SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(MARK ONE)
(  X  )   ANNUAL REPORT UNDER SECTION 13 OR 15(d)
          OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

          For the Fiscal Year Ended December 31, 1997

          or

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

          For the Transition Period From _______ to ________

Commission File No. 33-87392

                      HOSIERY CORPORATION OF AMERICA, INC.
       ------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

DELAWARE                                                 36-0782950
----------------------------------            --------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

3369 Progress Drive
Bensalem, Pennsylvania                                            19020
---------------------------------------------                 ------------
(Address of principal executive offices)                       (Zip Code)

Registrant's telephone number, including area code:   (215) 244-1777

Indicate by check mark whether the Registrant (1) has filed all reports required
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  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. (X)

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant is zero.  All of the voting stock is held by affiliates  and there is
no  established  public  trading  market  for any class of  common  stock of the
Registrant.

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

Class                                           Outstanding at March 24, 1998
----------------------------                   -------------------------------
Voting                                                      1,332,830
Class A, non-voting                                            75,652


<PAGE>



                                     PART I

ITEM 1.  BUSINESS

     Hosiery Corporation of America,  Inc. (the "Company"),  the Registrant is a
corporation organized in 1975 under the laws of the state of Delaware.

      The Company is engaged in the direct  mail  marketing,  manufacturing  and
distribution of quality women's sheer hosiery  products to consumers  throughout
the United States.  The Company has recently begun to expand its operations into
the United  Kingdom and  Germany.  The Company  markets  women's  sheer  hosiery
through a continuous  product  shipment or "continuity"  program.  The Company's
continuity program involves mailing to customers a specially priced introductory
hosiery  offer,  the  acceptance of which  enrolls  customers in the program and
results in additional  shipments of hose on a regular and continuous  basis upon
payment  of  a  prior  hose  shipment.  The  Company's  hosiery  production  was
approximately 61 million pairs in 1997,  primarily marketed under the Silkies(R)
brand name.  The  Company's  manufacturing  operations  supplied  79% of all the
hosiery required by the Company's continuity program during 1997.

      The Company markets its hosiery  products  exclusively  through its direct
mail  marketing  continuity  program.  The  success of this  program  depends on
targeting  likely  customers and on retaining  customers by  delivering  quality
hosiery  products  directly  to the  home on a  regular  basis.  Drawing  on its
customer  list of over 70 million  individuals  and on certain  rented  customer
lists,  the  Company  has  developed  sophisticated   statistical,   regression,
segmentation and other financial analyses to accurately target, test and acquire
first-time (and previously  inactive) "front end" customers  through direct mail
solicitation. The Company has designed an initial direct mail solicitation offer
which has attracted front end customers and reactivated previous customers.

      In order to induce  customers to participate  in the Company's  continuity
program,  the  introductory  hosiery  offer is  priced as a "loss  leader".  The
introductory  offer is priced at a nominal amount,  $1.00 per pair plus shipping
and  handling,  that is  substantially  less  than  the  cost of  manufacturing,
processing and shipping the related hosiery.

      Front  end  customers  who  continue  to   participate  in  the  Company's
continuity  program  become part of the Company's  repeat or "back end" customer
base.  After  responding to the front end solicitation and receiving their first
shipment,  customers can elect to continue in the program, receiving either four
or six pairs of hose with each  subsequent  shipment.  A customer who chooses to
participate  in the  continuity  program by making  regular  purchases  pursuant
thereto is an active back end customer. Such "active back end customers" exclude
customers  receiving  their first  shipment.  Upon  payment  for each  shipment,
customers are sent another  shipment of regularly  priced hose, on average every
four to six weeks. The Company has established a consistent and predictable back
end customer  base by providing  customers  with quality  hosiery  products on a
regular basis.  As of December 1997, the Company had  approximately  1.4 million
back end customers.

Marketing Strategy

      The Company has created a marketing  strategy which  combines  direct mail
marketing  techniques  with its  continuity  program.  The  Company's  marketing
efforts  focus on  targeting  and  acquiring  front  end  customers,  as well as
maintaining a strong  relationship with continuity or back end customers through
efficient  fulfillment  of quality  products,  customer  service,  creative  new
product  introductions  and  unique  marketing  strategies.  These  direct  mail
marketing initiatives,  refined by advanced statistical and regression analyses,
have increased the size and quality of its customer base.

      The  Continuity  Program.   The  Company's  current  initial  direct  mail
solicitation  offers its customers the  opportunity  to receive one free pair of
hosiery  with the  purchase  of two  additional  pairs at $1.00  per  pair.  The
customer is able to choose the size, style and color of hosiery for this initial
shipment.
                                       2
<PAGE>



Upon receiving the first shipment,  the customer can (i) pay for the product and
order a second  shipment,  (ii) pay for the  product  and  elect  not to order a
second shipment, or (iii) return the product and keep the free pair.

      By paying for the product and ordering a second  shipment of hosiery,  the
customer joins the Company's continuity program and becomes a repeat or back end
customer.  Upon  payment  for each  shipment,  customers  are sent a  subsequent
shipment of regularly priced hose, on average every four to six weeks, with some
customers electing a bi-monthly shipment option.  With each shipment,  customers
may change the selection of styles, colors and sizes. Back end shipments contain
either four or six pairs of hosiery which vary in price according to style.  All
shipments are made on credit,  but the Company's exposure to any one customer is
limited to the cost of one  shipment.  Customers are not required to commit to a
minimum purchase amount and can cancel the program at any time, for any reason.

      Acquiring  Front End  Customers.  Direct  mail  marketing  has  become the
Company's  sole means of attracting  new front end  customers  and  reactivating
previous customers,  and has replaced  less-targeted  methods previously used by
the Company,  including co-operative advertising and package inserts. Four major
solicitations  featuring the Company's  specially priced  introductory offer are
mailed each year  (January,  March,  June,  September).  There is no significant
seasonality in the mailings.

      The  Company  employs  advanced  statistical  and  regression  analyses in
conjunction with each of its solicitation  promotions.  The Company utilizes its
proprietary  in-house  database of over 70 million  customers,  as well as lists
rented from other direct marketing firms,  and analyzes  information  concerning
customer buying habits and payment records in order to determine which potential
customers  are likely to  purchase  hosiery  from the  Company on a regular  and
long-term basis. During each major  solicitation,  all chosen customer lists are
ranked by potential  realizable  profit.  The mailing cut off is then matched to
budgeted  production.  This process ensures that anticipated profit is maximized
from each of the four mailings.

      Retention  of  Back  End  Customers.  The  Company  seeks  to  retain  its
continuity or back end customers by providing high quality  hosiery on a regular
basis and at  competitive  prices.  In  addition,  as members of the  continuity
program, customers receive gift certificates with each shipment of hosiery which
can be  redeemed  for a wide array of  merchandise.  The  Company  also offers a
women's wear catalog  featuring  branded and private label lingerie and intimate
apparel products in conjunction with outside manufacturers.  Through these means
the Company  believes it has been able to establish a  predictable  base of back
end customers  without  significant  losses of customers  over time. The Company
continually is working on developing new means of better  retaining its back end
customers.  Customers exit the continuity  program for various reasons including
unavailability  of certain  styles and  colors,  preference  for retail  stores,
situational  changes,  too much  hosiery,  promotional  sales at retail  stores,
quality and garment fit.

      Through its data processing capabilities,  the Company tracks a customer's
order history from the initial order through each subsequent  purchase,  whether
the purchase is a hosiery product, merchandise from the women's wear merchandise
catalog,  or other consumer products received through gift redemptions.  Each of
the Company's  customer  service  representatives  has on-line  capabilities  to
retrieve customer specific queries and purchasing history.

      Customer  Testing.  All aspects of the  Company's  direct  mail  marketing
program  result  from  specific  customer  testing  which the  Company  conducts
continuously.  Such testing enables the Company to (i) project the profitability
of certain in-house and outside customer lists;  (ii) maximize response rates to
front end  solicitations;  (iii) determine the  profitability of the product mix
offered to back end customers;  (iv) determine optimal pricing strategy; and (v)
increase  payment and  retention  rates.  Constant  refinement  of test programs
through creative design, offer upgrades,  new hosiery products and referrals are
conducted  throughout various mailings with the objective of increasing response
rates or reducing cost, without negatively impacting  continuation or retention.
The time from test to  application  can take  between  three and  twelve  months
depending on the testing  employed.  Historically,  the Company's actual results
have been similar to its test results.

                                       3
<PAGE>



      Customer Profile.  Management believes that the Company's average customer
is a working woman between age 30 and 55. The Company estimates that its average
customer buys  approximately 60% of her sheer hosiery products from the Company,
and many of such customers purchase hosiery for other household members.

Product and Development

      The Company manufactures  moderately priced, quality women's sheer hosiery
under the  Silkies(R)  brand name.  The  Company's  product  line is designed to
include the more popular product styles and colors for which most customers have
the greatest demand and,  effective  January 1998,  includes six styles of sheer
hosiery,  in ten  different  colors and six sizes,  as well as knee-hi's and two
opqaue  styles  in  six  different  colors.  The  Company's  elastomer  products
(compression  garments  containing  spandex)  include  Control  Top,  Total  Leg
Control,  Sheer  Charm,  Opaque and Shapely  Perfection  styles.  The  Company's
elastomer   products  currently   represent   approximately  89%  of  its  total
production.   The  remainder  of  the  Company's   production  consists  of  its
non-elastomer  products  including  Panty 'n Hose,  Sheer to Waist  and  Knee-Hi
styles.  As of January  1998,  the styles range in price from $2.43 to $4.83 per
pair. The Company performs  extensive  consumer research and product testing to:
(i) ensure  product  quality,  (ii)  service all  significant  markets and (iii)
convert existing  compression hose customers to higher margin, sheer compression
hosiery products such as Shapely Perfection.

