also
         features a stretch characteristic that provides added comfort.  Initial
         shipments  of this product  began in the first  quarter of fiscal 1998.
         The Company  offers a similar  product  made of a cotton  lycra  blend,
         providing stretch qualities and wrinkle-resistant  characteristics.  It
         was   first   introduced   earlier   in   fiscal   1997   without   the
         wrinkle-resistant  features under the Savane Golf label;  however,  the
         product  was  met  with  limited  success.   Since  then,  the  Company
         introduced the  wrinkle-free  version,  which is offered for the Spring
         1998  season on a limited  basis at prices  higher than the new comfort
         stretch  slack.  In fiscal 1998 the Company will begin  production of a
         new Luster  Wash  product,  which  provides a dressier  look for cotton
         casuals  than our casual Deep Dye cotton  products.  The  Company  also
         offers a variety of seasonal goods,  with linen as the principal Spring
         seasonal fabric and corduroy for the Fall season.

                  Savane  Casuals for Women - The casual  women's wear market is
         an  area  for  additional  growth  of the  Savane  label.  The  Company
         initially  introduced  Savane  casuals  for women late in fiscal  1996.
         Distribution  and the  selection  of  products  in this line  increased
         during  fiscal 1997.  The women's  line  includes  casual  cotton twill
         slacks in selected  basic  colors,  shorts,  skirts,  a limited line of
         shirts,  as well as other seasonal  basic slacks.  These products offer
         the same  no-wrinkle,  easy  care  performance  features  as the  men's
         products.

                  Savane  Shirts  - The  shirt  business  is  another  area  for
         potential growth of the Savane label. The Company began shipping Savane
         shirts for men late in the fiscal 1996 fourth quarter with distribution
         of these products increasing throughout fiscal 1997. The line of shirts
         offered by the Company  includes  woven,  100% cotton shirts as well as
         polyester/cotton  shirts. The Savane woven shirts are treated with Deep
         Dye and PROCESS 2000 technologies.

                  Savane Dress Wear - Savane dress wear  includes  men's slacks,
         coats  and  suit   separates.   Dress   products  are  made  mainly  of
         polyester/wool and polyester/wool/lycra blend fabrics. A Deep Dye Dress
         product is also offered,  providing the same fade-resistant features as
         Deep Dye  Casuals.  In the first  quarter of 1997,  the  Company  began
         shipments of Savane  Elements(TM),  a new upscale dress line. This line
         uses  high-performance  Savane fabric finishes on polyester and worsted
         wool.  Similar to the Savane dress line, the Savane Elements dress line
         includes slacks, sport coats and suit separates.

         Farah - Products  sold under this label  include men's casual and dress
slacks. Dress products are made from blended fabrics,  while casual products are
mainly 100%  cotton.  Some casual  slacks with this label are  fabricated  using
wrinkle-resistant  technologies.  The Company  markets these products  primarily
through the mass-merchant distribution channel.

         John  Henry - This  label is  primarily  used for  dress  slacks,  suit
separates and sport coats produced from blended fabrics. Certain of the products
in  this  line  use  wrinkle-resistant  technologies.  The  John  Henry  line is
currently  being  sold to  Sears.  Product  distribution  of this  label  should
continue to grow in fiscal 1998 as the Company delivers more product to Sears.

         Private  Label - The  Company  produces  casual and dress  product  for
various retailers using their own labels. Products produced include casual wear,
dress,   women's  wear  and  boys.   Such  product  is  produced  to  customers'
specifications.

Operating Strategy

         The  Company's  operating  strategy  is (1) to  maximize  sales  of its
products by positioning  them in clear channels of  distribution  and adding new
merchandise within each product category, (2) to reduce overall product costs by
sourcing more product through third party  contractors,  allowing the Company to
better control inventory levels and match production with customer demands,  and
(3) to minimize administrative costs.

         The Savane label has grown to a widely recognized name in men's apparel
since the Company first  introduced its  wrinkle-free  line of casual wear under
the Savane name in 1993.  Today,  Savane is the second  largest  seller of men's
slacks in U.S.  department stores (NPD Market Survey reports of Department Store
Sales).

         As the Savane business grew,  sales declined in the Company's two other
product lines,  Farah and John Henry.  Competition from Savane  products,  which
were  being  sold in the  same  channels  of  distribution,  contributed  to the
decrease in Farah and John Henry products. Accordingly, the Company repositioned
its  three  primary  product  lines  into  separate  and  distinct  channels  of
distribution  to attempt to maximize  sales in each of the product  groups.  The
Savane label was and  continues to be sold  primarily  at the  department  store
level and certain other limited market sectors.  In June 1996, the Company began
shipping John Henry product to Sears.  Product sales of this label include men's
dress slacks, sport coats and suit separates. In the fiscal 1996 fourth quarter,
the Company began selling its Farah brand products to a limited number of stores
of a major retailer in the mass-merchant distribution channel.

         Following the repositioning of its products, the Company began focusing
on other  strategies to increase  sales in all three of its product  categories.
During  fiscal  1996,  the Company  introduced  casual and dress Deep Dye pants,
women's wear,  and shirts,  all under the Savane label.  In the first quarter of
fiscal 1997,  a new line of upscale  dress wear,  called  Savane  Elements,  was
introduced.  Sales in these  product  categories  continued  to grow  throughout
fiscal  1997.  In the second  quarter of fiscal 1997,  the Company  introduced a
cotton lycra  stretch pant,  which was marketed  without  wrinkle-free  features
under the Savane  Golf label;  but was met with  limited  success.  The pant was
redeveloped as a wrinkle-free  product and is now being sold to a limited number
of retailers  under the Savane  label for the Spring 1998  season.  In the first
quarter of fiscal  1998,  the Company  began  initial  shipments of a new cotton
stretch  pant  made of 100%  cotton.  The  Company  is also  pursuing  licensing
agreements with selected apparel and  apparel-related  vendors to further expand
the Savane label.

         Initial  sales of the John Henry  product  to Sears  included a limited
line of dress  slacks  which  sold  extremely  well,  indicating  wide  consumer
acceptance.  The  Company  has since  expanded  the John  Henry  line to include
additional dress slacks, sports coats and suit separates.

         In  the  third  quarter  of  fiscal  1997  the  Company  broadened  its
distribution  of the Farah  label to more  stores  within a large  mass-merchant
customer. Furthermore, in the first quarter of 1997, the Company entered into an
agreement  with its  mass-merchant  customer  to  license  the Farah  label on a
non-exclusive  basis.  The license applies to all categories of men's,  women's,
boys', and girls' apparel, accessories and shoes.

         In  addition  to product  realignment  and  marketing  strategies,  the
Company  continues to examine costs at all levels.  In fiscal 1995,  the Company
shifted  its  sourcing  strategy  to place  less  dependence  on  Company  owned
facilities,   allowing  for  greater  flexibility  in  production  sourcing.  In
connection with this strategy,  the Company sold its coat manufacturing facility
in San Jose,  Costa Rica in October 1995; and in June 1996, the Company sold its
largest production facility,  located in Piedras Negras,  Mexico.  During fiscal
1997,  the  Company  also  closed  one of  its  Irish  manufacturing  facilities
following  a fire and sold its  remaining  Irish  manufacturing  facility in the
third  quarter of fiscal  1997.  In the first half of fiscal  1998,  the Company
plans to close or sell its  finishing  facility in Cartago,  Costa Rica,  and to
reduce  production  significantly  at its remaining  manufacturing  plant in San
Jose,  Costa  Rica.  Currently,   approximately   two-thirds  of  the  Company's
production is supplied by outside  contractors.  By the end of fiscal 1998 it is
estimated  that  three-fourths  of all  production  will be  supplied by outside
contractors.  The Company believes this shift in production  sourcing allows for
greater  flexibility as market demands fluctuate (see  "Management's  Discussion
and Analysis of  Financial  Condition  and Results of  Operations - Risk Factors
Affecting the Company's Business and Prospects").


<PAGE>


Farah U.S.A.

         General. Farah U.S.A. produces and sells a variety  of casual and dress
clothing lines to retailers  throughout the United States.  Substantially all of
Farah U.S.A.'s apparel is produced by third party contractors, located primarily
in Mexico and Central America, and Farah U.S.A.  factories located in Costa Rica
and Mexico.  Farah U.S.A.  directs its products to the men's,  boys' and women's
segments of the  apparel  market,  with  approximately  93% of branded  sales in
fiscal 1997 in the men's  segment.  In fiscal 1992,  Farah U.S.A.  established a
private  label  division to  manufacture  and sell  private  label  products for
certain  customers.  Sales in the private label division  represent 15% of Farah
U.S.A. sales in fiscal 1997.

         Sales  and  Product Distribution.  Farah U.S.A. has aligned its product
labels in three distinct markets.  Savane continues to have a strong position in
department  stores,  while the John Henry brand is sold to Sears.  Farah-labeled
products are sold primarily to one customer in the mass-merchant channel.

         Farah U.S.A. has eight regional  corporate  account  executives who are
directly responsible for certain major retail accounts. Each member of the field
sales force  reports to a corporate  account  executive and is  responsible  for
primary relationships with smaller retailers.

         Farah  U.S.A.'s  sales  force  uses a  computer  system  that was first
implemented in fiscal 1990 as part of a company-wide program to increase quality
and  customer  service.  The system was  upgraded in fiscal  1997,  allowing for
direct communication  between the sales force and retail buyers on the Internet.
The system runs on laptop computers that members of the Farah U.S.A. sales force
carry  with  them as they  contact  retailers.  This  system  maintains  timely,
accurate data on style numbers, prices and size charts (size charts describe the
distribution of sizes that a retailer typically sells). The system also provides
up-to-date,   easily  accessible  data  on  inventories,   customer  orders  and
production  backlogs.  The system enables the sales force to execute orders more
efficiently  and assist the retailer in attaining  higher  margins by optimizing
inventory mixes and levels. See additional  discussion of the Company's computer
systems and effects of the Year 2000 Issue under  "Management's  Discussion  and
Analysis  of  Financial  Condition  and  Results of  Operations  - Risk  Factors
Affecting the Company's Business and Prospects."

         Farah U.S.A.  fills  retailers'  orders from  inventory at its El Paso,
Texas facility.  The Company sends most shipments  directly to retailers' stores
or their independent distribution centers. Certain retailers pick up their goods
at the El Paso  facility.  In the first quarter of 1998,  the Company will begin
moving its inventory to a newly constructed distribution center in Santa Teresa,
New Mexico. The move to this new facility is expected to be completed by the end
of March 1998 (see "Management's  Discussion and Analysis of Financial Condition
and Results of Operations - Risk Factors  Affecting  the Company's  Business and
Prospects").

         Sourcing.  Farah U.S.A.  continues to shift its sourcing of product and
production  activities  away from  Company-owned  facilities to more third party
contractors.  Currently, the Company operates a cutting facility in the U.S. and
two  facilities  in Mexico that provide both sewing and finishing  services.  It
also has a long term joint venture  arrangement in a Mexican finishing  facility
with a third party  Mexican  corporation.  In  addition,  the Company  currently
operates two  facilities in Costa Rica,  which also provide sewing and finishing
services.  However,  the Company  intends to reduce its operations in Costa Rica
(see   discussion  in  "Operating   Strategy"   above).   The  Company   obtains
approximately  26%  of  its  sewing   requirements  and  29%  of  its  finishing
requirements  from its Costa  Rican  facilities.  Farah  U.S.A.  also  purchases
finished product (generally shirts) from third party suppliers in Mexico and the
Orient.

         Finished product is generally sourced or produced outside of the U.S.A.
in order to maintain lower product costs. The Company  concentrates  much of its
sourcing in Mexico as little or no import duties are incurred.  Finished product
is  delivered  to the  Company's  distribution  center  in El  Paso,  Texas  for
distribution to Farah U.S.A.'s customers.

         The men's apparel industry in the United States has two primary selling
seasons.  The Spring  selling  season  extends from December to April.  The Fall
selling season extends from May to November.  Farah U.S.A.'s  operations  follow
this seasonal pattern. Farah U.S.A. begins to manufacture and place orders for a
given season two to six months before the retail season begins.

         Farah  U.S.A.  purchases  its  fabric  and trim  requirements,  such as
pocketing,  linings,  belts, buttons,  zippers and thread, from several domestic
and foreign  sources.  No single  supplier of raw materials is critical to Farah
U.S.A.'s  long-term  production  needs.   Although  the  Company  believes  that
alternative sources of supply exist,  short-term  disruptions could occur should
Farah U.S.A.  need to seek additional or replacement  suppliers.  The order lead
time for fabrics is approximately two to six months. Payment terms are generally
60 days.  Fabrics are  delivered to the Company's  cloth cutting  facility in El
Paso,  Texas.  Quality control  procedures  allow the Company to test for flaws,
coloring,  stretch, shrinkage and other characteristics.  After fabrics are cut,
they are  inspected,  batched and packed for  shipment to one of Farah  U.S.A.'s
offshore manufacturing plants or to third party contractors.

         Marketing.  Retailers are requiring  increased  quality of service from
their  suppliers  and greater  flexibility  in  managing  their  inventories  as
consumer demands change.  Many of Farah U.S.A.'s major customers  participate in
an  inventory  replenishment  program  referred to as "Quick  Response."  "Quick
Response" has evolved in the apparel  industry to assist retailers in minimizing
their  inventories by requiring the apparel  manufacturers to maintain  finished
goods inventory levels sufficient to meet the retailer's demand on short notice.
Farah U.S.A.  ships most "Quick  Response"  orders within 72 hours of receipt of
the order from the retailer.  The Company has  implemented  an  electronic  data
interchange  ("EDI") system with selected large retailers in order to respond to
their service demands and facilitate the "Quick Response"  program.  EDI systems
allow  retailers  to  electronically  transmit  orders  for  certain  items on a
frequent  basis,   typically  weekly.  Some  retailers  also  transmit  detailed
point-of-sale  data from their store locations.  The Company uses the sales data
to anticipate  demand from the  retailers,  update sales  forecasts and plan and
monitor production and inventory levels.

         In an effort to  enhance  retail  presentation,  Farah  U.S.A.  employs
merchandise  coordinators  who  visit  retail  store  accounts  that  carry  the
Company's branded product.  Merchandise  coordinators provide services,  such as
training and education of in-store sales personnel about the Company's products,
straightening slacks, ensuring that displays are neat and orderly, responding to
customer  questions and comments and ensuring that the stores are satisfied with
the Company's service.

         Advertising.   Farah  U.S.A.'s  advertising  program  is  comprised  of
national print advertising and participation in cooperative advertising programs
with retailers.  In fiscal 1996, the Company shifted its advertising strategy to
focus more  heavily on print  media and  point-of-sale  merchandise  and less on
national television campaigns. The Company's use in 1996 and 1997 of advertising
in several national  magazines and various other printed  material,  rather than
television  advertising,  resulted  in  significant  cost  reductions  that have
allowed  increases in customer store display  tables and fixturing.  The Company
intends to pursue this advertising concept by offering high quality fixturing at
our customer's retail stores.  Additionally,  cooperative  advertising  programs
allow the Company and  individual  retailers to combine  their efforts and share
the costs of local television, radio and newspaper advertisements.

         Competition.  The  apparel  industry is highly  competitive  due to its
emphasis on fashion, its mix of large and small producers,  the flow of imported
merchandise and a wide variety of retailing  methods.  The principal elements of
competition in the apparel  industry  include style,  quality,  price,  comfort,
brand loyalty, customer service and advertising. A large number of manufacturers
compete  in the men's  slacks  segment  of the  apparel  industry.  The  Company
believes its largest competitors in the United States are Levi Strauss & Co. and
Haggar Corp. In addition,  collection  wear designer labels (e.g.,  Polo,  Tommy
Hilfiger,  and  Claiborne)  are also gaining  greater  market share in the men's
slacks  segment.  Some of these  competitors  may  have  greater  financial  and
marketing  resources and  therefore,  may offer  significant  competition to the
Savane label.

Farah International

         Farah  International  sells  apparel  primarily in the United  Kingdom,
Australia  and  New  Zealand,   under  the  Farah  and  Savane   labels.   Farah
International's  product lines include  principally dress and casual slacks, and
shirts and sweaters  manufactured by third parties.  These products are designed
for the  specific  styles and  tastes of the  markets in which they are sold and
differ from Farah  U.S.A.  apparel.  During  fiscal  1997 the  majority of Farah
International's  products  utilized  polyester fabrics or blended fabrics with a
high polyester  content,  as opposed to natural fibers which are more popular in
the United States.