Data Processing and Management Information Systems

      The  Company  has  computer  and data  processing  capabilities  which are
adequate for its current level of operations. The Company has a full back up and
disaster recovery program for its data processing system which enables operation
at an outside facility within twelve hours of the onset of such need.

      The Company  provides  data  processing  services,  including  proprietary
software  programs,  to its  marketing  operations  that  manage the flow of all
hosiery  products from  solicitation  to customer  fulfillment.  These  services
include direct mail solicitations, customer list management and customer service
operations, including order input, billing, collection, printing and tracking of
customers ordering history.  Through its database  capabilities,  the Company is
also able to store and manage a  proprietary  database  of  customer  purchasing
habits gathered from the Company's hosiery sales history in addition to customer
gift redemptions and women's wear merchandise catalogs. This historical database
of  customer  purchasing  habits  covers  current  and past  hosiery  shipments,
customers' credit statistics, buying patterns and purchasing records.

      See page 15 regarding year 2000 plans.

Manufacturing and Distribution

      The Company  manages all phases of the  manufacturing  and  fulfillment of
hosiery products,  including  planning,  purchasing,  production,  packaging and
distribution.   The  Company's  direct  mail  marketing  program  is  vertically
integrated  into  its  manufacturing  and  production  operations,   the  latter
providing the  Company's  marketing  operations  with  approximately  79% of the
Company's  hosiery  needs.  By spreading  the volume of yearly  orders over four
major  solicitation  dates,  manufacturing  and  fulfillment  are  able to avoid
extreme  variations,  and thereby  ensure higher  efficiency  and better product
quality.  Additionally,  the  results of the  Company's  direct  mail  marketing
program  allow  the  Company   quickly  to  adjust  its   manufacturing   output
accordingly.

                                       4

<PAGE>



      Production Process. Once front end and back end orders have been received,
the  shipment   information  is  communicated  via  computer  to  the  Company's
facilities at Newland,  North  Carolina.  The Company's  ability to schedule its
annual output allows the Company to practice "Just In Time" inventory management
techniques.  The  primary  raw  materials  utilized by the Company are nylon and
spandex yarn, dye and chemicals,  and are readily available.  Such raw materials
are  purchased  directly from  suppliers who provide the Company with  technical
support. All knitting and sewing operations, including toe closing, line seaming
and gusset seaming,  are located at the Company's  facilities in Newland,  North
Carolina. Once the hosiery products have been manufactured, they are transported
to the Company's  Lancaster,  South  Carolina,  facility  where the products are
dyed,  packaged and then to the Heath Springs,  South  Carolina,  facility where
they are prepared for delivery.

      Suppliers.   The  primary  raw   materials   utilized  in  the   Company's
manufacturing  operations  are nylon and spandex yarn,  dye and  chemicals.  The
Company  purchases a majority of its yarn under  6-month  fixed-price  contracts
from  various  domestic  and  international  suppliers.   Although  the  Company
generally  stocks only a two to three week supply of raw  materials  in order to
manage inventory efficiently,  the predictable nature of the Company's shipments
generally allows it to order raw materials up to a year in advance and secure an
adequate supply at prearranged costs.

      Packaging and  Distribution.  The Company operates fully  automated,  high
speed packaging machines and distributes its products through the postal service
directly to the  customer's  home. The Company's use of  standardized  and fully
automated packaging allows the Company to achieve significant efficiencies.  The
Company uses the postal  service and has been able to control  delivery costs by
passing on to its customers any increases in postal rates. However, there can be
no  assurance  that in the future the Company  will be able to pass on increased
shipping costs to its customers. The Company also tries to minimize postal costs
through the use of  pre-sorting,  utilizing nine digit zip codes and co-mingling
of mail.

      Capital  Investment.  During the past eight  years,  the Company has spent
approximately  $27 million  replacing  the  majority of its  knitting and sewing
capacity with advanced robotics,  installing  automatic  packaging equipment for
more timely response through efficient fulfillment, building a new dye house and
distribution  facility  and  upgrading  its  computer  facilities.  The  Company
maintains relationships with its machinery producers in order to keep up-to-date
on  changing   manufacturing   methods.  The  Company's  current   manufacturing
operations have the capacity to produce approximately 65 million pairs annually.
Additional requirements are being outsourced in Mexico and Italy.

Growth Strategy

      Management  believes  that the  Company's  ability to analyze and manage a
large customer base,  combined with its knowledge of customer  buying  profiles,
provides  strong  potential for future growth  through the direct mail marketing
channel.  The  Company's  strategy  for  additional  growth  primarily  involves
expanding  its current  operations  by  acquiring  front end  customers  through
increased  solicitations  and  improved  response  rates.  In 1997,  the Company
brought in 7.2 million  front end customers  which has  increased  substantially
from 1995 and 1996 where 5.0 million and 6.6 million  front ends were  acquired,
respectively.

      The basis for the continued growth in front end  acquisitions  will be the
ability to obtain previously  unavailable  lists and new promotional  techniques
which have demonstrated improved response rates. Management anticipates that the
continued  increase in front end  customers  will  continue to lead to growth in
back end shipments over the next several years. The Company  believes,  based in
part on management's  significant  experience with international  operations and
test marketing  during 1997 in the United Kingdom,  France and Germany,  and the
introduction of new styles,  that the international  markets provide significant
opportunities for growth.

                                       5

<PAGE>


Competition and Industry

      The Company  operates  exclusively in the women's sheer hosiery  industry,
targeting  adult  females as  customers.  Management  believes  that the overall
women's  sheer  hosiery  market may be declining as a result of the high cost of
repeat purchases of such products and changes in women's choices in business and
leisure wear. Despite this apparent overall market decline, the Company has been
able to increase its sales from $136.3 million in 1995 to $178.7 in 1997.

      Women's sheer hosiery is sold through a variety of distribution  channels,
including discount stores, grocery and drug stores,  specialty stores,  national
chains and direct marketing.  The Company is the only organization which focuses
solely on  distributing  women's sheer hosiery  through a direct mail  marketing
continuity  program.  Although  several  competitors  have  sold  their  hosiery
products via mail order for many years,  this  distribution  has concentrated on
the large quantity sale of irregulars,  as opposed to the Company's  direct mail
marketing  of high quality  women's  hosiery  products in a continuity  program.
Because the Company sells women's sheer  hosiery,  it competes  indirectly  with
major manufacturers and distributors of women's sheer hosiery who primarily sell
through the retail  channel  and some of whom are larger and better  capitalized
than the Company, and may have greater brand recognition than the Company.

      The major United States hosiery  manufacturers include Sara Lee Hosiery, a
division of Sara Lee  Corporation,  Kayser-Roth,  a subsidiary of  Mexican-based
Grupo Synkro S.A., the Company and Americal, a privately held U.S. concern. Sara
Lee Hosiery  and  Kayser-Roth  account  for more than 70% of the  women's  sheer
hosiery market.  Over 60 other smaller  manufacturers also produce women's sheer
hosiery  primarily  for sale under  private  labels.  Sara Lee Hosiery is also a
significant competitor in the United Kingdom, France and Germany. Competition in
the  women's  sheer  hosiery  market is  generally  based on price,  quality and
customer service.

      In addition, the Company competes,  and faces potential competition,  with
other direct  marketing  companies.  Such competitors  include  businesses which
engage in direct mail,  catalog sales,  telemarketing  and other methods of sale
which compete for the  attention and spending  dollars of consumers in the home.
There are  numerous  direct  marketing  companies  that are  larger  and  better
capitalized than the Company and that offer more varied product assortments. The
Company  believes,  however,  that it is the only  significant  direct marketing
company to focus exclusively on women's sheer hosiery.

Employees

      As of December 31, 1997, the Company had 936  employees,  182 of whom were
located at its headquarters and operations center in Bensalem, Pennsylvania, 334
of whom were located at its manufacturing  facility in Newland,  North Carolina,
210 of whom  were  located  at its  manufacturing,  and  packaging  facility  in
Lancaster,  South  Carolina,  and 204 of whom were  located  at its  sewing  and
fulfillment operations facility in Heath Springs, South Carolina.  Additionally,
6 employees are currently  employed in Europe. Of the total number of employees,
132 are salaried  workers.  The remaining 804 are  non-salaried  employees,  the
majority of whom are paid an hourly wage plus  incentive  compensation  based on
productivity measures. The Company's hourly workforce is not affiliated with any
unions.  The Company has not  experienced  any work  stoppages  and believes its
relations with its employees are good.

Recapitalization

      On October 17,  1994,  the Company  effected the  recapitalization  of its
capital  stock  (the  "Recapitalization").   As  a  result  of  the  substantial
indebtedness incurred in connection with the  Recapitalization,  the Company has
significant  debt service  obligations.  At December 31, 1997,  the  outstanding
amount of the  Company's  indebtedness  (other  than trade  payables)  is $138.6
million,  including  $65.5  million of senior  secured debt and $68.5 million of
senior  subordinated  debt  (the  "Notes").  (See  Items 7 and 13 and  Note 3 to
Consolidated Financial Statements).

                                       6
<PAGE>



ITEM 2.  PROPERTIES
<TABLE>

      The Company owns or leases  facilities  at six  principal  locations.  The
following  sets  forth the  general  location  of each,  its size,  whether  the
facility is owned or leased and the principal function of each.
<CAPTION>

                                 Size in       Owned/
  Location                       Square Feet   Leased     Function
  --------                       -----------   ------     --------
<S>                              <C>           <C>        <C>
                                                          Headquarters;
                                                          Administration;
                                                          Marketing; Data
                                                          Processing; Customer
  Bensalem, Pennsylvania          60,000       Leased     Service

  Newland, North Carolina        138,000       Owned      Knitting; Sewing

  Lancaster, South Carolina      142,000       Owned      Dyeing; Packaging

  Heath Springs, South Carolina  143,000       Owned      Fulfillment Operations

                                                          Headquarters; United
  Liverpool, United Kingdom       15,000       Leased     Kingdom

  Ettligen, Germany                3,000       Leased     Office
</TABLE>

The owned facilities are subject to mortgages and security  interests granted to
secure payment of the Company's debt. See Note 10 to the Consolidated  Financial
Statements of Hosiery Corporation of America, Inc. in Item 8 hereof.

ITEM 3. LEGAL PROCEEDINGS

      The Company is involved in, or has been involved in, litigation arising in
the normal  course of its  business.  The  Company can not predict the timing or
outcome of these claims and proceedings.  Currently,  except as discussed below,
the  Company is not  involved  in any  litigation  which is  expected  to have a
material  effect on the  financial  position  of the  business or the results of
operations and cash flows of the Company.

      In 1984, as a result of a lawsuit brought by the Federal Trade  Commission
("FTC"),  the Federal  District Court for the Eastern  District of  Pennsylvania
issued a consent  injunction,  which  sets forth  specific  rules with which the
Company  must  comply in  conducting  its mail order  business  and  permanently
enjoins  the  Company,  its  successors  and  assigns,  its  officers,   agents,
representatives  and  employees,  and anyone  acting in concert with the Company
from violating various FTC and Postal Service laws and regulations.  The FTC had
previously  made  inquiries  about  some  aspects of the  Company's  promotional
materials  prompting the Company to adopt revised  promotional  materials which,
the Company believes but cannot assure,  will meet the concerns expressed by the
FTC.

      The  Company  had  received  inquiries  from  the  FTC and  sixteen  state
regulatory groups (the "States") concerning aspects of the Company's promotional
materials,  including whether the terms of the Company's  promotional offers are
sufficiently  disclosed  in such  materials.  Eleven of the States,  acting as a
multi-state  group,  sought to impose  certain  disclosure  requirements  on the
Company's promotional materials.

                                       7
<PAGE>



      The Company has reached an agreement  with the  multistate  group in which
the  Company  agreed  to  certain   modifications  and   clarifications  of  its
promotional  materials.  The agreement became effective as of September 1, 1997.
The Company's promotional materials for all of 1997 already include the majority
of the modifications and,  consequently,  the Company feels these  modifications
and  clarifications  will have no  additional  negative  impact on the Company's
response rates. However,  there may be some additional minor modifications which
will need to be made to the Company's promotional materials to fully satisfy the
terms of the Company's  agreement with the multistate  group,  and no assurances
can be given that such changes will not have a further  effect on the  Company's
response rate. In accordance  with the  agreement,  the Company paid $300,000 in
administrative  expenses and fees during 1997.  The agreement also requires that
refunds be made to customers under certain circumstances for a six-month period.
However, such refunds are not expected to be material to the Company's financial
condition or results of operations.

      The Company is hopeful that these  modifications and  clarifications  will
also  satisfy  the  inquiries  from  the  FTC  and the  states  not  part of the
multistate  group;  however,  no  assurances  can be given in this  regard.  The
modifications the Company has already made to its solicitation materials has had
a material  adverse effect on its domestic  response  rates.  However,  response
rates are only one of  several  factors  that  affect the  Company's  results of
operations.  State  regulators  from  time  to time  contact  the  Company  with
inquiries  regarding the Company's  promotional  materials and state  regulators
could require additional changes to the Company's promotional materials,  and no
assurance  can be given that such  changes will not be  significant  or will not
have a material adverse effect on the Company's  future  financial  condition or
results of operations.


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

      The  Company did not submit any matter to a vote of its  security  holders
during the fourth quarter of 1997.


                                     PART II


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

      There is no  established  public  trading  market  for any class of common
equity of the Company.

     As of March 18, 1998 the Company had  approximately 33 holders of record of
its common stock.

Dividend Policy

      The Company has not paid cash dividends on its common stock since 1992 and
does not anticipate paying such dividends in the foreseeable future. The Company
intends  to retain any future  earnings  for  reinvestment  in the  Company.  In
addition,  the Bank Credit  Agreement  and the  indenture  pursuant to which the
Notes were issued place limitations on the Company's ability to pay dividends or
make certain  other  distributions  in respect of its common  stock.  Any future
determination   as  to  the  payment  of  dividends  will  be  subject  to  such
prohibitions and  limitations,  will be at the discretion of the Company's Board
of Directors and will depend on the Company's  results of operations,  financial
condition,  capital  requirements and other factors deemed relevant by the Board
of  Directors,  including the General  Corporation  Law of the State of Delaware
(the "DGCL") which provides that dividends are only payable out of the Company's
surplus or current net profits.

                                       8

<PAGE>


ITEM 6. SELECTED FINANCIAL DATA
<TABLE>

<CAPTION>
                                       Year Ended December 31,
                                       -----------------------
                              1997      1996      1995     1994(a)    1993
                              ----      ----      ----     -------    ----
                                           (In Thousands)
<S>                         <C>       <C>       <C>       <C>       <C>

  Net Revenues              $178,682  $162,763  $136,299  $118,560  $109,824

  Operating Income Before
  Compensation Related to
  Stock Options and
  Expenses Related to
  Stock Offering and
  Acquisition (b)             35,854    36,968    31,427    21,613    16,018


  Income (Loss) From
  Continuing Operations
  Before Provision (Benefit)
  for Income Taxes and
  Cumulative Effect of
  Accounting Change           17,835    (5,696)   12,056    17,116    14,943

  Income From Continuing
  Operations Before
  Compensation Related to
  Stock Options, Expenses
  Related to Stock Offering
  and Acquisition, Provision
  (Benefit) for Income Taxes
  and Cumulative Effect of
  Accounting Change (b)       17,835    18,829    12,056    17,116   14,943

  Working Capital             12,455       589     5,794     3,152    7,518

  Total Assets               100,600    92,600    82,860    74,860   66,859

  Long-Term Debt             138,565   143,705   151,093   153,442   12,305

  Other Long-Term
  Obligations                     --        --        --        66      584

  Redeemable Equity
  Securities                     872       768       384        45       --

  Stockholders' Equity
  (Deficiency)               (72,083)  (83,822) (102,920) (110,266)  26,318

  Cash Dividends Declared         --        --        --        --       --
</TABLE>

----------------
(a)On October  17,  1994,  the  Company  effected  the  recapitalization  of its
   capital  stock.  For  discussion of the  recapitalization,  see Note 3 to the
   Consolidated  Financial Statements of Hosiery Corporation of America, Inc. in
   Item 8 hereof.

(b)During 1996, the Company granted options to certain  employees to purchase up
   to  215,369  shares  of common  stock.  The  Company  recognized  $22,938  of
   compensation  expense  related to the  difference  between the estimated fair
   value  of the  stock  at the date of  grant  and the  exercise  price of such
   options.  (See Note 18 to the  Consolidated  Financial  Statements of Hosiery
   Corporation  of  America,  Inc.  in Item 8 hereof  for  further  discussion.)
   Additionally  during  1996,  the  Company  incurred  costs  of $1.6  million,
   associated with a potential  initial public offering of equity securities and
   a  potential  acquisition,  neither  of which  were  consummated.  "Operating
   income"  and "income  (loss)  from  continuing  operations  before  provision
   (benefit) for income taxes and  cumulative  effect of accounting  change" per
   the Consolidated Financial Statements of Hosiery Corporation of America, Inc.
   have been  adjusted in the above table to exclude  these  charges in order to
   present comparable operating information with that of previous years.

                                       9
<PAGE>




ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996
        AND 1995

Results of Operations

      The  following  table sets forth  certain  income  statement  data for the
Company expressed as a percentage of net revenues.
<TABLE>

<CAPTION>
                                             Fiscal Years Ended December 31,
                                             -------------------------------
                                                  1997    1996    1995
                                                  ----    ----    ----
<S>                                               <C>     <C>     <C>

Net revenues....................................  100.0%  100.0%  100.0%
    Cost of sales...............................   45.9    46.2    44.7
    Administrative and general expenses.........    6.8     7.0     7.5
    Provision for doubtful accounts.............    6.0     6.2     5.7
    Marketing costs.............................   17.1    13.6    12.8
    Coupon redemption costs.....................    2.1     2.5     4.4
    Depreciation and amortization...............    1.7     1.8     1.8
                                                  -----   -----   -----

         Subtotal...............................   79.6    77.3    76.9
                                                   ----    ----    ----

Operating income before interest,
    compensation related to stock options,
    expenses related to stock offering and
    acquisition, other expenses (income) and
    provision (benefit) for income taxes........   20.4%   22.7%   23.1%
                                                   ====    ====    ====
</TABLE>

Fiscal 1997 Compared to Fiscal 1996

      Net  revenues  increased  by 9.8% to $178.7  million  in fiscal  1997 from
$162.8  million in fiscal  1996.  The  increase in net revenue  attributable  to
Europe of $9.4  million  was due to more than  double the $8.8  million in sales
reported for 1996. This increase in Europe is attributable to increased mailings
in the United  Kingdom  and  testing in France and  Germany.  The balance of the
increase  ($6.5  million) was generated in the United States  primarily  through
increased solicitation for new customers.

      Cost of sales  increased  9.2% to $82.1  million in fiscal 1997 from $75.2
million for fiscal 1996. As a percentage of net revenues, cost of sales declined
to 45.9% in 1997 versus 46.2% for the same period in 1996. The absolute increase
in cost of sales is related to increased shipments in the United States,  United
Kingdom and the test programs in Germany and France. Manufacturing efficiencies,
approximately $2 million,  helped offset the costs associated with the increased
shipments.

      Administrative  and general  expenses  increased  6.3% to $12.1 million in
fiscal 1997 from $11.4 million for the same period of 1996.  Increased personnel
and higher wages  account for the  increase.  As a percentage  of net  revenues,
administrative and general expenses were 6.8% in 1997 versus 7.0% in 1996.