         The United  Kingdom is Farah  International's  principal  market and in
fiscal 1997 accounted for approximately 63% of its sales.  Distribution channels
in the  United  Kingdom  are  significantly  different  from those in the United
States in that typically  retailers carry more private label brands than branded
products.  However,  the Farah label is a recognized  branded  label in the U.K.
market, as the Company has been doing business there for a number of years. As a
result,  most of the product  sold in the U.K. is under the Farah label with the
remainder  sold  under  the  Savane  label  and  other  private  labels.   Farah
International's  primary  distribution  channels in the United Kingdom are large
retail outlets and  independent  menswear  stores.  Product sold in the U.K. has
historically been supplied by the Company's manufacturing facilities in Ireland.
Over the years it has been increasingly  difficult to produce product in Ireland
at competitive costs.  Consequently,  by the end of fiscal 1996, the Company had
reduced the amount of product supplied by Ireland for the U.K.'s needs, with the
balance of product coming from third party contractors.  As a result of the fire
that occurred in the  Company's  leased  facility in Galway,  Ireland in January
1997,  the Company  assessed and decided to  terminate  the balance of its Irish
operations.  The Company  reported a pretax  charge of $2.5 million in the first
quarter of fiscal 1997 and an  additional  charge of $2.5  million in the fourth
quarter of fiscal 1997 to complete the  discontinuance of operations in Ireland.
As part of its plan,  the Company  entered into a supply  agreement with the new
owners of the facilities.

         Farah Australia and Farah New Zealand  accounted for  approximately 36%
of Farah International's sales in fiscal 1997. Most of the Company's product has
been sold under the Farah and Savane  labels with  approximately  10% being sold
under private  labels.  All of the product sold in Australia and New Zealand has
been  provided by two factories in Fiji operated by a joint venture in which the
Company has a 50% interest.

         For information  regarding the sales,  operating  profits and assets of
the Company in each of the  geographic  segments in which the Company  operates,
see Note 10 of Notes to Consolidated Financial Statements.

Savane Direct (formerly Value Slacks, Inc.)

         Prior to  mid-fiscal  1996,  the focus of the  Company's  retail  store
division (formerly known as Value Slacks) was to enter remote markets, generally
by opening  stores in suburban  areas and other  locations  across the U.S.  and
Puerto  Rico.  Generally,   the  retail  store  division  sold  closeout  goods,
irregulars  and excess  merchandise  produced by its  affiliate  company,  Farah
U.S.A.,  at lower prices.  As the factory  outlet store concept  gained  greater
acceptance in the U.S.,  Value Slacks began  reducing  operations in Puerto Rico
and  expanding  in the U.S. By the end of fiscal  1995,  all Puerto Rican stores
were closed and there were 36 stores owned by the Company in the U.S.

         Performance of the retail  division in the recent past has been poor as
competition from the  mass-merchant  discount  retailers and other men's apparel
manufacturers  entering the retail market has  increased.  Recognizing  this, in
late  fiscal  1996,  the  Company  began to shift its focus to create a group of
upscale  Savane retail shops which offer a line of first  quality  products in a
full  range of colors and sizes.  The new stores are  typically  located in high
traffic  suburban areas that target middle class America.  The new stores have a
more fashionable  appearance with upscale fixturing and displays.  Concurrently,
the Company has been closing  older  non-performing  stores.  The balance of the
stores  are being  reevaluated,  with some  being  remodeled  to  enhance  their
appearance  and  changing  the mix of  merchandise  being  offered to more first
quality goods. Since the change in direction of the retail division, the Company
has  opened 6 new stores and closed 8 older  stores  such that the  Company  now
operates 36 stores,  all in the U.S.  After  initiating the change in direction,
the Company began to see improvement in operating  results in the latter half of
fiscal 1997.


<PAGE>


Trademarks

         The  Company  owns  many  U.S.  and  foreign  trademark  registrations,
including  Savane,  Savane  Elements,  PROCESS  2000,  Farah and Farah  Clothing
Company(R),  and has several other trademark  applications pending in the United
States and foreign  countries.  The John Henry trademark is licensed from Zodiac
International Trading Corporation, an affiliate of Salant Corporation.  The John
Henry license is renewable by the Company through 2033.

Backlog

         Many of Farah  U.S.A.'s  major  customers  participate  in an inventory
replenishment  concept referred to as "Quick Response" as previously  discussed.
As a result,  customers tend to place orders close to delivery dates. Because of
the trend toward  Quick  Response,  orders  received  are not  necessarily  firm
commitments.  Therefore,  the Company  does not consider  customer  orders to be
"backlog" or necessarily an indication of future sales.

Seasonality

         The Company's  products are primarily  marketed for the Spring and Fall
retail selling seasons each year, with interim items introduced  periodically to
complement the two primary selling  seasons.  Sales volume for the first quarter
is generally the lowest of the year.  Fourth quarter sales volume is the highest
of the year. Farah U.S.A.  closes some of its factories in the first quarter for
approximately  two weeks at Christmas  time. The Company's  introduction of more
year-round basic products has diminished the seasonality somewhat.

Employees

         As of November 2, 1997, the Company had approximately  3,950 employees.
As of that  date,  Farah  U.S.A.,  Farah  International  and  Savane  Direct had
approximately  3,610, 150 and 190 employees,  respectively.  Of these employees,
approximately  460 were  either  salaried  or paid  based  on sales  commissions
earned,  with  the  remainder  paid  on an  hourly  basis  or on  the  basis  of
production.  Approximately  135 of Farah  U.S.A.'s  United States  employees are
members of the Amalgamated  Clothing and Textile Union and  approximately 790 of
its  employees  are  members of a union in  Mexico.  The  collective  bargaining
agreement with the Company's United States  employees  expires in February 2000.
The  collective  bargaining  agreement  for the  Company's  employees  in Mexico
expires in December 1998. The Company considers its relations with its employees
to be good.

Environmental Regulations

         Current  environmental  regulations have not had and, in the opinion of
the Company, assuming the continuation of present conditions,  will not have any
material effect on the capital expenditures, earnings or competitive position of
the Company.

Derivative Financial Instruments

         The Company does have limited exposure to foreign currency fluctuations
from its  international  operations;  however,  during 1997, the Company did not
utilize derivative financial instruments.

Customers

         As  consolidation  in  the  retail  industry  occurs,  fewer  customers
comprise a larger  percentage of the  Company's  total  consolidated  net sales.
During  fiscal  1997,  the  Company's  ten  largest   customers   accounted  for
approximately 66% of the Company's  consolidated revenues. In fiscal 1997, sales
to  three  customers  were  10% or  more of  consolidated  sales.  One  customer
accounted for $35.9 million (13.1%) of the Company's consolidated sales; another
accounted for $35.2 million (12.8%) of consolidated  sales; and a third customer
accounted for $27.3 million (10.0%) of consolidated sales.

Regulation

         Substantially  all of the Company's  total  production is  manufactured
abroad, either in its foreign factories or through arrangements with independent
foreign  contractors.  As a result,  the Company's  operations  may be adversely
affected by  political  instability  resulting in the  disruption  of trade from
foreign countries in which the Company's  facilities or contractors are located,
the imposition of additional  regulations  relating to imports or duties,  taxes
and other charges on imports,  any  significant  fluctuation of the value of the
dollar against foreign  currencies and restrictions on the transfer of funds. In
addition,  the Company's import operations are subject to constraints imposed by
bilateral  textile  agreements  between the United  States and  certain  foreign
countries.  These agreements impose quotas on the amount and type of goods which
can be  imported  into the United  States  from these  countries.  However,  the
Company closely monitors import quotas and can, in most cases,  shift production
to contractors  located in other countries with available  quotas or to domestic
factories.  The Company's  apparel products that are imported from its factories
in Mexico and Costa  Rica are  eligible  for  certain  duty-advantaged  programs
historically known as "807 Programs." With the advent of the North American Free
Trade Agreement  (NAFTA),  import quota regulations are not as significant as in
prior years.


<PAGE>


Item 2.  PROPERTIES

         The   Company's   principal   executive   offices  and  United   States
distribution  facility are located in El Paso, Texas. The Company considers both
its domestic  and  international  facilities  to be suitable and adequate and to
have sufficient  productive  capacity for current  operations (see "Management's
Discussion and Analysis of Financial  Condition and Results of Operations - Risk
Factors Affecting the Company's Business and Prospects"). The Company's lease on
its  previous  corporate  headquarters  in El Paso,  Texas  expires in May 1998.
Accordingly,  the Company  relocated  its  corporate  offices to another El Paso
location.  The new offices are leased under an operating  lease  agreement.  The
Company has also leased a new  distribution  warehouse  located in Santa Teresa,
New Mexico. Relocation to the new warehouse began in the first quarter of fiscal
1998.

         The following table reflects the general location,  use and approximate
size of the  Company's  significant  real  properties  currently in use or under
construction:
<TABLE>
<CAPTION>
                                                                                  Approximate           Owned/
            Location                                  Use                       Square Footage        Leased (1)
            --------                                  ---                       --------------
                                                                                                     -------------
<S>                                  <C>                                               <C>           <C>        
El Paso, Texas                       Garment manufacturing plant                         116,000     Owned (2)
Chihuahua, Mexico                    Garment manufacturing plant                          73,800     Owned
San Jose, Costa Rica                 Garment manufacturing plant                         124,000     Owned
Cartago, Costa Rica                  Garment manufacturing plant                          77,000     Owned
Auckland, New Zealand                Office/Warehouse                                      9,000     Owned
El Paso, Texas                       Corporate offices                                    43,500     Leased
El Paso, Texas                       Office/Warehouse                                  1,033,000     Leased (3)
El Paso, Texas                       Garment manufacturing plant                         201,000     Leased
Sydney, Australia                    Office/Warehouse                                     29,000     Leased
Suva, Fiji                           Two garment manufacturing plants                     35,000     Leased (4)
Witham, United Kingdom               Office/Warehouse                                     57,000     Leased
Retail locations in the United
    States                           36 Retail stores                                    100,000     Leased
Santa Teresa, New Mexico             Distribution Warehouse                              250,000     Leased (5)
Juarez, Mexico                       Garment manufacturing plant                          73,500     Leased
Queretero, Mexico                    Warehouse                                            32,700     Leased
</TABLE>

(1)  See Note 7 of Notes to Consolidated Financial Statements for a discussion
     of lease terms.
(2)  The facility is currently used for storage.  Underlying land is leased 
     through February 2002.
(3)  Originally, the facility was owned by the  Company  and was sold and leased
     back in 1988. The initial lease  term which is ten years  ends in 1998.  As
     of the end of fiscal 1997,  approximately 69% of the facility was subleased
     to a third party.
(4)  The facilities are leased by a 50% joint venture of which  the Company is a
     party.
(5)  On  November 30,  1996,  the  Company  entered   into  a  lease  for  a new
     distribution  center to be  constructed.  The facility was completed in the
     fourth quarter of 1997.  Relocation to the new warehouse began in the first
     quarter of fiscal 1998.

Item 3.  LEGAL PROCEEDINGS

         The  Company is  involved in certain  legal  proceedings  in the normal
course of business.  Based on advice of legal counsel, the Company believes that
the  outcome  of such  litigation  will  not  materially  affect  the  Company's
consolidated  financial  position,  results  of  operations  or cash  flows (see
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Risk Factors Affecting the Company's Business and Prospects").

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

         None


<PAGE>


                                                      PART II

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

         COMMON STOCK

         There were  10,278,989  shares of the Company's  common  stock,  no par
value, outstanding as of January 9, 1998, owned of record by approximately 2,200
shareholders.  Trading volume during fiscal 1997 averaged  approximately  54,800
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>
<CAPTION>

                                                1997                            1996
                                 ---------------------------      ----------------------------
                                     High           Low              High             Low
                                 -------------  ------------      ------------    ------------
         <S>                        <C>               <C>             <C>             <C>    
         1st Quarter                $       9             6           7  1/ 8         4  1/ 2
         2nd Quarter                   11 1/8         8 1/4           6  3/ 8         4  1/ 2
         3rd Quarter                       10         6 1/4                 9         5  3/ 4
         4th Quarter                  7 15/16         5 1/2           7  7/ 8         5  7/ 8
</TABLE>

         The closing sales price of the  Company's  common stock on the New York
Stock Exchange as of January 9, 1998, was $5.1875.

         As of November 2, 1997, there were approximately $1.7 million aggregate
principal amount of the Company's 8.5% convertible  subordinated  debentures due
February 1, 2004, outstanding, owned of record by 24 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.


<PAGE>


Item 6.  SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                          Thousands of dollars, except share and per share data
                                          ------------------------------------------------------------------------------
                                                  1997             1996          1995            1994          1993
                                          -------------------  ------------- --------------  -------------  ------------
Summary of Operations:
<S>                                       <C>                    <C>            <C>            <C>           <C>    
Net sales                                 $          273,719        247,598        240,797        242,775       180,114
Cost of sales                                        199,790        183,540        185,822        172,300       127,020
Selling, general and
       administrative expenses                        66,436         62,189         68,002         58,294        47,372
Termination of foreign operations                      5,106              -              -              -             -
Production conversion expenses                         2,061              -              -              -         4,000
Relocation expenses                                      904              -              -              -             -
Operating income (loss)                                (578)          1,869       (13,027)         12,181         1,722
Other income (expense):
       Foreign currency transaction
            gains (losses)                               163            374            512            449         (151)
       Gain (loss) on sale of assets                    (24)         10,041            756            (6)           320
       Other, net                                        203            684            209            237           (3)
Interest expense, net                                (3,392)        (3,231)        (3,726)        (1,756)       (1,452)
Income (loss) before income taxes                    (3,628)          9,737       (15,276)         11,105           436
Income tax provision (benefit)                       (3,898)          2,981        (2,335)            300           304
Net income (loss)                                        270          6,756       (12,941)         10,805           132

Per Share Information:

Net income (loss)                         $              .03            .66         (1.28)           1.16          0.02
Book value per share based on shares
       outstanding at balance sheet dates $             8.05           8.07           7.29           8.53          5.45
Shares outstanding                                10,278,989     10,172,971     10,145,326          10,080,341     7,971,625

Financial Position at Year-End:

Current assets                            $          131,028        118,338        127,911        123,919        95,325
Property, plant and equipment, net                    36,033         25,370         33,363         22,872        13,220
Other assets, non-current                              8,531         10,155         12,553         11,260        10,346
Total assets                                         175,592        153,863        173,827        158,051       118,891
Current liabilities                                   74,965         59,807         78,903         56,535        61,346
Long-term debt                                        13,771          4,706         12,568          5,170         1,179
Other liabilities                                      2,957          3,992          3,136          3,103         3,627
Deferred gain on sale of building                      1,185          3,218          5,250          7,282         9,314
Shareholders' equity                                  82,714         82,140         73,970         85,961        43,425
Total liabilities and shareholders'                  175,592        153,863        173,827        158,051       118,891
equity
Current ratio                                       1.7 to 1       2.0 to 1       1.6 to 1       2.2 to 1      1.5 to 1
</TABLE>
               


<PAGE>


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

Results of Operations

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

                                                              Fiscal Year Ended
                                                    --------------------------------------
                                                      1997            1996         1995
                                                    ----------      ---------     --------
       <S>                                              <C>            <C>          <C>     
       Net sales:
              Farah U.S.A.                               75.7 %         73.8 %       73.5 %
              Farah International                        18.1           19.4         19.7
              Savane Direct                               6.2            6.8          6.8
                                                    ----------      ---------     --------
         Total net sales                                100.0          100.0        100.0
         Cost of sales                                   73.0           74.1         77.2
                                                    ----------      ---------     --------
              Gross profit                               27.0           25.9         22.8
         Selling, general and
               administrative expenses                   24.3           25.1         28.2
         Termination of foreign operations                1.8            0.0          0.0
         Production conversion expenses                   0.8            0.0          0.0
         Relocation expenses                              0.3            0.0          0.0
                                                    ----------      ---------     --------
              Operating income (loss)                   (0.2)            0.8        (5.4)
         Other income (expense), net                    (1.1)            3.1        (0.9)
                                                    ----------      ---------     --------
              Income (loss) before income
                      taxes                             (1.3)            3.9        (6.3)
         Income tax expense (benefit)                   (1.4)            1.2        (0.9)
                                                    ----------      ---------     --------
              Net income (loss)                           0.1  %         2.7 %      (5.4) %
                                                    ==========      =========     ========
</TABLE>

1997 Sales Compared to 1996

         Consolidated sales increased by $26.1 million, or 10.5% in fiscal 1997,
compared  to  fiscal  1996.  Sales  in the  Company's  Farah  U.S.A.  and  Farah
International  business  groups  increased  during 1997.  Sales in the Company's
Savane Direct business group did not change in any material respect.