      Provision for doubtful  accounts  increased  $0.7 million or 7.3% to $10.8
million in fiscal  1997 from $10.1  million  for the same  period of 1996.  This
increase was caused by additional  front end, second and third shipments in 1997
as compared to 1996 (up 1.1 million  shipments which is 10.6% higher than 1996),
which have a higher  rate of  uncollectable  accounts.  As a  percentage  of net
revenues, bad debts were 6.0% for 1997 versus 6.2% for 1996.

                                       10
<PAGE>




      Marketing  costs  increased  38.5% to $30.5 million from $22.1 million for
the years ended  December  31, 1997 and 1996,  respectively.  This  increase was
partially attributable to higher amortization of prior years' deferred marketing
costs in 1997 compared to 1996,  related to the substantial  increase (21.6%) in
solicitations  in 1996 versus 1995.  In 1996,  52.6 million  solicitations  were
mailed as compared to 43.3 million in 1995.  These costs are  amortized  over 42
months with the greatest  amortization in the first 24 months.  Additionally,  a
substantial  portion  of this  increase  was  attributable  to higher  front end
solicitations,  in the current  year, as 22.9 million  additional  solicitations
were mailed in 1997  compared to 1996 (up 43.6%),  including the start up in the
United Kingdom.  Marketing expenditures were also incurred in France and Germany
for testing. As a percentage of net revenues, marketing costs were 17.1% in 1997
versus 13.6% for 1996.

      Coupon redemption costs declined to $3.7 million for fiscal 1997 from $4.1
million for fiscal 1996. As a percentage of net revenues,  redemption costs were
2.1% in 1997 versus 2.5% for 1996. This decrease  relates to the issuance of new
gift  catalogs in both 1996 and 1995 that have a lower  average cost per gift to
the Company,  and  beginning  in 1996,  the charging of shipping and handling to
redemption customers, which has also lowered the cost of future redemptions and,
therefore, the reserve balance for these future redemptions.

      Compensation  related to stock option  expense was $22.9  million in 1996.
This expense represents a non-cash charge attributable to options granted by the
Board of  Directors  on June 28,  1996,  with an  exercise  price below the then
market price of the Company's  common stock, as part of a series of transactions
in  contemplation  of a potential  initial public  offering.  No such charge was
incurred in 1997.

      Expenses of $1.6  million  were  incurred  in 1996  related to a potential
initial  public  offering  of equity  securities  and a  potential  acquisition,
neither of which were consumated. No such charges were incurred in 1997.

      Interest  expense  decreased  to $18.1  million for fiscal 1997 from $18.5
million for 1996.  This  decrease in interest  expense was primarily due to less
debt on the bank loan.  As a percentage of net  revenues,  interest  expense was
10.1% in 1997 versus 11.3% for 1996.

      Operating  income  at $35.9  million  for 1997 is  slightly  less than the
adjusted  operating income of $37.0 million for 1996 (adjusted to add back stock
option  compensation  expense  of $22.9  million  and costs  associated  with an
initial  public  offering  and  acquisition  of $1.6  million).  The decrease in
operating  income  from  1996 to  1997  is  primarily  caused  by the  increased
marketing costs offset by higher revenue and the continued decrease in all other
costs  as a  percentage  of net  revenues.  As a  percentage  of  net  revenues,
operating income, adjusted to exclude stock option compensation expense of $22.9
million and a potential  public  offering  and  acquisition  of $1.6 million for
1996, was 20.1% for 1997 versus 22.7% for 1996.

      The Company  had net income of $11.6  million in 1997 as compared to a net
loss of $4.3 million in 1996.  Excluding the stock option  compensation  expense
and a potential public offering and acquisition  costs of $15.9 million,  net of
tax in 1996,  net income  remained at $11.6  million in both 1997 and 1996. As a
percentage of net revenues, net income was 6.5% in 1997 versus 7.1% (adjusted as
previously detailed) for 1996.

Fiscal 1996 Compared to Fiscal 1995

      Net  revenues  increased  by 19.4% to $162.8  million in fiscal  1996 from
$136.3 million in fiscal 1995. This increase in net revenues was the result of a
combination of increased volume ($19.7  million),  a portion of which relates to
the Company's  recent  expansion into the United Kingdom,  the introduction of a
new style ($6.1  million)  and pricing  ($0.7  million).  In January  1996,  the
Company  commenced  operations in the United Kingdom  which,  for the year ended
December 31, 1996,  generated $8.8 million in revenue. In addition,  the Company
is currently  evaluating  potential  programs in Germany,  France and Japan. The
Company  began to  conduct  tests  during  1996 in  Germany  and  France and has
continued testing in 1997, as well as in Japan.

                                       11
<PAGE>





      Cost of sales  increased  23.3% to $75.2 million in fiscal 1996 from $61.0
million for fiscal 1995.  As a  percentage  of net  revenues,  cost of sales was
46.2% in 1996  versus  44.7% for the same  period  in 1995.  This  increase  was
primarily  due to  the  significant  increase  in  first  and  second  shipments
associated  with the  Company's  recently  initiated  operations  in the  United
Kingdom,  as well as the Company's  efforts to increase its solicitations in the
United States to acquire additional front end customers. The Company's first and
second  shipments  result in low margins  because they include the  introductory
offer,  which is  priced  substantially  less  than  the cost of  manufacturing,
processing  and  shipping  the  related   hosiery,   and  because   payment  and
continuation  rates of new  customers  are less than  those of older  customers.
First and second shipments increased by 2.5 million or 37.0% from 6.7 million in
1995 to 9.1  million in 1996.  These  additional  shipments,  in both the United
States  and the United  Kingdom,  reflected  primarily  a 9.4  million  increase
(21.6%) in  solicitations  to 52.6  million in fiscal 1996 from 43.3  million in
fiscal  1995.  Of the 2.5 million  increase in first and second  shipments,  1.2
million represent shipments within the Company's new United Kingdom program.

      Administrative  and general  expenses  increased 11.8% to $11.4 million in
fiscal 1996 from $10.2 million for the same period of 1995.  Increased personnel
and higher wages  account for the  increase.  As a percentage  of net  revenues,
administrative and general expenses were 7.0% in 1996 versus 7.5% in 1995.

      Provision for doubtful  accounts  increased $2.3 million or 29.1% to $10.1
million  in fiscal  1996 from $7.8  million  for the same  period of 1995.  This
increase was caused by additional  front end, second and third shipments in 1996
as compared to 1995 (up 2.7 million  shipments which is 37.0% higher than 1995),
which have a higher  rate of  uncollectable  accounts.  As a  percentage  of net
revenues, bad debts were 6.2% in 1996 versus 5.7% for 1995.

      Marketing  costs  increased  26.4% to $22.1 million from $17.4 million for
the years ended  December  31, 1996 and 1995,  respectively.  This  increase was
partially attributable to higher amortization of prior years' deferred marketing
costs in 1996 compared to 1995,  related to the substantial  increase (41.6%) in
solicitations  in 1995 versus 1994.  In 1995,  43.3 million  solicitations  were
mailed as compared to 30.6 million in 1994.  These costs are  amortized  over 42
months with the greatest  amortization in the first 24 months.  Additionally,  a
portion of this increase was attributable to higher front end solicitations,  as
9.4 million  additional  solicitations  were mailed in 1996 compared to 1995 (up
21.6%),  including the start up in the United  Kingdom.  Marketing  expenditures
were also  incurred in France and Germany for testing.  As a  percentage  of net
revenues, marketing costs were 13.6% in 1996 versus 12.8% for 1995.

      Coupon redemption costs declined to $4.1 million for fiscal 1996 from $6.0
million for fiscal 1995. As a percentage of net revenues,  redemption costs were
2.5% in 1996 versus 4.4% for 1995. This decrease  relates to the issuance of new
gift  catalogs in both 1996 and 1995 that have a lower  average cost per gift to
the Company,  and  beginning  in 1996,  the charging of shipping and handling to
redemption customers, which has also lowered the cost of future redemptions and,
therefore,  the reserve balance for these future redemptions.  Lower redemptions
account for $0.2 million of the decrease.

      Compensation  related to stock option  expense was $22.9  million in 1996.
This expense represents a non-cash charge attributable to options granted by the
Board of  Directors  on June 28,  1996,  with an  exercise  price below the then
market price of the Company's  common stock, as part of a series of transactions
in contemplation of a potential initial public offering.

      Expenses of $1.6  million  were  incurred  related to a potential  initial
public  offering of equity  securities and a potential  acquisition,  neither of
which were consumated.

      Interest  expense  decreased  to $18.5  million for fiscal 1996 from $19.7
million for 1995.  This decrease in interest  expense was a combination of lower
rates  ($0.6  million)  and less debt  ($0.6  million)  on the bank  loan.  As a
percentage of net revenues,  interest expense was 11.3% in 1996 versus 14.5% for
1995.

                                       12
<PAGE>




      Excluding stock option compensation expense of $22.9 million and the costs
associated  with the potential  initial public  offering and acquisition of $1.6
million, the Company would have had operating income of $37.0 million for fiscal
1996, a 17.6%  increase over $31.4  million for 1995,  and would have had pretax
income of $18.8 million for 1996, a 56.2% increase over $12.1 million for fiscal
1995.  These  increases were primarily  attributable to increased  sales,  lower
coupon redemption  costs, and lower interest costs,  offset by increases in cost
of sales, bad debts, marketing costs and administrative and general expenses. As
a percentage of net revenues, operating income, adjusted to exclude stock option
compensation  expense and  potential  initial  public  offering and  acquisition
expense of $22.9  million  and $1.6  million,  respectively,  was 22.7% for 1996
versus 23.1% for 1995. As a percentage of net revenues,  pretax income, adjusted
to exclude stock option compensation  expense of $22.9 million and the potential
initial public offering and acquisition  expense of $1.6 million,  was 11.5% for
1996 versus 8.8% for 1995.

      The Company  incurred a net loss of $4.3  million in 1996.  Excluding  the
stock option  compensation  expense and potential  initial  public  offering and
acquisition  costs of $15.9 million net of tax, net income would have  increased
to $11.6 million in 1996 from $7.5 million in 1995. This increase  resulted from
the increase in pretax income of $6.7 million,  adjusted to exclude stock option
compensation  expense  of  $22.9  million  and the  costs  associated  with  the
potential  initial public offering and acquisition of $1.6 million,  offset by a
$2.6 million  increase in the  provision  for income  taxes,  excluding the $8.6
million tax benefit  related to the stock  option  compensation  expense and the
costs associated with the potential intial public offering and acquisition. As a
percentage of net revenues, net income adjusted to exclude the net impact of the
stock option compensation  expense and the costs of the potential initial public
offering and acquisition, was 7.1% for 1996 versus 5.5% for 1995.

Liquidity and Capital Resources

      The Company's cash requirements arise principally from the need to finance
new front end solicitations  (customers),  capital expenditures,  debt repayment
and other working capital  requirements.  The Company mailed 75.6, 52.6 million,
and  43.3  million   solicitations   during  the  years  1997,  1996  and  1995,
respectively.  The Company financed these  solicitations  and expects to finance
future solicitations from internally generated funds and/or its Credit Facility.

      In fiscal 1997,  1996 and 1995,  capital  expenditures  were $2.6 million,
$4.9 million and $3.1 million,  respectively.  The majority of the  expenditures
were for the  purchase of  knitting,  sewing and dyeing  equipment  and facility
acquisition and enhancements.  These  expenditures  were financed  substantially
through the assumption of capital  leases.  Also, the Company  expects to expend
approximately  $2.5  million in 1998 for  additional  equipment.  These  capital
expenditures  will be financed  through  internal  sources or the  assumption of
capital leases.

      Working  capital  increased to $12.5 million from $0.6 million at December
31, 1996,  and $5.8 million at December 31, 1995. The increase from 1996 to 1997
is primarily the result of a new credit  agreement  with the banks that resulted
in a decrease in the current  portion of long-term  debt for 1997 and 1998,  and
consequently a higher cash balance.  Working  capital  decreased by $5.2 million
from 1995 to 1996 which was  primarily  the result of  increases  in the current
portion of long-term debt relating to increasing debt service  requirements  and
accounts payable, offset by increased receivables and inventories.

      Net cash  provided by operating  activities  was $11.2  million in 1997 as
compared to $7.4  million in 1996 and $8.6 million in 1995.  The  increase  from
1996 to 1997 was primarily  from the change in inventory  offset by the decrease
in accounts payable. The change from 1995 to 1996 was primarily due to increases
in  receivables,  inventory  and  marketing  costs  related to the growth of the
business,  offset by increases  in net income,  excluding  non-cash  charges for
stock option compensation,  depreciation and amortization of marketing costs and
accounts payable.

      Net cash used in  investing  activities  was $0.9  million  in 1997,  $2.5
million  in 1996  and  $1.0  million  in  1995,  and  related  primarily  to the
investment in equipment and the addition of a fulfillment facility in 1996.

                                       13
<PAGE>




      During 1997,  1996 and 1995,  the Company used $7.9 million,  $9.9 million
and $4.5  million,  respectively,  in financing  activities.  During 1997, a new
credit  agreement was reached with the Company's bank lenders which provided for
$65 million in term debt at a  substantially  lower  interest  rate (7.5% versus
8.8%),  an  increase in its line of credit from $15 million to $20 million and a
change in the covenants  relating to the credit agreement.  Net payments on bank
and other  financing,  including  capital  lease  obligations  and excluding the
termination of the prior term debt, totaled $7.3 million,  $9.9 million and $4.6
million in 1997, 1996 and 1995, respectively.

The Recapitalization

      On October 17,  1994,  the Company  effected the  recapitalization  of its
capital  stock  (the  "Recapitalization").   As  a  result  of  the  substantial
indebtedness incurred in connection with the  Recapitalization,  the Company has
significant debt service obligations.  In November 1997, the Company amended and
restructured its credit agreement. This change resulted in lower interest rates,
an increase in the revolving credit facility from $15 million to $20 million,  a
substantial  change in the timing of principal  payments and changes to the debt
covenants.  At  December  31,  1997,  the  outstanding  amount of the  Company's
indebtedness  (other than trade  payables) is $138.6  million,  including  $65.5
million of senior  secured debt and $68.5  million of senior  subordinated  debt
(the "Notes"). Since consummation of the Recapitalization, the Company's ongoing
cash  requirements  through  January  2002 will  consist  primarily  of interest
payments and required amortization payments under the Credit Agreement, interest
payments  on the  Notes,  payments  of  capital  lease  obligations,  front  end
marketing  expenditures,  working capital,  capital  expenditures and taxes. The
required  amortization payments under the Credit Agreement will be: $3.0 million
in 1998, $7.5 million in 1999,  $13.0 million in 2000, $20.0 million in 2001 and
$19.5 million in 2002.  Other than upon a change of control (as defined) or as a
result of certain  asset  sales,  the  Company  will not be required to make any
principal  payments in respect of the Notes until  maturity,  August  2002.  The
Company's  primary  source of liquidity  will be cash flow from  operations  and
funds available to it under a revolving  credit  facility.  The revolving credit
facility  provides for maximum  borrowings  of $20.0  million,  $17.7 million of
which was available at December 31, 1997.

Legal Proceedings

      The Company is involved in, or has been involved in, litigation arising in
the normal  course of its  business.  The  Company can not predict the timing or
outcome of these claims and proceedings.  Currently,  except as discussed below,
the  Company is not  involved  in any  litigation  which is  expected  to have a
material  effect on the  financial  position  of the  business or the results of
operations and cash flows of the Company.

      In 1984, as a result of a lawsuit brought by the Federal Trade  Commission
("FTC"),  the Federal  District Court for the Eastern  District of  Pennsylvania
issued a consent  injunction,  which  sets forth  specific  rules with which the
Company  must  comply in  conducting  its mail order  business  and  permanently
enjoins  the  Company,  its  successors  and  assigns,  its  officers,   agents,
representatives  and  employees,  and anyone  acting in concert with the Company
from violating various FTC and Postal Service laws and regulations.  The FTC had
previously  made  inquiries  about  some  aspects of the  Company's  promotional
materials  prompting the Company to adopt revised  promotional  materials which,
the Company believes but cannot assure,  will meet the concerns expressed by the
FTC.

      The  Company  had  received  inquiries  from  the  FTC and  sixteen  state
regulatory groups (the "States") concerning aspects of the Company's promotional
materials,  including whether the terms of the Company's  promotional offers are
sufficiently  disclosed  in such  materials.  Eleven of the States,  acting as a
multi-state  group,  sought to impose  certain  disclosure  requirements  on the
Company's promotional materials.

                                       14
<PAGE>




      The Company has reached an agreement  with the  multistate  group in which
the  Company  agreed  to  certain   modifications  and   clarifications  of  its
promotional  materials.  The agreement became effective as of September 1, 1997.
The Company's promotional materials for all of 1997 already include the majority
of the modifications and,  consequently,  the Company feels these  modifications
and  clarifications  will have no  additional  negative  impact on the Company's
response rates. However,  there may be some additional minor modifications which
will need to be made to the Company's promotional materials to fully satisfy the
terms of the Company's  agreement with the multistate  group,  and no assurances
can be given that such changes will not have a further  effect on the  Company's
response rate. In accordance  with the  agreement,  the Company paid $300,000 in
administrative  expenses and fees during 1997.  The agreement also requires that
refunds be made to customers under certain circumstances for a six-month period.
However, such refunds are not expected to be material to the Company's financial
condition or results of operations.

      The Company is hopeful that these  modifications and  clarifications  will
also  satisfy  the  inquiries  from  the  FTC  and the  states  not  part of the
multistate  group;  however,  no  assurances  can be given in this  regard.  The
modifications the Company has already made to its solicitation materials has had
a material  adverse effect on its domestic  response  rates.  However,  response
rates are only one of  several  factors  that  affect the  Company's  results of
operations.  State  regulators  from  time  to time  contact  the  Company  with
inquiries  regarding the Company's  promotional  materials and state  regulators
could require additional changes to the Company's promotional materials,  and no
assurance  can be given that such  changes will not be  significant  or will not
have a material adverse effect on the Company's  future  financial  condition or
results of operations.

Year 2000

      During 1997, the Company began reviewing its embedded technology, computer
systems and  software to  determine  which are not "Year  2000"  compliant.  The
Company  established  plans and processes for  evaluating and managing the risks
associated with this problem in order to ensure that all necessary modifications
and/or  replacements  of  existing  embedded  technology,  computer  systems and
software are completed on a timely basis.

      Some of the Company's internal  Information systems personnel are and will
be dedicated  toward  modifying  systems to be Year 2000  compliant by September
1998. To date, the Company is on schedule to meet that deadline.

      It is not expected that such modifications and or replacements will have a
material adverse effect on the Company's consolidated financial statements.  The
Company's use of internal  Information  System's  personnel to make the business
system  Year 2000  compliant  has and will  continue  to delay some  information
systems development and implementation that would benefit the Company in various
ways and to varying  extents.  The Company does not believe that it will be at a
competitive  disadvantage as a result of these delays.  In the event that any of
the  Company's  significant  suppliers  do not  successfully  achieve  Year 2000
compliance on a timely basis,  the Company's  business or operations will not be
adversely affected.

Inflation

      Over the past three years,  which has been a period of low inflation,  the
Company has been able to increase  sales volume to  compensate  for increases in
operating  expenses.  The Company  has  historically  been able to increase  its
selling  prices  as the  cost of  sales  and  related  operating  expenses  have
increased  and,  therefore,  inflation  has  not  had a  significant  effect  on
operations.