         Sales  at Farah U.S.A.  increased by $24.5 million,  or 13.4% in fiscal
1997,  compared to fiscal 1996. Unit sales and the average  sales price per unit
increased  by 12.1%  and  1.1%,  respectively.  Farah  U.S.A.  sales were $207.2
million in 1997 and $182.8 million in 1996. The following table compares  fiscal
1997 and fiscal 1996 Farah U.S.A. sales by product line.


<TABLE>
<CAPTION>

                                                           Thousands of dollars
                                                       ---------------------------
                                                           1997          1996        % Change
                                                       ---------------------------  ------------
                          <S>                        <C>                  <C>             <C>   
                          Savane                     $      139,373       118,154         18.0%
                          Farah and
                               Farah Clothing Co.            23,140        18,520          25.0
                          John Henry                         12,676         8,224          54.1
                          Private Label                      32,031        37,853        (15.4)
                                                       -------------  ------------  ------------
                                                     $      207,220       182,751         13.4%
                                                       =============  ============  ============
</TABLE>

         Sales of the  Company's  Savane  products  increased  18% during fiscal
1997. Unit sales of Savane product increased 19% from fiscal 1996 to 1997, while
the average selling price per unit decreased  approximately  1%. Increased men's
casual  product  sales  accounted  for most of the growth in the  Savane  label.
Women's casual wear and men's shirts,  which were introduced in July and October
1996,  respectively,  accounted for much of the  remaining  Savane sales growth.
Sales of men's dress wear  increased by 2.9% during  fiscal 1997,  versus fiscal
1996.  As it is becoming  increasing  difficult to gain more market share in the
men's  slacks  business,  the Company is  planning  to grow the Savane  label by
expanding  and entering new product  lines in both the men's and women's  casual
and dress  categories  (see "Risk Factors  Affecting the Company's  Business and
Prospects").

         The Savane product sales mix remained  relatively  constant from fiscal
1996 to 1997, with the primary changes stemming from the introduction of women's
wear and shirts  discussed  above.  Men's casual pant and shirt sales  comprised
77.0% of 1997 Savane  sales,  compared  to 76.5% in 1996.  Men's dress pants and
coats  accounted  for  19.3%  and  22.1%  of  Savane  sales  in 1997  and  1996,
respectively.  Women's wear made up 3.7% of Savane sales in fiscal 1997 and 1.4%
in fiscal 1996.

         John Henry  product  sales were $12.7  million in fiscal  1997, a 54.1%
increase over 1996 sales. In the third quarter of 1996 the Company  repositioned
the John Henry label with a "roll-out" program to Sears. Since the Sears program
began,  replenishment  sales of John Henry  product have  continued to grow.  An
expansion of the John Henry line  consisting  of the roll-out of dress pants and
suit separates is expected to increase John Henry sales to Sears in fiscal 1998.
Additionally, the Company is attempting to expand distribution of the John Henry
line to new retail  customers  within the same market segment (see "Risk Factors
Affecting the Company's Business and Prospects").

         Sales of Farah product increased during fiscal 1997 by $4.6 million, or
25.0%, compared to fiscal 1996. During fiscal 1996, the Company repositioned the
Farah label from department  stores to the mass-merchant  distribution  channel.
The initial  roll-out of Farah product to a major retailer in the  mass-merchant
distribution  channel occurred in the fourth quarter of fiscal 1996. The Company
has  increased  sales  of Farah  product  to that  same  customer  by  expanding
distribution to an increased  number of new stores and by converting an existing
private label  program to a  Farah-branded  program.  The Company is now working
with the same  mass-merchant to begin expanding  distribution of the Farah label
beyond the domestic market (see "Risk Factors  Affecting the Company's  Business
and Prospects").

         Private label sales decreased by $5.8 million , or 15.4%, during fiscal
1997,  compared to fiscal 1996. The conversion of a private label program with a
mass-merchant  to a Farah label program  (discussed  above)  contributed to this
decrease. In addition,  the Company reduced its volume of private label business
with  customers who provided  comparatively  low gross  margins.  The Company is
focusing on growing its private  label  business  with  existing  and new higher
margin private label  customers in fiscal 1998 (see "Risk Factors  Affecting the
Company's Business and Prospects").

         Farah International's  sales, which are comprised primarily of sales in
the United Kingdom and Australia, increased by $1.6 million, or 3.4%, from $48.0
million  in fiscal  1996 to $49.7  million  in fiscal  1997.  Unit sales and the
average selling price per unit increased 2.4% and 1.0%,  respectively,  at Farah
International.

        Farah U.K. sales comprised 63.0% of Farah  International's  fiscal  1997
sales,  compared to 62.6% in fiscal 1996. The average  selling price in the U.K.
increased by 4.8%,  primarily due to the strength of the British Pound  Sterling
versus the U.S. Dollar. Excluding currency fluctuations, the average sales price
per unit at Farah U.K. decreased by 1.1%. Unit sales in the U.K. were comparable
in both fiscal 1996 and fiscal 1997.

         Farah  Australia  sales  accounted  for 30.6% of Farah  International's
fiscal 1997 sales,  compared to 29.9% in fiscal 1996.  Sales at Farah  Australia
increased by 5.9% from fiscal 1996 to 1997. A 7.2% decline in the average  sales
price per unit  partially  offset the effect of a 14.1% increase in unit volume.
An  increase  in  private  label  business,   combined  with  continued   strong
performance of the Savane wrinkle-free product in Australia,  created the growth
in sales  volume.  The increased  prominence of private label  business in Farah
Australia's  sales mix  contributed to the decreased  average  selling price per
unit. The relative  weakness of the Australian  Dollar versus the U.S. Dollar in
1997,  compared to 1996,  also played a role in the decline in the average sales
price per unit in  Australia.  Exclusive of currency  fluctuations,  the average
sales price per unit in Australia decreased 5.3%.

         Sales at Savane Direct,  the Company's retail store division were $16.8
million in both fiscal 1997 and fiscal 1996. The average sales price per unit at
Savane Direct  increased 20.1% in fiscal 1997, while unit sales decreased 16.7%.
During  fiscal 1997,  the Company  pursued a strategy  built around  closing the
least profitable  Savane Direct stores,  opening new stores in better locations,
and converting  Savane  Direct's  product mix to include a higher  proportion of
first  quality  merchandise.  This  strategy  resulted in a net  decrease in the
number of Savane Direct stores.  Same store sales  increased 4.1% in fiscal 1997
compared to fiscal 1996. The conversion to more first quality merchandise during
fiscal  1997 and the  closing  of less  profitable  locations  were the  primary
factors  creating the increase in the average  selling  price per unit at Savane
Direct.

1996 Sales Compared to 1995

         Consolidated  sales  increased  by $6.8  million 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 Savane Direct.

         Sales at Farah U.S.A.  increased  by $5.7 million or 3.2%,  from $177.0
million in fiscal  1995 to $182.8  million 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>
<CAPTION>

                                                             Thousands of dollars
                                                       ---------------------------
                                                           1996          1995        % Change
                                                       ---------------------------  ------------
                          <S>                        <C>                  <C>            <C>        
                          Savane                     $      118,154       107,560          9.8%
                          Farah and
                               Farah Clothing Co.            18,520        27,145        (31.8)
                          John Henry                          8,224        11,477        (28.3)
                          Private Label                      37,853        30,853          22.7
                                                       -------------  ------------  ------------
                                                     $      182,751       177,035          3.2%
                                                       =============  ============  ============
</TABLE>

         The Company's  largest label,  Savane,  experienced  increased sales of
approximately  10% for the  year.  The  increase  in sales  was 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,  women's  wear,  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.  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.

         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 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.
After  those  initial  shipments,  John Henry  sales  improved  by more than 50%
compared to the same period in 1995. 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.

         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  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 women's wear, boys and dress.

         Farah International, comprised primarily of sales in the United Kingdom
and  Australia,  recorded sales growth of 1.1% from $47.5 million in fiscal 1995
to $48.0 million 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.

         Savane Direct, the Company's retail store division,  reported increased
sales of 3.6%, with sales  increasing from $16.2 million in fiscal 1995 to $16.8
million 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,  the  Company
implemented  a new marketing  strategy to more  properly  align its 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.

1997 Gross Profit Compared to 1996

         Gross profit increased by $9.9 million from fiscal 1996 to fiscal 1997.
Gross  profit as a  percentage  of sales was 27.0% and 25.9% in fiscal  1997 and
1996, respectively.  Farah U.S.A. recorded gross profit as a percentage of sales
of 23.8% in 1997, compared to 22.0% in 1996. Farah  International's gross profit
as a percentage  of sales  declined  from 33.9% in fiscal 1996 to 33.6% in 1997.
Gross profit at Savane Direct  increased from 45.5% of sales in 1996 to 47.5% in
1997.

         Gross  profit at Farah  U.S.A.  grew as a result of an  increase in the
average  selling price per unit.  Additionally,  the continued  effort to reduce
production  costs had a positive effect on gross margins.  Partially  offsetting
the  increase in fiscal 1997 gross  profit was the adverse  effect of the Savane
Golf pant program previously discussed. Due to poor initial product quality, the
Company  incurred  costs to rework the  product.  The  Company  also  accepted a
significant  number of returns and gave markdown  allowances to its customers in
order to sell the balance of the golf pant inventory.  Also  suppressing  fiscal
1997 gross profit was the  Company's  shirt  program.  Fiscal 1997 was the first
year  of the  program  since  the  Company  assumed  the  business  from  Oxford
Industries,  Inc. in 1996.  The Company  experienced  both  quality and delivery
problems from contractors in the Orient and Mexico as contracts were transferred
to the Company from Oxford and new contracts were sought.

         Increases in production costs at Farah International  offset the slight
increase in the average  price per unit sold.  Gross profit as a  percentage  of
sales  decreased  from  30.6% to 30.3%  from  fiscal  1996 to 1997 at Farah U.K.
Margins at Farah Australia  dropped from 37.7% in fiscal 1996 to 35.3% in fiscal
1997.  The  weakness  of the  Australian  Dollar,  relative  to the U.S.  Dollar
contributed to this pattern, as a portion of Farah Australia's raw materials are
purchased from the United States.

         Gross profit as a percentage of sales at Savane Direct  increased  from
45.5% in fiscal  1996 to 47.5% in fiscal  1997.  The move to more first  quality
merchandise and the closing of stores that had previously produced lower margins
contributed  to the increase in gross profit as a percentage  of sales at Savane
Direct.  Improvements in inventory  management  also positively  affected Savane
Direct gross margins.



<PAGE>


1996 Gross Profit Compared to 1995

         Gross profit increased by $9.1 million 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 Savane  Direct,
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  start-up  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 Savane  Direct 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.

1997 Selling, General and Administrative Expenses Compared to 1996

         Selling,  General,  and Administrative  expenses ("SG&A") declined as a
percentage of sales from 25.1% in fiscal 1996 to 24.3% in fiscal 1997. SG&A as a
percentage of sales decreased at Farah U.S.A. and Savane Direct and increased at
Farah  International.  Sales growth at Farah U.S.A more than offset increases in
cooperative  and other  advertising  expenses,  resulting in a drop in SG&A as a
percentage  of sales from 20.9% in fiscal  1996 to 20.3% in fiscal  1997.  Farah
U.S.A. sales and SG&A costs increased by 13.4% and 9.9%,  respectively in fiscal
1997.

          SG&A costs as a percentage of sales at Farah  International  increased
from 29.7% in 1996 to 31.9% in 1997. Increased SG&A costs at Farah U.K. produced
most of the  increase  in SG&A at Farah  International.  Higher  concession  and
exhibition  costs,  combined  with the hiring of  additional  quality  assurance
personnel produced the SG&A expense increase at Farah U.K. during 1997.

         At Savane Direct, SG&A costs as a percentage of sales declined to 51.0%
in fiscal 1997 from 57.7% in 1996. The store closing reserve  recorded by Savane
Direct in the prior fiscal year  produced  1996 SG&A costs that were higher than
those  incurred in fiscal  1997.  Additionally,  reductions  in  overhead  costs
resulting from the strategic closing of several Savane Direct stores contributed
to the decrease in fiscal 1997 SG&A expense at Savane Direct.



<PAGE>


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. The Company 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 to 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
Savane Direct,  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.

Termination of Foreign Operations

         The loss on the disposal of the Irish  facility is the result of a fire
that  occurred at a facility  that the Company  leased in Galway,  Ireland.  The
subsequent  reevaluation by the Company of its Irish operations  resulted in the
decision to terminate  manufacturing  activity in Ireland and in the sale of its
Irish facility in Kiltimagh. The charge recorded in connection with the disposal
of  those  facilities  consisted  primarily  of  the  write-down  of  equipment,
severance payments, and legal and professional fees.

Production Conversion Expenses

         The Company opened two new laundry  facilities and expanded a finishing
facility in Mexico  during  fiscal  1997.  Due to  start-up  costs such as those
associated  with  training  new  employees,   the  facilities   incurred  higher
production  costs and produced  more  irregular  units than the Company  expects
under normal  production  conditions.  The Company  believes that such costs and
irregular  rates will  decline  at these  facilities  in fiscal  1998 (see "Risk
Factors Affecting the Company's Business and Prospects").

         As a result of the sale of its Piedras Negras  facility in fiscal 1996,
the Company relies more heavily on outside contractors as sources of production.
The establishment of new relationships  with contractors in fiscal 1997 resulted
in irregular  production  rates above those that the Company normally expects to
incur. The expense connected with the conversion to new contractors is comprised
of the cost of selling excess irregular units at prices below production costs.

Relocation Expenses

         In the third quarter of fiscal 1997, the Company  completed its move to
a new  corporate  headquarters.  In  addition,  the Company is  currently in the
process of relocating  its  distribution  center to a new facility from which it
expects to realize improved distribution and inventory management  efficiencies.
The Company anticipates  completion of the distribution center relocation in the
second  quarter  of  fiscal  1998.  In  moving  to  the  new   headquarters  and
distribution  center the Company  incurred  duplicate  operating  costs,  moving
expenses and professional fees.



<PAGE>


Other Income (Expense)

         The following  table  illustrates  the changes in interest  expense and
interest  income,  over the past three  fiscal  years and the other  significant
items included in non-operating income and expense (in thousands):
<TABLE>
<CAPTION>

                                                                       1997           1996           1995
                                                                       ----           ----           ----
             <S>                                                  <C>                  <C>            <C>  
             Interest expense                                     $      4,108          4,065          4,627
             Interest income                                             (716)          (834)          (901)
                                                                     ----------     ----------    -----------
             Interest expense, net                                       3,392          3,231          3,726
                                                                     ==========     ==========    ===========

             Interest expense, net, as a percent of sales                 1.2%           1.3%           1.5%

             Average debt                                               42,464         40,352         47,910
             Average interest rate                                        9.4%           9.4%           9.7%
             Gain (loss) on sale of assets                                (24)         10,041            756
             Foreign currency transaction gains                            163            374            512
</TABLE>

         Total debt and interest expense increased throughout fiscal 1997 as the
Company undertook a number of significant  capital projects.  As discussed above
in  "Production  Conversion  Expenses" and  "Relocation  Expenses,"  fiscal 1997
capital projects included an expansion of a manufacturing  facility, a move to a
new corporate  headquarters,  and a transition to a new  distribution  facility.
Additionally,  as  discussed  below in "Impact of the Year 2000  Issue,"  during
fiscal 1997 the Company  continued  revisions to its  computer  systems with the
goal of enabling those systems to utilize dates beyond December 31, 1999.

         As discussed  below in "Liquidity and Capital  Resources,"  the Company
negotiated a new  revolving  credit  agreement  with the same lender  during the
third quarter of fiscal 1997. The new agreement reduced the interest rate on the
Company's  line of credit.  Increases in the prime  interest rate earlier in the
year,  combined  with higher  interest  rates on the  financing  of some capital
expenditures,  offset the  interest  rate  reduction  obtained in the new credit
agreement.

         Interest  income was derived  primarily from a note receivable that was
scheduled to mature in 2007. In the fourth quarter of 1997, the note was prepaid
by the borrower.

         In fiscal 1996 "Gain (loss) on sale of assets"  included a pre-tax gain
of  approximately  $9.3 million  realized on the sale of the  Company's  Piedras
Negras, Mexico facility.

Income Tax Expense (Benefit)

         The Company's  effective  tax rate was 107.4% in fiscal 1997,  compared
with 30.6% and 15.3% in fiscal 1996 and fiscal 1995,  respectively.  The Company
recorded a tax benefit of $3.9 million in fiscal 1997.  The  recognition of $3.2
million of deferred tax assets that were  generated but not  recognized in prior
years  comprised  the largest  portion of the  Company's  1997 tax benefit.  The
Company  recorded  the benefit of these  previously  unrecognized  deferred  tax
assets as a result of the  determination  that  realization  of a portion of its
deferred  tax assets that were  previously  covered by a valuation  allowance is
more likely than not. A net  increase in deferred tax assets  comprised  most of
the  remaining  1997 tax  benefit.  As of  November  2, 1997 the Company had net
deferred tax assets of $8.7 million,  partially offset by a valuation  allowance
of $1.1 million.  Realization  of the remaining  portion of the net deferred tax
asset   depends  upon  future   taxable   income.   The  Company  must  generate
approximately  $22.5  million  of  taxable  income in  future  years in order to
realize the benefit of its  deferred  tax asset.  Included in net  deferred  tax
assets are net  operating  loss  carryforwards  in the United  States and in the
United  Kingdom.  The Company has domestic net operating loss  carryforwards  of
$11.6 million,  of which $7.1 million expire in 2010. The remaining $4.5 million
of domestic net operating  loss  carryforwards  expire in 2012.  The Company can
carry forward  indefinitely its unused United Kingdom net operating loss of $3.0
million. The Company will continue to evaluate the 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.


<PAGE>


Liquidity and Capital Resources

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

                                                                     Thousands of dollars
                                                                     1997            1996
                                                                  ----------      ---------
           <S>                                                       <C>            <C> 
           Working capital                                           56,063         58,531
           Total debt                                                54,644         26,738
           Long-term debt                                            13,771          4,706
           Shareholders' equity                                      82,714         82,140
           Current ratio                                              1.7:1          2.0:1
           Long-term debt-to-equity                                   .17:1          .06:1
           Total debt-to-equity                                       .66:1          .33:1
           Days sales in accounts receivable                             56             59
           Inventory turnover                                           2.9            2.7
</TABLE>

         The  Company's  working  capital  decreased by $2.5 million from fiscal
1996 to fiscal 1997. The current ratio decreased from 2.0 at November 3, 1996 to
1.7 at November 2, 1997.  Increases  in  short-term  borrowings  and the current
portion of long-term debt, partially offset by increased inventory and decreased
accounts  payable,  were the primary  factors  reducing  the  Company's  working
capital.

         Short-term  borrowings  increased by $14.8 million  during fiscal 1997.
The Company's use of $11.6 million in cash to purchase property and equipment, a
$12.8 million  increase in inventories,  and a $3.4 million decrease in accounts
payable all contributed to the increase in short-term borrowings.  The growth in
inventories  resulted from  expanding the number of products the Company  offers
and  increasing  shelf stock to meet  customer  demands.  The Company  used $7.2
million of proceeds from the early  retirement of a note  receivable and related
certificate  of deposit that was  previously  pledged,  to reduce its  revolving
credit agreement balance. (Approximately $5.0 million of the note receivable was
previously  classified  as  non-current.)  Additionally,  as  part  of  its  new
revolving credit  agreement  discussed below, the Company received a $10 million
term loan which was also used to reduce the revolving credit agreement  balance.
The proceeds from the note receivable,  certificate of deposit and the term loan
reduced  the  working   capital  effect  arising  from  property  and  equipment
purchases, inventory growth and accounts payable reductions. The current portion
of long-term  debt  increased  by $4.0 million from 1996 to 1997.  The term loan
accounted for most of the increase with the remaining  balance coming from other
financings of capital expenditures.

         During  fiscal  1997,  the  Company  negotiated  a new  primary  Credit
Agreement with the same lender.  The agreement expires July 1, 2001. The current
and previous Credit  Agreements  differ in their maximum  available credit lines
and in their interest rates.  Additionally,  the new Credit Agreement includes a
term loan  payable in  monthly  installments  of  $208,333,  with the  remaining
balance  due at the end of a 48 month  period.  The balance of the term loan was
$9.2 million, $2.5 million of which was classified as current, as of November 2,
1997.

         The new  primary  Credit  Agreement  provides  maximum  credit of $75.0
million for the Company's United States and United Kingdom operations for either
borrowings or letters of credit.  The previous agreement provided $50.0 million.
Formulas  derived  from  accounts  receivable  and  inventory  define  borrowing
capacity  under the Credit  Agreement.  As of November 2, 1997,  usage under the
Credit Agreement was $36.5 million (including letters of credit of $1.3 million)
and the excess credit line available was $23.5 million.

         The new primary Credit Agreement charges a lower interest rate than the
previous  agreement.  The interest rate under the new Credit  Agreement and term
loan is prime (8 1/2% at November 2, 1997) plus 1/2% for borrowings and 1/6% per
month for letters of credit.  The Company may also from time to time convert all
or part of the loans  outstanding under the Credit Agreement or term loan into a
loan based on the LIBOR Rate.  Upon  conversion,  the interest rate is the LIBOR
Rate,  plus 2.75%.  The conversion to and continued  applicability  of the LIBOR
Rate is conditioned upon specific notification  requirements,  a minimum of $5.0
million of LIBOR Rate loans  outstanding,  and various other  requirements.  The
previous  agreement  charged  interest  at the prime  interest  rate plus 1%. At
November 2, 1997, the Company had $33.5  million,  including $8.0 million of the
term loan  balance,  in LIBOR  loans  outstanding  under the  Credit  Agreement.
Interest  rates on the LIBOR  contracts  outstanding  at November 2, 1997 ranged
from 8.38% to 8.41%.  An unused  credit line fee of 1/2% per annum is charged on
the unused portion of the line when borrowings decrease below $17.5 million.

         The Credit Agreement is  collateralized  by substantially all assets of
Farah  U.S.A.,  Farah U.K.  Limited and Savane  Direct 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 Credit  Agreement  restricts  certain  additional  indebtedness and
requires the maintenance of minimum tangible net worth,  minimum working capital
and maximum capital  expenditures for Farah Incorporated  consolidated and Farah
U.S.A.  As of  November  2,  1997,  the  Company  was in  compliance  with these
covenants.  The Credit  Agreement  prohibits  the  payment of  dividends  by the
Company,  and  except  for  debt  service  of  the  Company's  8.5%  convertible
subordinated  debentures,  the Credit Agreement  restricts the subsidiaries from
transferring  substantially  all  net  assets  to  the  parent  company  through
intercompany loans, advances or dividends.

         In fiscal 1998,  the  financing of capital  expenditures,  estimated at
$9.2 million,  will produce the Company's  primary liquidity  requirements.  The
Company expects to complete the transition to its new  distribution  facility in
the  second  quarter  of fiscal  1998.  The lease on the  existing  distribution
warehouse  expires in May 1998.  The Company spent $3.9 million on new shelving,
equipment,  and other leasehold improvements at the new distribution facility in
fiscal  1997  and  expects  to incur  an  additional  $3.7  million  in  capital
expenditures at that location in fiscal 1998. The lease  agreement  provides the
Company  use of the  facility  for a  fifteen-year  period  with two  additional
five-year options.

         The Company is considering various long-term financing  arrangements to
fund its 1998 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 1997,  1996 and 1995 were $18.3
million, $5.1 million and $15.7 million,  respectively.  As of November 2, 1997,
material commitments for capital expenditures were approximately $4.4 million.

         Most of Farah  U.S.A.'s  major fabric  suppliers  provide 60-day terms,
subject to certain limits. During fiscal 1997 the maximum outstanding balance at
any month-end under these credit terms was $9.4 million.

         Inflation did not materially impact the Company in fiscal 1997, 1996 or
1995.

Impact of the Year 2000 Issue

         The Year 2000 Issue is the result of computer  programs  being  written
using two digits,  rather than four to define the  applicable  year.  Any of the
Company's  computer programs that have  date-sensitive  software may recognize a
date using "00" as the year 1900 rather than as the year 2000. This could result
in a system  failure  or  miscalculations  causing  disruptions  of  operations,
including,  among other things, a temporary  inability to process  transactions,
send invoices, or engage in similar normal business activities.

         Based on  assessments  made during  fiscal  1996 and 1997,  the Company
decided to replace its entire inventory management,  warehouse  distribution and
order  processing  systems so that  those  systems  will  utilize  dates  beyond
December  31, 1999  properly.  The  Company  also  updated  the  versions of its
warehouse  distribution  and financial  software so that they utilize such dates
correctly.  In addition,  the Company will review all of its auxiliary  computer
application  systems for Year 2000  compliance  in fiscal 1998 and will make any
necessary  changes.  In  fiscal  1998,  processor-controlled  systems,  such  as
security systems and manufacturing equipment systems used by the Company will be
assessed  for Year 2000  compliance,  with any  necessary  changes to be made in
fiscal 1998 and fiscal 1999. The Company believes that the planned modifications
and conversions will allow it to mitigate the Year 2000 Issue.  However, if such
modifications  and  conversions are not made, or are not completed  timely,  the
Year  2000  Issue  could  have  a  material  adverse  effect  on  the  Company's
operations.

         The  Company  will  initiate  formal  communications  with  all  of its
significant  suppliers and large  customers to determine the extent to which the
Company is vulnerable  to those third  parties'  failure to remediate  their own
Year 2000 Issue.  The Company's total estimated Year 2000 project costs and time
tables are based on presently available  information,  and include the Company's
assessment of the abilities of other third  parties to  effectively  address the
issue. However, there can be no assurance that the systems of other companies on
which the Company's systems rely will be timely converted,  or that a failure to
convert  by another  company,  or a  conversion  that is  incompatible  with the
Company's  systems,  would not have material adverse effect on the Company.  The
Company  believes it has no exposure to  contingencies  related to the Year 2000
Issue for the products it has sold.

         The Company  will  utilize  both  internal  and  external  resources to
reprogram,  or replace,  and test the software for Year 2000 modifications.  The
Company plans to complete the inventory management and order processing portions
of the Year 2000  project no later than  December 31, 1998 and plans to complete
the remainder of the project by June 30, 1999. The Company incurred $1.0 million
in costs  attributable  to the Year 2000  project in fiscal  1997 and expects to
incur $2.6  million in such costs in fiscal  1998.  The  majority of these costs
have been and will  continue  to be  capitalized,  as they  relate  to  software
purchases and development.

         The discussion  above  incorporates the Company's best estimates of the
costs and completion  date of the Year 2000 project.  The Company  derived these
estimates using numerous  assumptions of future events,  including the continued
availability of certain  resources and other factors.  There can be no guarantee
that the Company will achieve these estimates.  Therefore,  actual results could
differ  materially  from those  plans.  Specific  factors  that might cause such
material  differences include, but are not limited to, the availability and cost
of  personnel  trained in this area,  the  ability  to locate  and  correct  all
relevant computer codes, and similar uncertainties.

Subsequent Event

         Subsequent to year-end,  the Company's Board of Directors  approved the
closure  of the  Company's  finishing  facility  in  Cartago,  Costa  Rica and a
reduction of sewing  operations in the Company's San Jose,  Costa Rica facility.
The Cartago  facility,  as well as some of the  manufacturing  equipment in both
locations will be held for sale. The Company  expects to record a pre-tax charge
of $3.5 to $4.0 million in the first quarter of fiscal 1998 on the write-down of
these assets to expected  realizable  value and the accrual of costs  related to
severance payments and other closing expenses.  Approximately 700 employees will
be terminated between the two facilities.  The Company expects the completion of
these events to occur prior to the end of fiscal 1998.

Risk Factors Affecting the Company's Business and Prospects

         General.  The Company cautions readers that various factors could cause
the actual results of the Company to differ  materially  from those indicated by
forward-looking  statements  made from time to time in news  releases,  reports,
proxy  statements,  registration  statements  and other  written  communications
(including the preceding sections of this document),  as well as oral statements
made from time to time by representatives of the Company.  Except for historical
information,  matters  discussed  in such oral and  written  communications  are
forward-looking statements that involve risks and uncertainties,  including, but
not limited to,  economic and business  conditions  in the U.S. and abroad;  the
level of demand for apparel products and success of planned marketing  programs;
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  levels and  sourcing;  the  ability of the
Company  to access  the  credit  market to  finance  capital  expenditures;  and
currency fluctuations.

         Sourcing. In 1996, the Company terminated its shirt licensing agreement
with Oxford  Industries,  Inc.  and  reintroduced  wrinkle-free  shirtings  as a
significant   addition  to  the  Savane  label.   Due  to  timing  and  sourcing
complexities  and market  acceptance,  risk factors  associated  with shirts are
greater than those  associated with the Company's  traditional  men' casual wear
product lines.

         The closure or sale of several of the Company's manufacturing plants in
Mexico,  Costa Rica,  and Ireland in fiscal  1995,  1996 and 1997  resulted in a
significant shift in the percentage of production activities supplied by outside
contractors.  The  percentage  of  production  supplied  by outside  contractors
increased  to more than 66% by the end of  fiscal  1997.  Although  the shift in
production to outside  contractors  allows  greater  flexibility  in sourcing as
market  demands  fluctuate,  conversion  costs  are  incurred  to  start-up  new
contractors.  During 1997, the Company  experienced higher than normal irregular
production  rates at some of the new  locations.  As previously  discussed,  the
Company plans to further reduce  production at its Costa Rica sewing plant,  and
hold its Costa Rican  laundry  facility for sale in fiscal 1998.  As the Company
continues to decrease  reliance on owned facilities in the future,  the risk for
increased  irregular  production,  late deliveries,  and higher other production
costs during the conversion process exists.

         Relocation  of  Distribution  Center.  The  Company  will move to a new
distribution  center in fiscal 1998. The target  completion date for the move is
March 31, 1998.  Although the Company has taken the necessary  steps to ensure a
smooth  transition,  additional risks exist related to this relocation.  The new
distribution center will function with a new state-of-the-art  system,  designed
to  increase  efficiencies  in pulling  and  packing  product.  Any  significant
difficulties  experienced  with this new system could result in  disruptions  in
shipments in the first and second quarters of 1998.

         Year 2000  Systems  Conversion.  The Year 2000  Issue is the  result of
computer programs being written using two digits, rather than four to define the
applicable  year.  Any  of  the  Company's   computer  programs  that  have  the
date-sensitive  software may recognize a date using "00" as the year 1900 rather
than as the year 2000. This could result in a system failure or  miscalculations
causing  disruptions of operations,  including,  among other things, a temporary
inability to process  transactions,  send invoices,  or engage in similar normal
business  activities.  The Company is currently in the process of replacing  its
entire inventory management, warehouse distribution and order processing systems
so that those systems will utilize dates beyond December 31, 1999 properly.  The
Company  believes  that  the  planned  modifications  and  conversions  will  be
completed timely and will allow it to mitigate the Year 2000 Issue.  However, if
such  modifications  and conversions are not made, or are not completed  timely,
the Year 2000 Issue could have a material effect on the Company's operations.

         Customers.  As  consolidation  in the  retail  industry  occurs,  fewer
customers  comprise a larger percentage of the Company's total  consolidated net
sales.  During fiscal 1997,  the Company's ten largest  customers  accounted for
approximately 66% of the Company's  consolidated revenues. In fiscal 1997, sales
to  three  customers  were  10% or  more of  consolidated  sales.  One  customer
accounted for $35.9 million (13.1%) of the Company's consolidated sales; another
accounted for $35.2 million (12.8%) of consolidated  sales; and a third customer
accounted for $27.3 million (10.0%) of consolidated sales.

         Regulation.  Substantially  all of the  Company's  total  production is
manufactured  abroad,  either in its foreign  factories or through  arrangements
with independent foreign contractors.  As a result, the Company's operations may
be adversely  affected by political  instability  resulting in the disruption of
trade from foreign  countries in which the Company's  facilities or  contractors
are located,  the  imposition of additional  regulations  relating to imports or
duties, taxes and other charges on imports,  any significant  fluctuation of the
value of the dollar against foreign  currencies and restrictions on the transfer
of  funds.  In  addition,   the  Company's  import  operations  are  subject  to
constraints  imposed by bilateral textile  agreements  between the United States
and certain foreign countries.  These agreements impose quotas on the amount and
type of goods which can be imported into the United States from these countries.
However,  the Company  closely  monitors  import  quotas and can, in most cases,
shift production to contractors located in other countries with available quotas
or to domestic factories.  The Company's apparel products that are imported from
its factories in Mexico and Costa Rica are eligible for certain  duty-advantaged
programs  historically  known as "807  Programs."  With the  advent of the North
American  Free Trade  Agreement  (NAFTA),  import quota  regulations  are not as
significant as in prior years.

Recent Pronouncements

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statement of Financial  Accounting  Standards No. 128 (SFAS 128),  "Earnings Per
Share." SFAS 128 will  supersede ABP Opinion No. 15,  "Earnings Per Share." SFAS
128 requires dual  presentation  of basic and diluted  earnings per share on the
face of the income statement for entities with complex capital structures.  SFAS
128 is effective for annual and interim  periods ending after December 15, 1997.
Earlier application is not permitted.  Implementation of SFAS 128 would not have
had a material impact of the Company's earnings per share for fiscal 1997.