                                       15
<PAGE>


Accounting Statements Not Yet Adopted

      Reporting  Comprehensive  Income.  In June 1997, the Financial  Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting  Comprehensive  Income. This statement  establishes standards
for the reporting and display of  comprehensive  income and its  components in a
full set of financial statements.  The Company will be required to adopt the new
method of reporting  comprehensive  income during  fiscal year 1998.  Management
does not  believe  that the effect of  implementing  this new  standard  will be
material to the Company's financial position or results of operations.

      Disclosures  about Segments of an Enterprise and Related  Information.  In
June 1997,  the FASB  issued  SFAS No.  131,  Disclosures  about  Segments of an
Enterprise and Related Information. This statement establishes standards for the
manner in which business enterprises report information about operating segments
in financial  statements.  It also establishes standards for related disclosures
about products and services,  geographic areas, and major customers. The Company
will be required to adopt the new standards for disclosures of an enterprise and
related information during fiscal year 1998. When adopted, SFAS No. 131 will not
have any effect on the Company's  financial  position or results of  operations,
but may require the Company to provide  expanded  disclosure  regarding  certain
operating segments.  However,  the Company has not yet determined the effects of
SFAS No. 131 on its financial statement disclosures.


                                       16
<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                            HOSIERY CORPORATION OF AMERICA, INC.

               Index to Financial Statements and Financial Statement Schedule

                                                                   Page Number
                                                                   -----------
Financial Statements and Independent Auditors' Report:
     Independent Auditors' Report................................      18
     Consolidated Balance Sheets--December 31, 1997 and 1996.....      19
     Consolidated Statements of Operations--For the years
        ended December 31, 1997, 1996 and 1995...................      20
     Consolidated Statements of Cash Flows--For the years
        ended December 31, 1997, 1996 and 1995...................      21
     Consolidated Statements of Stockholders' Deficiency--For
        the years ended December 31, 1997, 1996 and 1995.........      23
     Notes to Consolidated Financial Statements..................      24
Financial Statement Schedule and Independent Auditors' Report:
     Independent Auditors' Report................................      S-1
     Schedule I--Valuation and Qualifying Accounts--For the
        years ended December 31, 1997, 1996 and 1995.............      S-2

    Schedules other than those listed above are omitted because they are either
not  applicable or not required or the  information  required is included in the
consolidated financial statements or notes thereto.

                                       17
<PAGE>



INDEPENDENT AUDITORS' REPORT


To the Board of Directors of
  Hosiery Corporation of America, Inc.
Bensalem, Pennsylvania

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Hosiery
Corporation of America, Inc. and subsidiaries (the "Company") as of December 31,
1997  and  1996,  and  the  related   consolidated   statements  of  operations,
stockholders'  deficiency  and cash  flows  for each of the  three  years in the
period  ended   December  31,  1997.   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,  such consolidated  financial  statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1997
and 1996,  and the results of their  operations and their cash flows for each of
the three years in the period  ended  December  31,  1997,  in  conformity  with
generally accepted accounting principles.






Deloitte & Touche LLP
Philadelphia, Pennsylvania

March 6, 1998

                                       18
<PAGE>
<TABLE>

                                     HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
                                                  CONSOLIDATED BALANCE SHEETS
                                                  DECEMBER 31, 1997 AND 1996
                                         (Dollars in thousands, except per share data)

<CAPTION>


<S>                                                                                               <C>          <C>
                                                                                                1997         1996
ASSETS                                                                                          ----         ----
CURRENT ASSETS:
     Cash and cash equivalents ...........................................................   $   4,327    $   1,960
     Accounts receivable, less an allowance for doubtful accounts of
      $1,448 and $1,540 in 1997 and 1996, respectively ...................................      24,180       22,939
     Income tax refunds receivable .......................................................        --            100
     Inventories .........................................................................      15,158       15,538
     Prepaid and other current assets ....................................................       2,398        1,770
                                                                                             ---------    ---------
         Total current assets ............................................................      46,063       42,307
PROPERTY AND EQUIPMENT, net ..............................................................      17,261       17,422
DEFERRED CUSTOMER ACQUISITION COSTS ......................................................      30,795       24,664
DEFERRED DEBT ISSUANCE COSTS, less accumulated amortization of
     $5,316 and $3,684 in 1997 and 1996, respectively ....................................       6,084        7,185
DEFERRED INCOME TAXES ....................................................................        --            375
OTHER ASSETS .............................................................................         397          647
                                                                                             ---------    ---------
TOTAL ....................................................................................   $ 100,600    $  92,600
                                                                                             =========    =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
     Current portion of long-term debt ...................................................   $   3,117    $   8,637
     Current portion of capital lease obligations ........................................       1,550        1,627
     Accounts payable ....................................................................       7,120        7,885
     Accrued expenses and other current liabilities ......................................       5,366        5,442
     Accrued interest ....................................................................       4,608        4,703
     Accrued coupon redemption costs .....................................................       4,568        5,044
     Deferred income taxes ...............................................................       7,279        8,380
                                                                                             ---------    ---------
          Total current liabilities ......................................................      33,608       41,718
LONG-TERM DEBT, Less current portion .....................................................     129,307      129,142
CAPITAL LEASE OBLIGATIONS, Less current portion ..........................................       4,591        4,299
ACCRUED COUPON REDEMPTION COSTS ..........................................................         429          495
DEFERRED INCOME TAXES ....................................................................       3,876         --
                                                                                             ---------    ---------
          Total liabilities ..............................................................     171,811      175,654
                                                                                             ---------    ---------
COMMITMENTS AND CONTINGENT LIABILITIES
REDEEMABLE EQUITY SECURITIES .............................................................         872          768
                                                                                             ---------    ---------
STOCKHOLDERS' DEFICIENCY
     Preferred stock, $.01 par value, 12,000,000 shares authorized:
       4,000,000 shares designated as pay-in-kind preferred stock, stated at
       liquidation value of $10 per share; 25% cumulative, (liquidation preference
       of $79,838 and $63,082 in 1997 and 1996, respectively), 3,739,782 shares
       issued and outstanding ............................................................      37,398       37,398
     Common stock, voting, $.01 par value: 3,000,000 shares authorized,
       1,321,522 shares issued and outstanding ...........................................          13           13
     Common stock, Class A, non-voting, $.01 par value:
       500,000 shares authorized, 75,652 shares issued and outstanding ...................           1            1
     Additional paid-in capital ..........................................................      16,565       16,669
     Compensatory stock options outstanding ..............................................      22,938       22,938
     Accumulated deficit .................................................................    (148,301)    (159,894)
     Restricted stock ....................................................................        (697)        (947)
                                                                                             ---------    ---------
       Stockholders' deficiency ..........................................................     (72,083)     (83,822)
                                                                                             ---------    ---------
TOTAL ....................................................................................   $ 100,600    $  92,600
                                                                                             =========    =========
<FN>
                      See notes to consolidated financial statements.
</FN>
</TABLE>

                                            19

<PAGE>

<TABLE>

                                 HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF OPERATIONS
                                       YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                                  (Dollars in thousands)
<CAPTION>

                                                                                         1997        1996         1995
                                                                                         ----        ----         ----
 <S>                                                                                  <C>         <C>          <C>
NET REVENUES ......................................................................   $ 178,682   $ 162,763    $ 136,299
                                                                                      ---------   ---------    ---------
COSTS AND EXPENSES:
     Cost of sales ................................................................      82,119      75,184       60,982
     Administrative and general expenses ..........................................      12,121      11,404       10,200
     Provision for doubtful accounts ..............................................      10,791      10,057        7,788
     Marketing costs ..............................................................      30,538      22,055       17,442
     Coupon redemption costs ......................................................       3,671       4,140        5,969
     Depreciation and amortization ................................................       3,059       2,996        2,493
     Compensation related to stock options ........................................        --        22,938         --
     Expenses related to stock offering and acquisition ...........................        --         1,587         --
     Other expenses (income) ......................................................         529         (41)          (2)
                                                                                      ---------   ---------    ---------
 OPERATING INCOME .................................................................      35,854      12,443       31,427
     Interest income ..............................................................          90         327          378
     Interest expense .............................................................      18,109      18,466       19,749
                                                                                      ---------   ---------    ---------
 INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES ........................      17,835      (5,696)      12,056
 PROVISION (BENEFIT) FOR INCOME TAXES .............................................       6,242      (1,390)       4,560
                                                                                      ---------   ---------    ---------
 NET INCOME (LOSS) ................................................................   $  11,593   $  (4,306)   $   7,496
                                                                                      =========   =========    =========
<FN>
                 See notes to consolidated financial statements.
</FN>
</TABLE>







                                        20





<PAGE>

<TABLE>

                                  HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                      YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                                 (Dollars in thousands)

<CAPTION>

                                                                                             1997          1996       1995
                                                                                             ----          ----       ----
<S>                                                                                       <C>           <C>         <C>