         In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS 130),  "Reporting  Comprehensive
Income."  This  statement  establishes  standards  for  reporting and display of
comprehensive income and its components.  The Company has several items of other
comprehensive income and will adopt this standard in its 1998 fiscal year.

         In June 1997, the Financial Accounting Standards Board issued Statement
of  Financial  Accounting  Standards  No.  131 (SFAS  131),  "Disclosures  about
Segments of an Enterprise and Related Information." This Statement requires that
public business  enterprises report certain information about operating segments
in complete  sets of financial  statements  of the  enterprise  and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business  enterprises report certain information about their product
and  services,  the  geographic  areas in which they  operate,  and their  major
customers.  Upon adoption of this pronouncement,  additional disclosures will be
required by the Company.  This Statement is effective for fiscal years beginning
after December 15, 1997. Earlier application is encouraged.  The Company intends
to adopt this statement for its 1998 fiscal year.



<PAGE>


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations

Years ended November 2, 1997,  November 3, 1996 and November 3, 1995  (Thousands
of dollars except per share data)
<TABLE>
<CAPTION>
                                                         1997                1996               1995
                                                 -----------------      ---------------    ----------------
<S>                                              <C>                        <C>                 <C>    
Net sales                                        $        273,719              247,598             240,797
Cost of sales                                             199,790              183,540             185,822
                                                 -----------------      ---------------    ----------------

       Gross profit                                        73,929               64,058              54,975

Selling, general and administrative expenses               66,436               62,189              68,002
Termination of foreign operations                           5,106                    -                   -
Production conversion expenses                              2,061                    -                   -
Relocation expenses                                           904                    -                   -
                                                     -------------      ---------------    ----------------

       Operating income (loss)                              (578)                1,869            (13,027)

Other income (expense):
       Interest expense                                   (4,108)              (4,065)             (4,627)
       Interest income                                        716                  834                 901
       Foreign currency transaction gains                     163                  374                 512
       Gain (loss) on sale of assets                         (24)               10,041                 756
       Other, net                                             203                  684                 209
                                                 -----------------      ---------------    ----------------
                                                          (3,050)                7,868             (2,249)
                                                 -----------------      ---------------    ----------------

Income (loss) before income taxes                         (3,628)                9,737            (15,276)

Income tax provision (benefit)                            (3,898)                2,981             (2,335)
                                                 -----------------      ---------------    ----------------

Net income (loss)                                $            270                6,756            (12,941)
                                                 =================      ===============    ================

Net income (loss) per share                      $            .03                  .66              (1.28)
                                                 =================      ===============    ================

Weighted average shares of common stock
     (all periods) and common stock equivalents
     (income periods only) outstanding                 10,295,035           10,195,133          10,122,308
                                                 =================      ===============    ================

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets

November 2, 1997 and November 3, 1996 (Thousands of dollars except share data)
<TABLE>
<CAPTION>
 
                                                                         1997               1996
                                                                   --------------     -----------------
<S>                                                                 <C>                         <C>   
ASSETS
Current assets:
     Cash                                                           $       2,332                 3,777
     Trade receivables, net of allowance
         of $746 in 1997 and $662 in 1996                                  43,053                41,671
     Inventories:
          Raw materials                                                    12,339                11,404
          Work-in-process                                                  18,457                15,251
          Finished goods                                                   43,996                35,378
                                                                    --------------     -----------------
                 Total inventories                                         74,792                62,033
     Other current assets                                                  10,851                10,857
                                                                    --------------     -----------------

                 Total current assets                                     131,028               118,338

Note receivable                                                                 -                 5,260
Property, plant and equipment, net                                         36,033                25,370
Other non-current assets                                                    8,531                 4,895
                                                                    --------------     -----------------
                                                                    $     175,592               153,863
                                                                    ==============     =================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Short-term debt                                                $      35,572                20,744
     Current installments of long-term debt                                 5,301                 1,288
     Trade payables                                                        20,600                24,038
     Accrued compensation                                                   2,755                 3,101
     Other current liabilities                                             10,737                10,636
                                                                    --------------     -----------------

                  Total current liabilities                                74,965                59,807

Long-term debt, excluding current installments                             13,771                 4,706
Other non-current liabilities                                               2,957                 3,992

Deferred gain on sale of building                                           1,185                 3,218

Commitments and contingencies

Shareholders' equity:
     Common stock, no par value, $.01 stated
          value, 20,000,000 shares authorized; issued
          10,315,264 in 1997 and 10,209,246 in 1996                        46,026                46,024
     Additional paid-in capital                                            30,627                29,894
     Cumulative foreign currency
          translation adjustment                                          (2,416)                 (742)
     Minimum pension liability adjustment                                       -               (1,243)
     Retained earnings                                                      8,586                 8,316
                                                                    --------------     -----------------
                                                                           82,823                82,249

     Less: Treasury stock, 36,275 shares, at cost                             109                   109
                                                                    --------------     -----------------
                 Total shareholders' equity                                82,714                82,140
                                                                    --------------     -----------------
                                                                    $     175,592               153,863
                                                                    ==============     =================
</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>

<TABLE>
<CAPTION>

FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity

Years ended November 2, 1997,  November 3, 1996 and November 3, 1995  (Thousands
of dollars except share data)
                                                                                                  Cumulative
                                                                                                   Foreign
                                                                                  Additional       Currency
                                                                Common Stock        Paid-in      Translation
                                                  -----------------------------
                                                     Shares          Amount         Capital       Adjustment
                                                  --------------   ------------  --------------  -------------
<S>                                                  <C>              <C>             <C>          <C>   
Balance, November 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)
     Net income                                               -              -               -              -
     Foreign currency translation adjustment                  -              -               -        (1,674)
     Minimum pension liability adjustment                     -              -               -              -
     Exercise of stock options and other                                                                    -
                                                         106,018             2             733              -
                                                 --------------   ------------  --------------  -------------
Balance, November 2, 1997                            10,315,264       $ 46,026        $ 30,627     $  (2,416)
                                                  ==============   ============  ==============  =============


Consolidated Statements of Shareholders' Equity (Continued)

                                                     
                                                     Minimum
                                                     Pension                           Treasury Stock
                                                    Liability         Retained   ----------------------------
                                                   Adjustment         Earnings      Shares         Amount
                                                  --------------   ------------- -------------   ------------
<S>                                                  <C>              <C>              <C>            <C>    
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
     Net income                                               -             270             -              -
     Foreign currency translation adjustment                  -               -             -              -
     Minimum pension liability adjustment                 1,243               -             -              -
     Exercise of stock options and other                      -               -             -              -
                                                  --------------   ------------- -------------   ------------
Balance, November 2, 1997                           $         -      $    8,586        36,275         $  109
                                                  ==============   ============= =============   ============
</TABLE>



<PAGE>


FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows

Years ended November 2, 1997,  November 3, 1996 and November 3, 1995  (Thousands
of dollars)
<TABLE>
<CAPTION>
                                                                        1997               1996                1995
                                                                  ----------------    ---------------     ---------------
<S>                                                               <C>                       <C>                 <C> 
Cash flows from (used in) operating activities:
     Net income (loss)                                            $           270              6,756            (12,941)
     Adjustments to reconcile net income (loss) to net cash
        from (used in) operating activities:
           Depreciation and amortization                                    5,675              5,434               4,020
           Amortization of deferred gain on building sale                 (2,033)            (2,032)             (2,032)
           Amortization of deferred gain on subsidiary sale               (1,507)            (2,538)                   -
           Deferred income taxes                                          (5,107)              1,654             (1,934)
           (Gain) or loss on sale of assets                                    24           (10,041)               (756)
           Write-off of property, plant and equipment                       1,524                  -                   -
           Loss on discount of note receivable                                665                  -                   -

     Decrease (increase) in:
           Trade receivables, net                                         (1,382)            (1,847)             (2,893)
           Inventories                                                   (12,759)             10,730               2,661
           Other current assets                                             1,326              1,931             (1,016)
     Increase (decrease) in:
           Trade payables                                                 (3,438)              6,394             (4,662)
           Other                                                            (246)              (990)             (1,098)
                                                                  ----------------    ---------------     ---------------
                 Net cash from (used in) operating activities            (16,988)             15,451            (20,651)
                                                                  ----------------    ---------------     ---------------

Cash flows from (used in) investing activities:
     Purchases of property, plant and equipment                          (11,618)            (4,397)            (11,756)
     Proceeds from disposition of property, plant
           and equipment                                                       85             22,689               1,785
                                                                  ----------------    ---------------     ---------------
                 Net cash from (used in) investing activities            (11,533)             18,292             (9,971)
                                                                  ----------------    ---------------     ---------------

Cash flows from (used in) financing activities:
     Net increase (decrease) in short-term debt                            14,828           (24,035)              26,771
     Proceeds from issuance of long-term debt                              10,000                  4               6,426
     Repayment of long-term debt                                          (3,099)            (9,371)             (1,284)
     Proceeds from repayment of note receivable                             4,935                  -                   -
     Proceeds from sale of common stock                                       566                 19                 934
     Other                                                                  (135)              (318)               (923)
                                                                  ----------------    ---------------     ---------------
                 Net cash from (used in) financing activities              27,095           (33,701)              31,924
                                                                  ----------------    ---------------     ---------------

Effect of exchange rate changes on cash                                      (19)                 78                (17)
                                                                  ----------------    ---------------     ---------------

Net increase (decrease) in cash                                           (1,445)                120               1,285
Cash, beginning of year                                                     3,777              3,657               2,372
                                                                  ----------------    ---------------     ---------------
Cash, end of year                                                 $         2,332              3,777               3,657
                                                                  ================    ===============     ===============

Supplemental cash flow disclosures:
    Interest paid                                                 $         4,061              4,449               4,116
    Income taxes paid                                                       1,364              1,019               1,625
    Assets acquired through direct financing
        loans or capital leases                                             6,643                726               3,923
    Exchange of non-monetary assets                                         (466)                  -                   -

</TABLE>

See accompanying notes to consolidated financial statements.



<PAGE>


FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 2, 1997, November 3, 1996 and November 3, 1995

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 and shirts and women's  slacks and skirts.  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 1997
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 inventory markdowns 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.

         In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS 130),  "Reporting  Comprehensive
Income."  This  statement  establishes  standards  for  reporting and display of
comprehensive income and its components.  The Company has several items of other
comprehensive income and will adopt this standard in its 1998 fiscal year.

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 2, 1997 and November 3, 1996.

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. 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 7 for further discussion.

INTANGIBLE ASSETS

         At  November  2, 1997 and  November  3, 1996,  intangible  assets  were
approximately  $1.0  million  and  $1.4  million,  respectively,  and  consisted
primarily of goodwill and trademarks. 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 was $281,000 in 1997, $353,000 in 1996 and $283,000
in 1995.

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 was $14.0 million in 1997,  $10.7 million in 1996 and $17.0
million in 1995.

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 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."

         Also included in foreign currency transaction gains and losses for 1997
is a gain of $758,000 due to cumulative translation adjustments transferred from
equity to operations upon the sale of one of the Company's foreign subsidiaries.

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 1997 and  1996 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.  In
February  1997, the Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards No. 128 (SFAS 128),  "Earnings Per Share." SFAS
128 will  supersede ABP Opinion No. 15,  "Earnings Per Share." SFAS 128 requires
dual  presentation  of basic and diluted  earnings  per share on the face of the
income  statement  for entities  with complex  capital  structures.  SFAS 128 is
effective for annual and interim periods ending after December 15, 1997. Earlier
application  is not permitted.  Implementation  of SFAS 128 would not have had a
material impact of the Company's earnings per share for fiscal 1997.


<PAGE>


2.  Property, Plant and Equipment

Property, plant and equipment is comprised of the following:

<TABLE>
<CAPTION>

                                                                           Thousands of dollars
                                                  Estimated useful    ------------------------------
                                                  lives (years)            1997            1996
                                                -------------------   ---------------   ------------
<S>                                                   <C>             <C>                    <C>   
Factory machinery and equipment                        9-12            $      29,594         27,060
Buildings                                             20-50                    5,193          5,479
Building improvements                                  3-20                    7,418          4,373
Other fixtures and equipment                           3-20                   16,580         13,813
Land                                                                             770            770
Factory machinery and other fixtures and
    equipment under capital lease                                              4,170          3,440
Construction in progress                                                       5,378            937
                                                                      ---------------   ------------
       Total property, plant and equipment                                    69,103         55,872
Less accumulated depreciation
    and amortization                                                          33,070         30,502
                                                                      ---------------   ------------
        Net property, plant and equipment                             $       36,033         25,370
                                                                      ===============   ============
</TABLE>

         Accumulated amortization on assets under capital  leases  totaled  $2.1
million at November 2, 1997 and $1.3 million at November 3, 1996.

         At November 2, 1997, construction in progress consisted of $4.6 million
of  equipment   purchased  for  the  Company's  new  distribution   center,  and
approximately  $800,000 for hardware,  software and installation  costs incurred
related to  replacement  of the  Company's  enterprise  wide  computer  systems.
Construction  in progress  under capital leases was $2.6 million and $348,000 at
November 2, 1997 and November 3, 1996, respectively.

         During  1997,  the  Company  closed its  manufacturing  plant in Galway
Ireland and sold its  remaining  Irish  facility  located in  Kiltimagh.  Assets
abandoned  or  sold  in  Ireland   approximated  $1.5  million.  See  additional
discussion in Note 8.

         In June 1996, the Company sold its facility  located in Piedras Negras,
Mexico for a purchase  price of  approximately  $22.2 million in cash.  Proceeds
from the sale,  net of expenses,  were used to retire a long-term  capital lease
obligation of approximately $7.2 plus other long-term  obligations.  The balance
of the  proceeds of  approximately  $13.8  million was applied to the  Company's
Credit Agreement.

         Depreciation  and  amortization  of  property,   plant  and   equipment
approximated  $5.4  million  in 1997,  $5.1 million  in 1996 and $3.7 million in
1995.
<PAGE>


3.  Debt and Liquidity

SHORT-TERM DEBT

         The Company's  primary Credit  Agreement  provides up to $75 million of
credit through July 1, 2001, for the Company's  United States and United Kingdom
operations  for either  borrowings  or letters of credit.  The Credit  Agreement
includes a term loan payable in monthly installments over a 48 month period. The
balance of the term loan was $9.2  million  as of  November  2,  1997.  Formulas
derived from accounts  receivable and inventory define borrowing  capacity under
the Credit  Agreement.  The Credit Agreement is  collateralized by substantially
all  assets of Farah  U.S.A.,  Farah  U.K.  Limited  and  Savane  Direct  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 for the Credit Agreement and term loan is
prime (8 1/2% at November 2, 1997) plus 1/2% for  borrowings  and 1/6% per month
for letters of credit.  The  Company  may also from time to time  convert all or
part of the loans  outstanding  under the Credit  Agreement  or term loan into a
loan based on the LIBOR Rate. Upon conversion, the interest rate is be the LIBOR
Rate,  plus 2.75%.  The conversion to and continued  applicability  of the LIBOR
Rate is conditioned  upon specific  notification  requirements,  a minimum of $5
million of LIBOR Rate loans  outstanding,  and various  other  requirements.  At
November 2, 1997, the Company had $33.5  million,  including $8.0 million of the
term loan  balance,  in LIBOR  loans  outstanding  under the  Credit  Agreement.
Interest  rates on the LIBOR  contracts  outstanding  at November 2, 1997 ranged
from 8.38% to 8.41%.  An unused  credit line fee of 1/2% per annum is charged on
the unused portion of the line when borrowings  decrease below $17.5 million. As
of  November  2,  1997,  usage  under the  Credit  Agreement  was $36.5  million
(including  letters  of credit  of $1.3  million)  and the  excess  credit  line
available was $23.5 million.  The Credit Agreement  restricts certain additional
indebtedness and requires the maintenance of minimum tangible net worth, minimum
working  capital and limits  capital  expenditures.  As of November 2, 1997, the
Company was in compliance with these covenants.  The Credit Agreement  prohibits
the payment of  dividends  by the  Company,  and except for debt  service of the
Company's  8.5%  convertible  subordinated  debentures,   the  Credit  Agreement
restricts the subsidiaries from transferring substantially all net assets to the
Parent Company through intercompany loans, advances or dividends.