OPERATING ACTIVITIES:
   Net income (loss) ..................................................................   $ 11,593      $ (4,306)   $  7,496
   Adjustments to reconcile net income (loss) to net cash provided
    by operating activities:
      Depreciation and amortization ...................................................      3,059         2,996       2,493
      Amortization of debt issue costs and discounts ..................................      1,844         1,852       1,848
      Compensation related to stock options ...........................................       --          22,938        --
      Deferred income taxes ...........................................................      3,150        (5,043)      1,882
      Loss (gain) on sale and abandonments of property and equipment ..................          4            (3)         (2)
      Amortization of restricted stock ................................................        250           552        --
      Amortization of deferred customer acquisition costs .............................     24,489        17,994      15,574
      (Increase) decrease in operating assets:
            Accounts receivable .......................................................     (1,241)       (3,231)     (2,052)
            Inventories ...............................................................        380        (5,724)     (1,527)
            Payments for deferred customer acquisition costs ..........................    (30,620)      (23,083)    (17,902)
            Prepaid and other current assets ..........................................       (528)         (488)       (312)
            Other assets ..............................................................        (44)          298         (56)
      Increase (decrease) in operating liabilities:
            Accounts payable, accrued expenses and other liabilities ..................       (630)        3,842       1,142
            Income taxes payable ......................................................       --            (129)        129
            Accrued coupon redemption costs ...........................................       (542)       (1,099)       (150)
                                                                                          --------      --------    --------
                  Net cash provided by operating activities ...........................     11,164         7,366       8,563
                                                                                          --------      --------    --------
INVESTING ACTIVITIES:
   Acquisitions of property and equipment .............................................       (919)       (2,522)     (1,019)
   Proceeds from sale of property and equipment .......................................          3            39           6
                                                                                          --------      --------    --------
                  Net cash used in investing activities ...............................       (916)       (2,483)     (1,013)
                                                                                          --------      --------    --------
FINANCING ACTIVITIES:
   Proceeds from bank and other financing .............................................     65,000          --          --
   Payments on bank and other financing ...............................................    (70,566)       (8,391)     (3,364)
   Payments on capital leases .........................................................     (1,783)       (1,519)     (1,256)
   Debt issuance costs ................................................................       (532)         --           (23)
   Payments of costs associated with issuance of stock ................................       --            --           (33)
   Issuance of Redeemable Equity Securities, net of costs to issue ....................       --            --           185
   Purchase price adjustment of Treasury stock ........................................       --            --           (88)
   Proceeds from stock subscription ...................................................       --            --           125
                                                                                          --------      --------    --------
                  Net cash used in financing activities ...............................     (7,881)       (9,910)     (4,454)
                                                                                          --------      --------    --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................................      2,367        (5,027)      3,096
   Cash and cash equivalents at beginning of year .....................................      1,960         6,987       3,891
                                                                                          --------      --------    --------
   Cash and cash equivalents at end of year ...........................................   $  4,327      $  1,960    $  6,987
                                                                                          ========      ========    ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid during the year for:
      Interest ........................................................................   $ 16,310      $ 16,719    $ 15,111
                                                                                          ========      ========    ========
      Income taxes ....................................................................   $  3,303      $  4,102    $  2,261
                                                                                          ========      ========    ========
</TABLE>


                                             21



<PAGE>
                      HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF CASH FLOWS
                           YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                      (Dollars in thousands)


(Continued)

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
     Capital lease  obligations  of $1,999,  $2,338 and $2,103 were entered into
     for new equipment during 1997, 1996 and 1995, respectively.

     In 1996,  two officers of the Company were  granted  approximately  $300 of
     redeemable equity securities as additional compensation for 1996.

     During 1995, in connection  with the issuance of redeemable  common shares,
     certain  agreements  were  amended and  executed in order that  preferred
     stock issued in 1995 and 1994 would be  redeemable  under the same basic
     terms of the redeemable  common  stock.  Due to the  change in terms of the
     preferred  stock agreement,  10,218  shares  issued in October  1994 with a
     value net of issuance costs  of $97 were  reclassified  from  preferred
     stock  to  redeemable  equity securities in 1995. See notes to consolidated
     financial statements.


                See notes to consolidated financial statements.

                                            22


<PAGE>
<TABLE>

                                     HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
                                                       (Dollars in thousands)

<CAPTION>

                                         PREFERRED STOCK                   COMMON STOCK
                                      --------------------   ----------------------------------------
                                                                                         CLASS A,                       Retained
                                               PIK                                       NON VOTING       Additional    Earnings
                                        ------------------    --------    ------     -----------------     Paid-In       (Accum.
                                        Shares     Amount      Shares     Amount     Shares     Amount     Capital       Deficit)
                                      ---------   --------    --------    ------     -------    ------   ---------     ----------


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

BALANCE January 1, 1995               3,750,000   $ 37,500    1,321,522     $ 13      75,652      $ 1     $ 16,840     $ (162,996)
Net income                                                                                                                  7,496
Amendment of preferred stock
   agreement resulting in certain
   redeemable preferred equity
   securities                           (10,218)      (102)
Additional costs associated with
   previously purchased and retired
   treasury stock                                                                                                             (88)
Costs associated with issuance of
   stock                                                                                                       (35)
Accretion of preference value over
   carrying value of redeemable
   preferred stock                                                                                             (52)
Receipt of stock subscription
Foreign currency translation
                                      ---------   --------    ---------   ------      ------    -----    ---------     ----------
BALANCE December 31, 1995             3,739,782     37,398    1,321,522       13      75,652        1       16,753       (155,588)
Net loss                                                                                                                   (4,306)
Compensation under restricted
   stock awards
Stock options granted
Accretion of preference value over
   carrying value of redeemable
   preferred stock                                                                                             (84)
Foreign currency translation
                                      ---------   --------    ---------   ------      ------    -----    ---------     ----------
BALANCE December 31, 1996             3,739,782     37,398    1,321,522       13      75,652        1       16,669       (159,894)
Net income                                                                                                                 11,593
Compensation under restricted
   stock awards
Accretion of preference value over
   carrying value of redeemable
   preferred stock                                                                                            (104)
                                      ---------   --------    ---------   ------     -------   ------    ---------     ----------
BALANCE December 31,1997              3,739,782   $ 37,398    1,321,522     $ 13      75,652      $ 1     $ 16,565     $ (148,301)
                                      =========   ========    =========   ======     =======   ======    =========     ==========
<FN>

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

                                                                        23






<PAGE>
<TABLE>

                                HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
                                                (Dollars in thousands)

<CAPTION>

                                                                      Compensatory
                                            Stock                         Stock           Foreign
                                         Subscription   Restricted       Options          Currency
                                         Receivables      Stock        Outstanding      Translation       Total
                                         ------------   ----------   -------------      -----------    ---------
<S>                                         <C>          <C>         <C>                <C>           <C>

BALANCE January 1, 1995                     $ (125)      $ (1,499)            -               -       $ (110,266)
Net income                                                                                                 7,496
Amendment of preferred stock
   agreement resulting in certain
   redeemable preferred equity
   securities                                                                                               (102)
Additional costs associated with
   previously purchased and retired
   treasury stock                                                                                            (88)
Costs associated with issuance of
   stock                                                                                                     (35)
Accretion of preference value over
   carrying value of redeemable
   preferred stock                                                                                           (52)
Receipt of stock subscription                  125                                                           125
Foreign currency translation                                                               $   2               2
                                          --------         ------        --------          -----       ---------
BALANCE December 31, 1995                       -          (1,499)            -                2        (102,920)
Net loss                                                                                                  (4,306)
Compensation under restricted
   stock awards                                               552                                            552
Stock options granted                                                    $ 22,938                         22,938
Accretion of preference value over
   carrying value of redeemable
   preferred stock                                                                                           (84)
Foreign currency translation                                                                  (2)             (2)
                                          --------         ------        --------          -----       ---------
BALANCE December 31, 1996                       -            (947)         22,938              -         (83,822)
Net income                                                                                                11,593
Compensation under restricted                                 250                                            250
   stock awards
Accretion of preference value over
   carrying value of redeemable
   preferred stock                                                                                          (104)
                                          --------         ------        --------          -----       ---------
BALANCE December 31,1997                    $   -          $ (697)       $ 22,938          $   -       $ (72,083)
                                          ========         ======        ========          =====       =========
<FN>
                                          See notes to consolidated financial statements.
</FN>
</TABLE>

                                                            23a




<PAGE>

            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)


1.   ORGANIZATION

     Hosiery  Corporation  of  America,  Inc.  and  subsidiaries  is  a  company
     incorporated  in the State of  Delaware  and is engaged in the direct  mail
     marketing,  manufacturing and distribution of quality women's sheer hosiery
     products to consumers  throughout the United States and the United Kingdom.
     The Company  markets  women's  sheer hosiery  through a continuous  product
     shipment or "continuity" program. The Company's continuity program involves
     mailing to customers a specially  priced  introductory  hosiery offer,  the
     acceptance  of which  enrolls  customers  in the  program  and  results  in
     additional shipments of hose on a regular and continuous basis upon payment
     of a prior hose shipment.  The Company's  manufacturing  operations  supply
     approximately  79% of all the hosiery required by the Company's  continuity
     program.


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation - The consolidated financial statements include
     the accounts of Hosiery  Corporation of America,  Inc. (the  "Company") and
     its subsidiaries.  All significant  intercompany  accounts and transactions
     have been eliminated.

     Revenue Recognition - Revenue less allowance for returns is recognized when
     merchandise  is shipped.  The Company  provides  for returns at the time of
     shipment based upon historical experience.

     Cash and Cash Equivalents - Cash and cash  equivalents  consist of cash and
     other  short-term  securities  purchased with maturities of less than three
     months.

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

     Property  and  Equipment - Property and  equipment  are stated at cost less
     accumulated depreciation. Depreciation is provided on a straight-line basis
     using  estimated  lives  of 31  years  for  buildings,  5 to 10  years  for
     machinery and equipment, 5 to 7 years for furniture and fixtures and 3 to 5
     years  for  automobiles.  Leasehold  improvements  are  amortized  over the
     shorter  of the  estimated  useful  life or the  lease  periods  which  are
     generally 15 to 18 years.

     Deferred Customer  Acquisition Costs - Deferred customer  acquisition costs
     consist of  marketing  costs  (postage,  printed  material,  customer  list
     rentals,  etc.) of the  initial  shipment to a customer  and similar  costs
     associated with the resolicitation of previously canceled customers.  These
     costs are  aggregated  by promo-  tional  program and are  amortized  on an
     accelerated  basis  based  upon  the  estimated  current  year  revenue  in
     proportion to the expected  future  revenue  generated by these  customers.
     Approximately 58% of these costs are amortized in the first 12 months,  70%
     within 18 months,  and 79% within 24 months. The loss incurred on front end
     shipments to customers  is charged to  operations  at the time of the front
     end shipment.