         The  following  table  reflects  short-term  debt balances and interest
rates in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
                                                           Thousands of dollars
                                               ------------------------------------------
                                                  1997            1996           1995
                                               ------------   -------------   -----------
         <S>                                     <C>                <C>           <C>   
         Average outstanding balance             $  31,813          31,473        36,842

         Maximum month-end
              balance outstanding                $  42,899          41,816        47,338

         Weighted average interest rate:
              During year                             9.4%            9.4%          9.7%
              Year-end                                8.5%            9.2%          9.8%

</TABLE>


<PAGE>


LONG-TERM DEBT
<TABLE>
<CAPTION>

                                                                                  Thousands of dollars
                                                                               ---------------------------
                                                                                  1997           1996
                                                                               -----------    ------------
<S>                                                                                <C>              <C>   
Term note, collateralized by substantially all assets of Company, bearing
   interest at prime plus .5% and LIBOR plus 2.75% for LIBOR Rate Loans,
   due July 1, 2001, payable in monthly installments of $208,333               $    9,167               -
                                                                                   

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                                               -           1,165

Collateralized loan for aircraft purchase bearing interest at 8.85%, fixed
   through April 2, 2000, then at prime plus 1%, due in monthly 
   installments through April 2, 2007                                               1,078               -

Various notes, collateralized by property, plant and equipment, bearing
    interest at rates ranging from 9.0% to 10.93%, due in monthly
    installments through 2001                                                       1,288             554

Various obligations under other capital leases                                      5,876           2,612
                                                                               -----------    ------------
      Total long-term debt                                                         19,072           5,994
      Less current installments                                                     5,301           1,288
                                                                               -----------    ------------
          Net long-term debt                                                   $   13,771           4,706
                                                                               ===========    ============
</TABLE>


Installments of long-term debt and capital lease obligations mature as follows:
<TABLE>
<CAPTION>

                                                        Thousands of dollars
                                                ---------------------------------
                                                  Long-term       Capital Lease
                                                     Debt          Obligations
                                                --------------   ----------------
                           <S>                     <C>                     <C>    
                                      1998         $    3,237              2,490
                                      1999              3,040              1,715
                                      2000              2,728                957
                                      2001              1,771                507
                                      2002                104                445
                           2003 and beyond              2,316                819
                                                --------------   ----------------
                                                       13,196              6,933
                     Less interest portion                  -              1,057
                                                ==============   ================
                                                   $   13,196              5,876
                                                ==============   ================
</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 1998.



<PAGE>


4.  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 employee  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 the cost recognition provisions of SFAS 123 are presented below.

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  and  1997  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 4,000 options in 1997,  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 these years.

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 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 57,500,  31,000 and 9,000 shares under
the  Director  Stock Option Plans in 1997,  1996 and 1995,  respectively.  Stock
options granted from the 1988 Stock Option Plan have a term of ten years and are
fully vested as of the date of grant.  Stock options  granted from the 1996 plan
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 1997, 1996 and 1995.


<PAGE>


         A summary of the status of the  Company's  stock options as of November
2, 1997,  November 3, 1996 and November 3, 1995 and the changes during the years
ended on those dates is presented below:
<TABLE>
<CAPTION>

                                    1997 Stock Options          1996 Stock Options           1995 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
                              ------------- ------------   ------------- ------------   -------------- -------------
<S>                                <C>        <C>               <C>       <C>                <C>          <C>
Outstanding at beginning
     of year                       949,713    $    8.21         455,637   $    10.87          478,985     $   10.68
Granted                             61,500         8.05         520,000         5.94           16,000          8.53
Exercised                         (98,650)         5.74         (3,500)         5.48         (25,514)          5.81
Forfeited                         (41,000)        14.01        (17,924)        11.08         (10,834)         11.02
Expired                            (6,063)         7.50         (4,500)         6.96          (3,000)          9.81
                              -------------                -------------                --------------
Outstanding at end of year         865,500         8.21         949,713         8.21          455,637         10.87
                              =============                =============                ==============

Exercisable at end of year         801,000         8.25         678,463         9.07          448,637         10.91
Weighted-average fair
     market value of options
     granted during the year         $3.85                        $2.66                         $3.78
</TABLE>

         As of  November  2,  1997,  the  weighted  average  remaining  term for
outstanding  options is 7.17 years.  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 1997,  1996 and
1995:  dividend yield of 0% for all years;  expected volatility of 45.1% in 1997
and 51.3% in 1996 and 1995;  risk-free  interest  rates are  different  for each
grant and  range  from  6.1% to 7.1%;  and the  expected  lives of  options  are
different for each grant and range from 3.6 years to 4.8 years.

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 fiscal
1997, 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
12,500  shares  vested in 1997,  37,665  shares vested in 1996 and 62,666 shares
vested in 1995. The Company  recognizes the expense related to these awards over
the period of  service  specified  in the  vesting  provision  of the awards and
recorded  compensation expense of $77,000 in 1997, $266,000 in 1996 and $704,000
in 1995 for restricted stock awards.



<PAGE>


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

         Had the compensation cost for the Company's employee based compensation
plans been determined  consistent with SFAS 123, the Company's net income (loss)
and net income (loss) per common share for 1997, 1996 and 1995 would approximate
the pro forma amounts below (in thousands except per share data):
<TABLE>
<CAPTION>

                                              1997          1996         1995
                                           ------------  -----------  ------------
          <S>                               <C>               <C>        <C>   
          Net income (loss):
              As reported                   $      270        6,756      (12,941)
              Pro forma                     $     (78)        5,945      (12,973)

          Net income (loss) per share:
              As reported                   $      .03          .66        (1.28)
              Pro forma                     $    (.01)          .58        (1.28)

</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.

5.   Income Taxes

         The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at November 2, 1997 and November 3, 1996 are
as follows:
<TABLE>
<CAPTION>
                                                                          Thousands of dollars
                                                                       --------------------------
                                                                          1997          1996
                                                                       -----------   ------------
            <S>                                                        <C>                <C>    
            DEFERRED TAX ASSETS:
                U.S. federal NOL carryforwards                         $    3,949          2,062
                Foreign NOL carryforwards                                   1,382            771
                Deferred gains                                                403          1,871
                Foreign tax credit carryforwards                              626            451
                Other accrued expenses                                      4,031          3,563
                Other                                                         759            235
                                                                       -----------   ------------
                      Total deferred tax assets                            11,150          8,953
                                                                       -----------   ------------

            DEFERRED TAX LIABILITIES:
                Tax in excess of financial statement
                   depreciation and amortization                            1,732          1,980
                Other                                                         699            600
                                                                       -----------   ------------
                      Total deferred tax liabilities                        2,431          2,580
                                                                       -----------   ------------

                Net deferred tax asset                                      8,719          6,373
                Valuation allowance                                       (1,064)        (3,825)
                                                                       -----------   ------------
                       Deferred income tax asset, net                       7,655          2,548
                       Less current portion                               (4,207)        (2,548)
                                                                       -----------   ------------
                       Long-term deferred income tax asset, net        $    3,448              -
                                                                       ===========   ============
</TABLE>

         The fiscal  1997  increase  in the  Company's  deferred  tax assets was
primarily  due to the  Company's  domestic  and  foreign  net  operating  losses
incurred for the year.  Realization of the deferred tax assets is dependent upon
the Company  generating  future taxable income from operations in the respective
taxing jurisdictions.  The Company has domestic net operating loss carryforwards
of $11.6  million,  of which $7.1 million  expire in 2010.  The  remaining  $4.5
million of domestic net operating loss carryforwards expire in 2012. The Company
does not  believe it is more likely  than not that it will  generate  sufficient
taxable  income  during the  carryforward  periods for  certain  portions of the
deferred  tax assets and  accordingly,  provided a valuation  allowance  of $1.1
million and $3.8 million at November 2, 1997 and November 3, 1996, respectively.

         During fiscal 1997, the Company  reevaluated the  realizability  of its
deferred  tax  assets  pursuant  to  the  criteria  of  Statement  of  Financial
Accounting Standards No. 109, and concluded that it is more likely than not that
the Company will realize tax benefits associated with its domestic net operating
losses,  together with certain other tax benefits,  that were previously subject
to valuation allowance.  As a result of this reevaluation,  the beginning of the
year valuation allowance was reduced by approximately $3.2 million.

         The federal  examination of the Company's United States tax returns for
fiscal  years 1994 and 1995 was  completed  during the year without any proposed
income or expense  adjustments or modifications to its tax credits.  The Company
is waiting for  acceptance of the auditor's  report from the Joint  Committee on
Taxation of the United States Treasury Department.

Income (loss)  before taxes and incomes  taxes in 1997,  1996 and 1995 are shown
below:
<TABLE>
<CAPTION>

                                                                     Thousands of dollars
                                                       --------------- -- ------------- -- --------------
                                                            1997              1996             1995
                                                       ---------------    -------------    --------------
<S>                                                        <C>                   <C>            <C>
INCOME (LOSS) BEFORE INCOME TAXES:
    Domestic operations                                    $    (855)            6,277          (16,728)
    Foreign operations                                        (2,773)            3,460             1,452
                                                       ---------------    -------------    --------------
                      Total consolidated                   $  (3,628)            9,737          (15,276)
                                                       ===============    =============    ==============

INCOME TAX PROVISION:
    Domestic operations
         Current                                           $      668              450           (1,087)
         Deferred                                             (3,956)            1,654           (1,934)
                                                       ---------------    -------------    --------------
             Total domestic                                   (3,288)            2,104           (3,021)

    Foreign operations
         Current                                                  541              877               686
         Deferred                                             (1,151)                -                 -
                                                       ---------------    -------------    --------------
              Total foreign                                     (610)              877               686
                                                       ---------------    -------------    --------------
                       Total consolidated                  $  (3,898)            2,981           (2,335)
                                                       ===============    =============    ==============
</TABLE>

                                        
The effective tax rate differs from the U.S. statutory rate of 34% as summarized
below:
<TABLE>

                                                                      Thousands of dollars
                                                       --------------- -- ------------- -- --------------
                                                            1997              1996             1995
                                                       ---------------    -------------    --------------
<S>                                                     <C>                      <C>             <C>  
Expected income taxes at U.S. statutory rate            $     (1,234)            3,311           (5,194)
     Non-deductible expenses                                       92              212                87
     Permanent differences on assets sold                           -              172                 -
     Effect of differing tax rates in foreign                     191             (91)                46
          countries
     Unrecognized deferred tax benefits                           244                -             2,633
     U.S. taxes on dividends from foreign countries               166                -                93
     Recognition of previously unrecognized
         deferred tax benefits                                (3,226)            (761)                 -
     Other                                                      (131)              138                 -
                                                       ---------------    -------------    --------------
Income taxes, as reported                               $     (3,898)            2,981           (2,335)
                                                       ===============    =============    ==============
</TABLE>

                                                    
         At  November  2,  1997,  the  Company's  foreign  subsidiaries  had net
deferred tax assets of $2.0 million from net operating  loss  carryforwards  and
deferred charges that are available to offset future foreign taxable income.  In
addition,  at November 2, 1997,  the Company had  $626,000 in foreign tax credit
carryforwards  to  offset  any U.S.  tax  generated  by  future  foreign  income
repatriated and taxed in the U.S. These credits expire in the years 1998 through
2001 if not used.


<PAGE>


         Certain  of  the  Company's  foreign  subsidiaries  have  undistributed
accumulated  earnings of approximately  $25.5 million,  as adjusted for U.S. tax
purposes at November 2, 1997. No U.S. tax has been provided on the undistributed
earnings  because the Company intends to indefinitely  reinvest such earnings in
the foreign  operations.  The amount of the unrecognized  deferred tax liability
associated with the  undistributed  earnings that have not been previously taxed
in the U.S. was approximately  $7.1 million at November 2, 1997. If earnings are
repatriated,  foreign tax  credits can offset a portion of the U.S.  tax on such
earnings.

6.  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 1997,  1996 and 1995,  the Company's
contribution  to the plan was  approximately  $418,000,  $306,000 and  $444,000,
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 2, 1997,  November 3, 1996 and November 3, 1995, included the following
components:
<TABLE>
<CAPTION>
                                                                          Thousands of dollars
                                                        --------------------------------------------
                                                           1997            1996            1995
                                                        ------------    ------------   -------------
<S>                                                      <C>                  <C>           <C>   
Service cost-benefits earned during the period           $       60              64              47
Interest cost on projected benefit obligation                   579             576             577
Actual return on plan assets                                (1,300)           (786)         (1,514)
Net amortization and deferral                                   705             263           1,165
                                                        ------------    ------------   -------------
      Net periodic pension cost                          $       44             117             275
                                                        ============    ============   =============

</TABLE>

<PAGE>


         The  following  table sets forth the funded  status at November 2, 1997
and November 3, 1996, of the defined benefit plan:
<TABLE>
<CAPTION>

                                                                                Thousands of dollars
                                                                           ----------------------------
                                                                               1997           1996
                                                                           -------------  -------------
<S>                                                                      <C>                   <C>   
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION:
Vested benefit obligation                                                $      (7,694)        (7,601)
 Nonvested benefit obligation                                                     (129)          (174)
                                                                           -------------  -------------
      Accumulated benefit obligation                                     $      (7,823)        (7,775)
                                                                           =============  =============


Projected benefit obligation                                             $      (7,823)        (7,775)
Plan assets at market value                                                       8,371          7,437
                                                                           -------------  -------------
       Funded status                                                                548          (338)
Unrecognized transition liability being recognized over
    average future service of plan participants                                     335            401
Unrecognized net loss from past experience different from
    that assumed and effects of changes in assumptions                              793          1,243
Adjustment required to recognize minimum liability                                    -        (1,644)
                                                                           -------------  -------------

       Prepaid/(Unfunded Reserve)                                        $        1,676          (338)
                                                                           =============  =============
</TABLE>

         In  determining  the  benefit  obligations  and  service  cost  of  the
Company's  defined  benefit plan,  weighted  average  discount rates of 7.5% and
7.75% were used in 1997 and 1996,  respectively.  The expected long-term rate of
return on plan assets was 9.5% in both years.


<PAGE>


7.  Commitments and Contingencies

      Lease and Capital Expenditure Commitments

         During 1988,  the Company  consummated a sale and leaseback of its main
El Paso, Texas,  manufacturing and office facility. In connection with the sale,
the Company entered into a 10 year operating lease of the facility which expires
in May 1998. A deferred  gain was  recognized on the sale, of which $1.2 million
remains  to be  recognized  through  1998.  A  portion  of the  sale was paid by
delivery of a $7.5  promissory note to the Company,  collateralized  by a second
mortgage on the property.  In the fourth quarter of 1997,  this note  receivable
was prepaid by the borrower.  In consideration for this prepayment,  the Company
discounted  the note 12.5%. A loss of  approximately  $665,000 was recognized in
this  transaction,  and  is  reflected  in  the  caption  "Other,  net"  on  the
Consolidated Statement of Operations.

         The Company and its  subsidiaries  occupy  certain  facilities  and use
certain  equipment  under  operating  leases which expire at various  dates from
fiscal 1998 to 2016.  The  following  is a summary by year of the  noncancelable
portion of future minimum lease payments under operating leases:
<TABLE>
<CAPTION>

                                                      Thousands
                                                       of dollars
                                                    ---------------
                                               <S>     <C>   
                                               1998    $     8,640
                                               1999          5,096
                                               2000          3,965
                                               2001          3,179
                                               2002          2,951
                                              Later         25,185
                                              years
                                                     --------------
                                    Lease payments*    $    49,016
                                                     ==============
</TABLE>

         *Minimum  payments  have not been  reduced by minimum  sublease  rental
         income of $820,000 due in the future under noncancelable subleases.

         The  Company   has   subleased   approximately   70%  of  its  El  Paso
manufacturing  facility.  The  noncancelable  portion of future  minimum  rental
income due in 1998 is $820,000.

         Rental  expense for all  operating  leases for 1997,  1996 and 1995 was
$8.4  million,  $8.2  million and $8.7  million,  respectively  (net of sublease
income of  approximately  $1.3  million in 1997,  $1.1  million in 1996 and $1.0
million in 1995).

         At  November  2,  1997,  the  Company  had   commitments   for  capital
expenditures of approximately $4.4 million.

      Credit Risks

         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 1997, 1996 and 1995, one U.S. customer  accounted for $35.9
million (13.1%), $36.3 million (14.6%) and $30.2 million (12.5%),  respectively,
of the Company's  consolidated sales. In addition, in 1997 and 1996 another U.S.
customer  accounted  for $ 35.2  million  (12.8%) and $26.6  million  (10.7%) of
consolidated sales,  respectively.  A third customer accounted for $27.3 million
(10.0%) of consolidated sales in 1997.


<PAGE>


      Legal Proceedings

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

8.      Termination of Foreign  Operations,  Production  Conversion Expenses and
Relocation Expenses

                   Termination  of foreign  operations.  During fiscal 1997, the
Company incurred a loss related to a fire and ultimate  disposition of its Irish
operations. A total loss of approximately $5.1 million was recognized related to
these  events.  This loss resulted  mainly from the  write-down of fixed assets,
severance  payments and legal and  professional  fees incurred.  This amount has
been  classified as  "Termination  of foreign  operations"  in the  Consolidated
Statement of Operations.

         Production  conversion  expenses.  In fiscal 1997, the Company incurred
start-up  costs  related to two new laundry  facilities  in Juarez and  Torreon,
Mexico and the  expansion  of the  Company's  existing  facility  in  Chihuahua,
Mexico.  Conversion costs were also incurred as the Company began to source more
product  from  global  contractors.  Expenses  related  to these  items  totaled
approximately  $2.1 million,  and have been  separately  stated in the line item
"Production conversion expenses" in the Consolidated Statement of Operations.

         Relocation  expenses.  In the third quarter of fiscal 1997, the Company
completed its move to new corporate  headquarters.  In addition,  the Company is
currently in the process of relocating its distribution center to a new facility
from which it expects to realize improved  distribution and inventory management
efficiencies.  The Company  anticipates  completion of the  distribution  center
relocation  in the  second  quarter  of  fiscal  1998.  In  moving  to  the  new
headquarters and distribution  center, the Company incurred duplicate  operating
costs,  moving  expenses and  professional  fees.  These  expenses  approximated
$904,000,  and  have  been  separately  stated  under  the  caption  "Relocation
expenses" in the Consolidated Statement of Operations.

9.       Fair Values of Financial Instruments

         The  following  methods  and  assumptions  were used by the  Company in
estimating the fair value  disclosures for its financial  instruments.  For cash
and 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
approximate  fair value,  as interest  rates for these  instruments  approximate
current  market  rates.  The  carrying  amount  of  the  Company's   convertible
debentures  was $1.7 million at November 2, 1997 and November 3, 1996.  The fair
value  for these  debentures  for the same  periods  was $1.3  million  and $1.2
million  respectively.  The fair value of the  convertible  debentures was based
upon quoted market prices at November 2, 1997 and November 3, 1996.


<PAGE>


10.      Geographic Segment Information

         The  Company is engaged in one  business  segment.  This  includes  the
design,  manufacture,  distribution  and sale of men's,  young men's,  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 1997, 1996 and 1995.  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>
<CAPTION>

                                                             Thousands of dollars
                                                    -------------------------------------------
                                                       1997            1996           1995
                                                    ------------   -------------   ------------
        <S>                                       <C>                   <C>            <C>    
        NET SALES:
        United States to unaffiliated customers   $     224,051         199,574        193,274
        Transfers between areas                               -               -            266
                                                    ------------   -------------   ------------
                  Total United States                   224,051         199,574        193,540
        Europe                                           31,752          30,677         32,033
        South Pacific                                    17,916          17,347         15,490
        Adjustments and eliminations                          -               -          (266)
                                                    ------------   -------------   ------------
                  Total                           $     273,719         247,598        240,797
                                                    ============   =============   ============

        OPERATING PROFIT (LOSS):
        United States                             $       5,180           1,981       (12,489)
        Europe                                          (4,801)               3            385
        South Pacific                                     1,970           2,626          1,549
        Adjustments and eliminations                          -               -              -
                                                    ------------   -------------   ------------
                  Total                                   2,349           4,610       (10,555)

        Net gain (loss) on sale of assets                  (24)          10,041            755
        General corporate expenses                      (2,561)         (1,683)        (1,751)
        Interest expense, net                           (3,392)         (3,231)        (3,725)
                                                    ------------   -------------   ------------
              Income (loss) before income taxes   $     (3,628)           9,737       (15,276)
                                                    ============   =============   ============

        IDENTIFIABLE ASSETS:
        United States                             $     143,182         123,520        146,172
        Europe                                           15,513          16,552         17,326
        Far East and the South Pacific                   21,000          17,645         14,357
        Adjustments and eliminations                    (4,103)         (3,854)        (4,028)
                                                    ------------   -------------   ------------
                   Total                          $     175,592         153,863        173,827
                                                    ============   =============   ============

</TABLE>
 
         Approximately  66% and 26% of all product sold in the United  States in
1997 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  2, 1997 were net assets  located in Mexico and Costa
Rica totaling approximately $6.7 million and $8.3 million respectively.

         In June 1997, the Financial Accounting Standards Board issued Statement
of  Financial  Accounting  Standards  No.  131 (SFAS  131),  "Disclosures  about
Segments of an Enterprise and Related Information." This Statement requires that
public business  enterprises report certain information about operating segments
in complete  sets of financial  statements  of the  enterprise  and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business  enterprises report certain information about their product
and  services,  the  geographic  areas in which they  operate,  and their  major
customers.  Upon adoption of this pronouncement,  additional disclosures will be
required by the Company.  This Statement is effective for fiscal years beginning
after December 15, 1997. Earlier application is encouraged.  The Company intends
to adopt this statement for its 1998 fiscal year.

11.      Quarterly Unaudited Information

         Quarterly unaudited information for fiscal 1997 compared to fiscal 1996
is as follows: 
<TABLE>
<CAPTION>

                                                                  Thousands of dollars except share data
                                                  First Quarter  Second Quarter    Third Quarter    Fourth Quarter
                                                  ------------- ----------------  ---------------  ---------------
        <S>                                    <C>                  <C>              <C>              <C> 
        1997
        Net sales                              $       61,938           70,771           64,256           76,754
        Gross profit                                   17,708           19,888           16,723           19,610
        Net income (loss)                             (1,955)            3,211            (403)            (583)
        Net income (loss) per share                     (.19)              .31            (.04)            (.06)
        Weighted average shares of common
        stock and common stock equivalents
        outstanding                                10,191,103       10,434,026       10,276,022       10,278,989

        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
</TABLE>

         In the  first  quarter  of 1997 an after tax loss of $2.5  million  was
         recorded  related  to a loss  incurred  in one of the  Company's  Irish
         facilities, as a result of a fire.

         In the  fourth  quarter  of 1997 an  additional  after tax loss of $1.1
         million was recorded related to the final  disposition of the Company's
         Irish facilities.

         In the third  quarter of 1996,  the Company  sold its  Piedras  Negras,
         Mexico facility,  resulting in an after-tax gain of approximately  $6.9
         million.

12.      Subsequent Events

         Subsequent  to  November  2, 1997,  the  Company's  Board of  Directors
approved the closure of the Company's finishing facility in Cartago,  Costa Rica
and a reduction  of sewing  operations  in the  Company's  San Jose,  Costa Rica
facility.  The Cartago facility, as well as some of the manufacturing  equipment
in both locations will be held for sale. The Company expects to record a pre-tax
charge of $3.5 to $4.0 million in the first quarter of 1998 on the write-down of
these assets to expected  realizable  value and the accrual of costs  related to
severance payments and other closing expenses.  Approximately 700 employees will
be terminated between the two facilities.  The Company expects the completion of
these  events  to occur  prior to the end of fiscal  1998.  This  decision  will
eliminate  certain  fixed costs and should  result in lower product costs as the
Company  sources  more goods from  Mexico and other  lower cost  suppliers  (See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Risk Factors Affecting the Company's Business and Prospects").



<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS



TO THE SHAREHOLDERS OF FARAH INCORPORATED:

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Farah
Incorporated (a Texas  corporation)  and subsidiaries as of November 2, 1997 and
November  3,  1996  and  the  related  consolidated  statements  of  operations,
shareholders'  equity,  and cash flows for the years 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 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 2, 1997 and  November 3, 1996,  and the results of
their  operations  and their cash flows for the years then ended,  in conformity
with generally accepted accounting principles.




/s/ COOPERS & LYBRAND L.L.P.

COOPERS & LYBRAND L.L.P.

El Paso, Texas
December 17, 1997


<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS




TO THE SHAREHOLDERS OF FARAH INCORPORATED:

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




/s/ ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP

Dallas, Texas
December 15, 1995




<PAGE>


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

         There were no changes or  disagreements  with accountants on accounting
and financial disclosure in fiscal 1997.

         In fiscal 1996, the Board of Directors requested the Audit Committee of
the Board seek proposals from  accounting  firms with a view toward reducing the
Company's audit and accounting fees. On the basis of the proposals received, the
Board appointed the firm of Coopers & Lybrand L.L.P. On March 13, 1996,  Coopers
& Lybrand L.L.P. was informed of the Board's  decision.  Also on March 13, 1996,
Arthur Andersen LLP was notified of its dismissal.

         This change in  accountants  enabled the Company to effect a savings in
audit and  accounting  fees.  Arthur  Andersen  LLP's  report  on the  Company's
financial  statements  for fiscal 1995 did not  contain an adverse  opinion or a
disclaimer of opinion and was not qualified as to  uncertainty,  audit scope, or
accounting  principles.  During  fiscal 1995 and the period from the end of that
fiscal year to the date of the Board's  dismissal of Arthur  Andersen LLP, there
were no  disagreements  with  Arthur  Andersen  LLP on any matter of  accounting
principles or practices,  financial statement  disclosure,  or auditing scope or
procedure,  which  disagreements,  if not resolved to the satisfaction of Arthur
Andersen LLP,  would have caused it to make a reference to the subject matter of
the disagreements in connection with its reports.




<PAGE>

                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required under this item is set forth under the caption
"Directors and Executive Officers" on pages 5 through 7, and "Performance of the
Common Stock" and "Stock Option and  Compensation  Committee Report on Executive
Compensation"  on pages 14 through 15 of the  Company's  Proxy  Statement  dated
January  30,  1998  prepared  in  connection  with its 1998  Annual  Meeting  of
Shareholders and is incorporated herein by reference.

Item 11.  EXECUTIVE COMPENSATION

         The information required under this item is set forth under the caption
"Compensation  of  Executive  Officers"  on pages 8 through 11 of the  Company's
Proxy  Statement  prepared  in  connection  with  its  1998  Annual  Meeting  of
Shareholders and is incorporated herein by reference.


Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required under this item is set forth under the caption
"Ownership  of  Common  Stock"  on  pages 3 through  4 of  the  Company's  Proxy
Statement  prepared in connection  with its 1998 Annual Meeting of  Shareholders
and is incorporated herein by reference.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information  required  under this item is set forth  under the  caption
"Compensation  of Directors" on pages 12 and 13, and under the  caption "Certain
Transactions" on page 13 of the Company's Proxy Statement prepared in connection
with its 1998  Annual  Meeting of  Shareholders  and is  incorporated  herein by
reference.


                                     PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>

    (a)  Documents filed as part of this Report.                          Page
         <S>                                                            <C>    
         1.  Financial Statements (included in Item 8, Financial
             Statements and Supplementary Data):

             Consolidated Statements of Operations - Years ended 
             November 2, 1997, November 3, 1996 and November 3,
             1995                                                          26

             Consolidated Balance Sheets - November 2, 1997 and
             November 3, 1996                                              27
 
             Consolidated Statements of Shareholders' Equity - 
             Years ended November 2, 1997, November 3, 1996 and 
             November 3, 1995                                              28

             Consolidated Statements of Cash Flows - Years ended  
             November 2, 1997, November 3, 1996 and November 3,
             1995                                                          29

             Notes to Consolidated Financial Statements                 30-44

             Reports of Independent Public Accountants                  45-46

             Selected Financial Data for fiscal years ended 
             1993 to 1997                                                  13

        2.   Schedule II     Valuation and Qualifying Accounts -
                             Years ended November 2, 1997 and 
                             November 3, 1996                              57

             All other  schedules  are  omitted  because  they are not
             applicable,  not required under the instructions,  or the
             information  is reflected in the  consolidated  financial
             statements or notes thereto.
</TABLE>

    (b)  Reports on Form 8-K.

         No reports on Form 8-K were filed during the last quarter of the period
for which this report is filed.
<TABLE>
<CAPTION>

         (c)   Exhibits.

    3            Articles of Incorporation and Bylaws.
    <S> <C>      <C> 
    *   3.1      Restated Articles of Incorporation dated March 17, 1988 (filed as Exhibit 3.1 to Form S-3 as of
                 March 25, 1994).

    *   3.2      Amendment to the Articles of Incorporation of Farah Incorporated dated March 26, 1993 (filed as
                 Exhibit 3.2 to Form S-3 on March 25, 1994).

    *   3.3      Bylaws of Farah Incorporated Amended and Restated as of September 1, 1993 (filed as Exhibit 3.2
                 to Form 10-K as of November 5, 1993).


   4 Instruments defining the Rights of Security Holders, including Indentures.

    *   4.1      Indenture, dated as of February 1, 1994 (filed as Exhibit 1 to Form 8-A as of February 1, 1994).

                 Pursuant to  subsection  (b)(4)(iii)  of Item 601 of Regulation S-K, Registrant hereby agrees to
                 furnish to the Commission upon request copies of other instruments defining rights of holders of
                 long-term  debt,  none  of  which  instruments  authorizes indebtedness

   10   Material Contracts.

    *   10.1     Amended and Restated  Employment  Agreement  dated  August 2, 1994 (filed as Exhibit  10.52 to
                 Form 10-Q dated August 5, 1994).

    *   10.2     Amended and  Restated  Employment  Agreement  dated  August 25, 1994 (filed as Exhibit 10.4 to
                 Form 10-K dated November 4, 1994).

    *   10.3     Net  Lease,  dated  as of May 16,  1988,  between  Farah  U.S.A.,  Inc.  and Far  Pass  Realty
                 Associates, Ltd. (filed as Exhibit 5 to Form 8-K dated May 25, 1988).

    *   10.4     Guarantee of Lease by Farah Incorporated (filed as Exhibit 6 to Form 8-K dated May 25, 1988).

    *   10.5     Pledge Agreement by Farah U.S.A.,  Inc. to Far Pass Realty Associates,  Ltd. (filed as Exhibit
                 7 to Form 8-K dated May 25, 1988).

    *   10.6     Amended and Restated  Farah  Manufacturing  Company,  Inc. 1986 Stock Option Plan, and Form of
                 Stock Option  Agreement  (filed as Exhibit 4 (a) to the  Company's  Registration  Statement on
                 Form S-8, Registration No. 2-75949).

    *   10.7     Farah Manufacturing  Company,  Inc. Executive Stock Option Plan, as amended, and form of Stock
                 Option Agreement (filed as Exhibit 10.29 to Form 10-K as of October 31, 1988).

    *   10.8     Farah  Incorporated  1988  Non-Employee  Directors  Stock Option Plan and form of Stock Option
                 Agreement (filed  as Exhibit 10.31 to Form 10-K as of October 31, 1988).

    *   10.9     Accounts Financing Agreement (Security Agreement),  dated August 2, 1990 between Farah U.S.A.,
                 Inc. ("Farah U.S.A.") and Congress Financial  Corporation  (Southwest)  ("Congress") (filed as
                 Exhibit 10.53 to Form 10-Q as of July 31, 1990).

    *   10.10    Covenant  Supplement to Accounts  Financing  Agreement  (Security  Agreement)  dated August 2,
                 1990,  between Farah U.S.A.  and Congress  (filed as Exhibit 10.54 to Form 10-Q as of July 31,
                 1990).

    *   10.11    Inventory  and  Equipment  Security  Agreement  Supplement  to  Accounts  Financing  Agreement
                 (Security Agreement) dated August 2, 1990, between Farah U.S.A. and Congress (filed as Exhibit
                 10.56 to Form 10-Q as of July 31, 1990).

    *   10.12    Trade Financing  Agreement Supplement  to Accounts  Financing  Agreement (Security  Agreement)
                 dated  August 2, 1990,  between Farah U.S.A. and Congress (filed as Exhibit 10.57 to Form 10-Q
                 as of July 31, 1990).

    *   10.13    Form of Pledge and Security  Agreement,  dated August 2, 1990 (filed as Exhibit  10.58 to Form
                 10-K as of October 31, 1990).

    *   10.14    Collateral  Assignment of License,  dated August 2, 1990, by Farah U.S.A. in favor of Congress
                 (filed as Exhibit 10.60 to Form 10-Q as of July 31, 1990).

    *   10.15    Estoppel and Consent Agreement, dated August 2, 1990 by Farah Incorporated ("Farah") (filed as
                 Exhibit 10.61 to Form 10-Q as of July 31, 1990).

    *   10.16    Deed  of  Trust and  Security  Agreement,  dated  July 30, 1990, by Farah U.S.A.  and Farah in
                 favor of Congress (filed as Exhibit 10.63 to Form 10-Q as of July 31, 1990).

    *   10.17    Form of Guarantee and Waiver,  dated August 2, 1990 (filed as Exhibit 10.64 to Form 10-K as of
                 October 31, 1990).

    *   10.18    Collateral  Assignment  of  Agreements,  dated August 2, 1990,   by Farah in favor of Congress
                 (filed as Exhibit 10.68 to Form 10-Q as of July 31, 1990).

    *   10.19    Collateral  Assignment of Agreements,  dated August 2, 1990, by Farah Manufacturing Company of
                 New  Mexico,  Inc. in favor of  Congress  (filed as Exhibit  10.69 to Form 10-Q as of July 31,
                 1990).

    *   10.20    Subordination  Agreement,  dated August 2, 1990,  by Farah U.S.A.  and Farah (filed as Exhibit
                 10.70 to Form 10-Q as of July 31, 1990).

    *   10.21    Form of Pledge and Security  Agreement,  dated August 2, 1990 (filed as Exhibit  10.71 to Form
                 10-K as of October 31, 1990).

    *   10.22    Trademark  Collateral  Assignment  and  Security Agreement, dated August 2, 1990,  by Farah in
                 favor of Congress  (filed as Exhibit 10.75 to Form 10-Q as of July 31, 1990).

    *   10.23    Patent  Collateral  Assignment  and  Security  Agreement,  dated  August 2, 1990,  by Farah in
                 favor of Congress  (filed as Exhibit 10.76 to Form 10-Q as of July 31, 1990).

    *   10.24    General  Security  Agreement,  dated August 2, 1990,  by Farah in favor of Congress  (filed as
                 Exhibit 10.77 to Form 10-Q as of July 31, 1990).

    *   10.25    Form of General Security Agreement,  dated August 2, 1990 (filed as Exhibit 10.78 to Form 10-K
                 as of October 31, 1990).

    *   10.26    Amendment No. 1, dated November 5, 1990, to Financing  Agreements  dated August 2, 1990 (filed
                 as Exhibit 10.98 to Form 10-K as of October 31, 1990).

    *   10.27    Amendment No. 2 dated February 11, 1991, to Financing  Agreements  dated August 2, 1990 (filed
                 as Exhibit 10.103 to Form 10-Q as of January 31, 1991).

    *   10.28    Sublease between Farah U.S.A.,  Inc. and The Tonka  Corporation,  dated January 6, 1992 (filed
                 as Exhibit 10.107 to Form 10-K as of October 31, 1991).

    *   10.29    Farah  Incorporated  1991 Stock Option and Restricted Stock Plan dated October 15, 1991 (filed
                 as Exhibit 10.108 to Form 10-K as of October 31, 1991).

    *   10.30    Amendment No. 3 dated January 29, 1992,  to Financing  Agreements  dated August 2, 1990 (filed
                 as Exhibit 10.112 to Form 10-Q as of February 7, 1992).

    *   10.31    Amendment  No. 4  dated  June 25,  1992,  to  Accounts Financing  Agreement  dated  August  2,
                 1990  between  Congress  Financial  Corporation  (Southwest) and  Farah U.S.A., Inc. (filed as 
                 Exhibit 10.118 to Form 10-Q as of August 7, 1992).

    *   10.32    Amendment  No. 5 dated  August  31,  1992,  to  Accounts Financing  Agreement dated  August 2,
                 1990  between  Congress Financial  Corporation  (Southwest)  and  Farah U.S.A., Inc. (filed as 
                 Exhibit 10.119 to Form 10-Q as of August 7, 1992).

    *   10.33    Amendment  No. 6 dated  September  4, 1992,  to Accounts Financing  Agreement dated  August 2,
                 1990  between  Congress  Financial  Corporation  (Southwest)  and Farah U.S.A., Inc. (filed as
                 Exhibit 10.120 to Form 10-Q as of August 7, 1992).

    *   10.34    Amendment  No. 7 dated September  16, 1992, to Accounts Financing  Agreement  dated  August 2,
                 1990  between  Congress Financial  Corporation (Southwest) and  Farah  U.S.A., Inc.  (filed as
                 as Exhibit 10.121 to Form 10-Q as of August 7, 1992).

    *   10.35    Stock  Purchase  Agreement  dated  August 4, 1992,  between  Farah  Incorporated  and Marciano
                 Investments, Inc. (filed as Exhibit 10.122 to Form 10-Q as of August 7, 1992).

    *   10.36    Letter  Agreement  dated  October 28, 1992,  amending the Accounts Financing  Agreement  dated
                 August 2, 1990  between  Farah U.S.A.,  Inc. and  Congress  Financial  Corporation (Southwest),
                 (filed as Exhibit 10.125 to Form 10-K as of November 6, 1992).

    *   10.37    Amended and  Restated  Farah  Savings and  Retirement  Plan,  as of  January 1, 1991, (filed as
                 Exhibit 10.125 to Form 10-K as of November 6, 1992).

    *   10.38    Amended  and Restated Stock Purchase Agreement dated March 12, 1993 (amending and restating the
                 stock  purchase  agreement dated  February  23, 1993)  between Farah  Incorporated, the Georges
                 Marciano Trust and the Paul Marciano Trust,  (filed as Exhibit 10.128 to Form 10-Q as of May 7,
                 1993).

    *   10.39    Amendment  No. 8 to Financing  Agreements  as of May 7, 1993 between  Farah  U.S.A.,  Inc.  and
                 Congress Financial  Corporation  (Southwest),  (filed as Exhibit 10.129 to Form 10-Q as of  May
                 7, 1993).

    *   10.40    Amendment  No. 9  dated  July  16, 1993 to Accounts Financing Agreement  dated  August 2,  1990
                 between  Congress  Financial Corporation (Southwest),  (filed as Exhibit 10.129 to Form 10-Q as
                 of May 7, 1993).

    *   10.41    Deferred  Compensation  Agreement dated December 20, 1993 (filed as Exhibit 10.45 to  Form 10-K
                 as of November 4, 1994).

    *   10.42    Form of Deferred  Compensation  Agreements  dated December 16, 1994 (filed as Exhibit  10.46 to
                 Form 10-K as of November 4, 1994).

    *   10.43    Amendment  No. 10 dated  November  5,  1993 to  Accounts Financing  Agreement  dated  August 2,
                 1990  between   Congress   Financial Corporation  (Southwest)  and Farah U.S.A., Inc. (filed as 
                 as Exhibit 10.49 to Form 10-K as of November 5, 1993).

    *   10.44    Amendment  No. 11 dated  January  21,  1994 to  Accounts Financing  Agreement  dated  August  2,
                 1990  between  Congress   Financial  Corporation  (Southwest)  and Farah U.S.A., Inc. (filed  as
                 as Exhibit 10.50 to Form 10-Q dated February 4, 1994).

    *   10.45    Amendment No. 12 dated July 14, 1994 to Accounts Financing dated August 2, 1990 between Congress
                 Financial Corporation  (Southwest)  and  Farah  U.S.A.,  Inc.  (filed  as Exhibit 10.53 to  Form
                 10-Q dated August 5, 1994).

    *   10.46    Amendment  No. 13 dated March 7, 1995  to  Accounts Financing  Agreement  dated  August  2, 1990
                 between  Congress Financial Corporation  (Southwest)  and  Farah  U.S.A., Inc. (filed as Exhibit
                 10.51 to Form 10-Q as of May 5, 1995).

    *   10.47    Amendment  No.  14  dated April 5, 1995 to Accounts Financing  Agreement  dated  August  2, 1990
                 between  Congress  Financial  Corporation (Southwest)  and  Farah U.S.A., Inc. (filed as Exhibit
                 10.52 to Form 10-Q as of August 4, 1995).

    *   10.48    Amendment  No.  15  dated  August  1,  1995 to  Accounts Financing  Agreement  dated  August  2,
                 1990 between Congress Financial Corporation (Southwest) and Farah U.S.A., Inc. (filed as Exhibit
                 10.53 to Form 10-Q as of August 4, 1995).

    *   10.49    Amended and Restated Employment  Agreement dated July 10, 1995 (filed as Exhibit 10.53 to Form
                 10-K as of November 3, 1995).

    *   10.50    Form of Deferred  Compensation  Agreements  dated December 21, 1995 (filed as Exhibit 10.54 to
                 Form 10-K as of November 3, 1995).

    *   10.51    Employment  Agreement  dated March 1, 1996  (filed as Exhibit  10.55 to Form 10-Q as of May 5,
                 1996).

    *   10.52    Amendment  dated December 6, 1995 to the Farah  Incorporated  1991 Stock Option and Restricted
                 Stock Plan dated October 15, 1991 (filed as Exhibit 10.56 to Form 10-Q as of May 5, 1996).

    *   10.53    Asset Purchase  Agreement Farah  Incorporated,  Farah U.S.A, Inc. Galey & Lord, Inc. and Galey
                 & Lord Industries  Inc.,  dated May 20, 1996 (filed as Exhibit 10.57 to Form 10-Q as of May 5,
                 1996).

    *   10.54    Lease  Agreement  dated  October 4, 1996 between Farah U.S.A.,  Inc. and Orso  Partners,  Ltd.
                 (filed as Exhibit 10.57 to Form 10-K as of November 3, 1996).

    *   10.55    Lease  Agreement dated  November 30, 1996 between Farah U.S.A., Inc. and Santa Teresa  Limited
                 Partnership  (filed as Exhibit 10.58 to Form 10-K as of November 3, 1996).

    *   10.56    Amended and Restated Accounts Financing Agreement dated June 1, 1997 among  Congress Financial
                 Corporation  (Southwest) and  Farah  U.S.A.,  Inc.,  Value  Clothing Company,  Inc. and  Farah
                 Manufacturing  (U.K.)  Limited  (filed as Exhibit 10.59 to Form 10-Q as of May 4, 1997).

    *   10.57    Exhibit No. 1 to Trademark  Agreement  dated June 1, 1997 by  Farah   Incorporated   in  favor
                 of congress Financial Corporation (Southwest)(filed as Exhibit 10.60 to Form 10-Q as of May 4,
                 1997).

    *   10.58    Amended and Restated  Inventory and Equipment  Security Agreement dated June 1, 1997 (filed as
                 Exhibit 10.61 to Form 10-Q as of May 4, 1997).

    *   10.59    Farah (U.K.) Supplement to Accounts  Financing  Agreement dated June 1, 1997 (filed as Exhibit
                 10.62 to Form 10-Q as of May 4, 1997).

    *   10.60    Amended and Restated General Security Agreement  (Multiple Farah Companies) dated June 1, 1997
                 (filed as Exhibit 10.63 to Form 10-Q as of May 4, 1997).

    *   10.61    Amended and Restated General  Security  Agreement  (Farah  International,  Inc.) dated June 1,
                 1997 (filed as Exhibit 10.64 to Form 10-Q as of May 4, 1997).

    *   10.62    Trade  Financing  Agreement  Supplement  to Accounts  Financing  Agreement  dated June 1, 1997
                 (filed as Exhibit 10.65 to Form 10-Q as of May 4, 1997).

    *   10.63    General Security Agreement (Farah  Incorporated) dated June 1, 1997 (filed as Exhibit 10.66 to
                 Form 10-Q as of May 4, 1997).

    *   10.64    General Security  Agreement (Value Clothing Company,  Inc. and Value Slacks,  Inc.) dated June
                 1, 1997 (filed as Exhibit 10.67 to Form 10-Q as of May 4, 1997).

    *   10.65    Secured Promissory Note, in the original principal amount of $10,000,000  dated  June 1, 1997,
                 made by Farah U.S.A., Inc. to the order of Lender  (filed as Exhibit 10.68 to Form 10-Q as  of
                 May 4, 1997).

    *   10.66    The Acknowledgment and Confirmation of Guaranty and Other Financing Agreements,  dated June 1,
                 1997,  executed by Guarantors and  Corporacion  Farah Costa Rica, S.A. de C.V. for the benefit
                 of Lender (filed as Exhibit 10.69 to Form 10-Q as of May 4, 1997).

        10.67    Form of Deferred Compensation Agreements dated December 18, 1997.

        10.68    Letter Amendment dated December 5, 1997 to Employment Agreement dated July 10, 1995.

        10.69    Letter Amendment dated December 5, 1997 to Employment Agreement dated August 25, 1994.

        10.70    Letter Amendment dated December 5, 1997 to Employment Agreement dated August 25, 1994.

        10.71    Letter Amendment dated December 5, 1997 to Employment Agreement dated March 2, 1996.

        10.72    Letter Amendment dated December 5, 1997 to Employment Agreement dated August 25, 1994.

      *Incorporated herein by reference.


        21       Subsidiaries of Farah Incorporated

        23.1     Consent of Independent Accountants (Coopers & Lybrand L.L.P.)

        23.2     Consent of Independent Public Accountants (Arthur Andersen LLP)

        27       Financial Data Schedule

</TABLE>

<PAGE>



                                                     SIGNATURES


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

                                                     FARAH INCORPORATED
                                                     (Registrant)


                                  /s/ Russell G. Gibson
                                  ------------------------------------------
                                  Russell G. Gibson
                                  Principal Financial Officer

                                  /s/ Polly H. Vaughn
                                  ------------------------------------------
                                  Polly H. Vaughn
                                  Principal Accounting Officer

Dated:     January 28, 1998


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities indicated on January 28, 1998.



/s/ Richard C. Allender                      /s/ Sylvan Landau
------------------------------------         -----------------------------------
Richard C. Allender                          Sylvan Landau
Principal Executive Officer, Director        Director


/s/ Clark L. Bullock                         /s/ Michael R. Mitchell
------------------------------------         -----------------------------------
Clark L. Bullock                             Michael R. Mitchell
Director                                     Director


/s/ Christopher L. Carameros                 /s/ Charles J. Smith
------------------------------------         -----------------------------------
Christopher L. Carameros                     Charles J. Smith
Director                                     Director


/s/ John D. Curtis
------------------------------------
John D. Curtis
Director



<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Shareholders of Farah Incorporated


Our report on the  consolidated  financial  statements of Farah  Incorporated (a
Texas corporation) and subsidiaries is included on page 45 of this Form 10-K. In
connection with our audits of such consolidated  financial  statements,  we have
also audited the related  financial  statement  schedule on page 57 of this Form
10-K.

In our opinion,  the financial  schedule  referred to above,  when considered in
relation  to the  basic  consolidated  financial  statements  taken  as a whole,
presents  fairly,  in all  material  respects,  the  information  required to be
included therein.



/s/ COOPERS & LYBRAND L.L.P.

COOPERS & LYBRAND L.L.P.


El Paso, Texas
December 17, 1997







<PAGE>

<TABLE>
<CAPTION>
                                                                                                      Schedule II


                                        FARAH INCORPORATED AND SUBSIDIARIES

                                         Valuation and Qualifying Accounts


                                 Years Ended November 2, 1997 and November 3, 1996
                                                  (in thousands)

                                                  Balance at        Charged to
                                                 beginning of        costs and                           Balance at
                Description                          year            expenses          Deductions       end of year
--------------------------------------------     --------------    --------------    ---------------    -------------
<S>                                                <C>               <C>               <C>                <C>
Year Ended November 2, 1997:
    Allowance for doubtful accounts                $       662       $       126       $         42       $      746
    Allowance for sales returns                            384               192                123              453
    Self-insurance reserves                              1,220             2,728              3,199              749

Year ended November 3, 1996:
    Allowance for doubtful accounts                        720               169                227              662
    Allowance for sales returns                            302               166                 84              384
    Self-Insurance reserves                              1,291             2,913              2,984            1,220



</TABLE>


<PAGE>



                       FARAH INCORPORATED AND SUBSIDIARIES

                      FORM 10-K INDEX TO ATTACHED EXHIBITS
                (All Exhibits listed are on pages 59 through 72)

<TABLE>
<CAPTION>

Page
                                                                                                           Numbers
    <S>                <C>                                                                                       <C>
    Exhibit 10.67      Form of Deferred Compensation Agreements dated December 18, 1997.                         59

    Exhibit 10.68      Letter  Amendment  dated December 5, 1997 to Employment  Agreement  dated July            63
                       10, 1995.

    Exhibit 10.69      Letter  Amendment dated December 5, 1997 to Employment  Agreement dated August            64
                       25, 1994.

    Exhibit 10.70      Letter  Amendment dated December 5, 1997 to Employment  Agreement dated August            65
                       25, 1994.

    Exhibit 10.71      Letter  Amendment  dated December 5, 1997 to Employment  Agreement dated March            66
                       2, 1996.

    Exhibit 10.72      Letter  Amendment dated December 5, 1997 to Employment  Agreement dated August            68
                       25, 1994.

    Exhibit 21         Subsidiaries of Farah Incorporated                                                        69

    Exhibit 23.1       Consent of Independent Accountants (Coopers & Lybrand L.L.P.)                             70

    Exhibit 23.2       Consent of Independent Public Accountants (Arthur Andersen LLP)                           71

    Exhibit 27         Financial Data Schedule                                                                   72

</TABLE>


<PAGE>