     Software Costs - Software costs, principally internally developed,  consist
     of the expenses  associated with the development  (computer time,  license,
     programming  time) of material  software  projects with a long-term benefit
     and are included in the  consolidated  balance sheet as Other Assets.  Such
     assets are amortized on a  straight-line  basis over a 5 to 10 year period.
     Effective  January 1, 1994, the Company  changed its estimate of the useful
     life of software  costs for new  software to 7 years to better  reflect the
     estimated period during which such assets will remain in service.

                                       24
<PAGE>



            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)

     Derivative  Financial  Instruments - The Company  enters into interest rate
     caps to manage exposure to fluctuations in interest rates. Premiums paid on
     caps are amortized to interest expense over the term of the cap.

     Deferred  Debt  Issuance  Costs  -  Debt  issuance  costs  represent  costs
     associated  with bank  borrowings  and notes  and are  amortized  using the
     effective interest method over the terms of the related borrowings.

     Income  Taxes - The Company uses the  liability  method of  accounting  for
     income taxes in accordance with SFAS No. 109,  Accounting for Income Taxes.
     Under the liability method, deferred income taxes are determined based upon
     enacted tax laws and rates applied to the differences between the financial
     statement and tax basis of assets and liabilities.

     Impairment   of   Long-Lived   Assets  -  Long-lived   assets  and  certain
     identifiable  intangibles  are reviewed for impairment  whenever  events or
     changes in circumstances  indicate that the carrying amount of an asset may
     not be  recoverable.  Recoverability  is assessed  based on the future cash
     flows  expected  to  result  from  the use of the  asset  and its  eventual
     disposition.  If the sum of the  undiscounted  cash  flows is less than the
     carrying  value  of the  asset,  an  impairment  loss  is  recognized.  Any
     impairment  loss,  if  indicated,  is  measured  as the amount by which the
     carrying amount of the asset exceeds the estimated fair value of the asset.

     Accounting  for  Stock-Based  Compensation  - As permitted by SFAS No. 123,
     Accounting for Stock-Based Compensation,  the Company has chosen to measure
     stock-based  compensation  expense in accordance with the method prescribed
     by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
     to Employees.

     Foreign Currency  Translation - Foreign entities  translate monetary assets
     and  liabilities at year-end  exchange rates while  non-monetary  items are
     translated at historical rates.  Income and expense accounts are translated
     at the average rates in effect during the year, except for depreciation and
     certain marketing  expenses which are translated at historical rates. Gains
     or losses from changes in exchange  rates are  recognized  in income in the
     year of occurrence.

     Use of Estimates - The preparation of the Company's  consolidated financial
     statements in conformity  with  generally  accepted  accounting  principles
     necessarily  requires  management to make  estimates and  assumptions  that
     affect the reported  amounts of assets and  liabilities  and  disclosure of
     contingent  assets and liabilities at the date of the financial  statements
     and the  reported  amounts of revenues and  expenses  during the  reporting
     period. Actual results could differ from those estimates.

     New  Accounting  Standards  - In June 1997,  the FASB  issued SFAS No. 130,
     Reporting  Comprehensive  Income. This statement  establishes standards for
     the reporting and display of  comprehensive  income and its components in a
     full set of financial  statements.  This  standard is effective  for fiscal
     years beginning  after December 15, 1997.  Management does not believe that
     the  effect of  implementing  this new  standard  will be  material  to the
     Company's financial position or results of operations.

                                       25
<PAGE>



            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)

     In June 1997, the FASB issued SFAS No. 131,  Disclosures  about Segments of
     an Enterprise and Related Information. This statement establishes standards
     for the  manner in which  business  enterprises  report  information  about
     operating segments in financial  statements.  It also establishes standards
     for related disclosures about products and services,  geographic areas, and
     major  customers.  This  standard is effective  for fiscal years  beginning
     after  December  15,  1997.  When  adopted,  SFAS No. 131 will not have any
     effect on the Company's  financial  position or results of operations,  but
     may require the Company to provide expanded  disclosure  regarding  certain
     operating segments. However, the Company has not yet determined the effects
     of SFAS No. 131 on its financial statement disclosures.

     Reclassifications - Certain reclassifications were made to the prior year's
     consolidated financial statements to conform to classifications used in the
     current period.

3.   GEOGRAPHIC SEGMENTS

     The Company  organizes  its business  units into two  geographic  segments:
     North America and Europe. The segments' accounting policies are the same as
     those described in the summary of significant accounting policies.

                                North America      Europe       Total
                                -------------      ------       -----

      Net Revenues                $160,490        $18,192      $178,682

      Operating Income (Loss)       39,057         (3,203)       35,854

      Total Assets                  91,297          9,303       100,600


4.   RECAPITALIZATION

     On July 19,  1994,  an affiliate of Kelso & Company,  Inc.  ("Kelso"),  the
     Company and Joseph A.  Murphy,  the sole  stockholder  of the Company  (the
     "Stockholder"),   entered  into  a  Recapitalization   and  Stock  Purchase
     Agreement   (the   "Recapitalization    Agreement").    Pursuant   to   the
     Recapitalization  Agreement,  the Company  repurchased from the Stockholder
     (the  "Repurchase")  for  approximately  $191.2  million,   which  includes
     approximately $0.9 million in post-closing adjustments (net of $7.8 million
     received  from the  Stockholder  for the  purchase  of certain  assets (see
     below)),  all of its then  outstanding  shares  of  preferred  stock  and a
     substantial  portion of its then  outstanding  shares of common  stock.  On
     October 17, 1994, the Company effected the  recapitalization of its capital
     stock (the  "Recapitalization"),  pursuant to which certain  affiliates and
     designees  of Kelso and  certain  members of  operating  management  of the
     Company  (collectively,  the  "Investor  Group"),  purchased a  controlling
     equity  interest in the Company.  The Company  effected the Repurchase with
     the  proceeds  of  the   Financing  (as  defined   below).   Following  the
     consummation  of the Repurchase (and after giving effect to the purchase of
     common stock by the Investor Group pursuant to the Financing), the Investor
     Group owned  approximately  74% of the  Company's  common  stock,  with the
     Stockholder retaining approximately 21% of the Company's common stock.

                                       26
<PAGE>



            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)


4.   RECAPITALIZATION (continued)

     The Company  obtained the funds necessary to effect the  Repurchase,  repay
     certain existing  indebtedness of the Company and pay the fees and expenses
     incurred  in  connection  with  the  Recapitalization  primarily  from  the
     proceeds of a financing (the "Financing")  which included (i) borrowings of
     $80.0 million under a credit agreement, consisting of $80.0 million of term
     loan facilities (the "Term Loan  Facilities") and a $15.0 million revolving
     credit facility, entered into among the Company, Bankers Trust Company, and
     the banks signatory  thereto,  (ii) gross proceeds of  approximately  $69.1
     million from the issuance  and sale of the Units (each unit  consisting  of
     one Senior Subordinated Note and one share of Class A Common Stock),  (iii)
     gross proceeds of approximately $36.5 million from the sale to the Investor
     Group of  shares  of a new  class  of  pay-in-kind  preferred  stock of the
     Company for cash,  and (iv) gross proceeds of  approximately  $17.1 million
     from the sale to the Investor Group of shares of Common Stock for cash. The
     Company also utilized working capital of approximately  $2.0 million to pay
     fees and expenses  incurred in  connection  with the  Recapitalization.  In
     addition,   certain  members  of  the  Company's  management  were  granted
     restricted  pay-in-kind  preferred  stock and  restricted  common  stock of
     $1,022 and $478, respectively (see Note 19).

     The  Recapitalization  and Stock  Purchase  Agreement  contained  customary
     representations,  warranties and conditions. The Recapitalization and Stock
     Purchase  Agreement also provided that, at or prior to the  consummation of
     the  Acquisition,  the  Stockholder  and the  Company  enter into an Escrow
     agreement  pursuant to which,  among  other  things,  $10.0  million of the
     aggregate purchase price paid by the Company to the Stockholder pursuant to
     the  Repurchase be held in escrow to provide a source of payment to satisfy
     the Stockholder's  indemnification  obligations under the  Recapitalization
     and Stock Purchase Agreement.

     Prior to the Recapitalization, the Company had authorized classes of voting
     and  non-voting  common  stock,  with  shares of voting  stock  issued  and
     outstanding.  As part of the  Recapitalization,  such non-voting  stock was
     retired and such voting  stock was  changed and  reclassified  from Class A
     Common  Stock,  par value $1.00 per share,  into one share of Common Stock,
     par  value  $.01  per  share.   In  addition,   in   connection   with  the
     Recapitalization,  the Company issued and sold shares of non-voting Class A
     Common Stock, a small number of which was purchased by certain designees of
     Kelso, and the remainder of which was sold in the form of Shares as part of
     the Units.  Upon the occurrance of any Conversion Event (as defined,  e.g.,
     any  transfer of shares of Class A Common  Stock to any persons who are not
     affiliates of the transferor),  each share of Class A Common Stock shall be
     convertible into one share of the Company's Common Stock. Subsequent to the
     Recapitalization, the Company effected a stock split of its Common Stock on
     approximately a 62.22-to-1 basis.

     On November  20,  1997,  the Company  amended and  restructured  its credit
     agreement. This change resulted in lower interest rates, an increase in the
     revolving  credit  facility from $15 million to $20 million,  a substantial
     change  in the  timing  of  principal  payments  and  changes  to the  debt
     covenants.

5.   PROVISION FOR COUPON REDEMPTION

     As part of the marketing  program,  the Company  issues  coupons to program
     participants  based upon the  products  purchased  or the  referral  of new
     customers to the Company.  Customers may redeem coupons for free gifts from
     a program  catalog once they have collected the required number of coupons.
     During 1997,  customers  with an average of 32 coupons  redeemed for a free
     gift after a collection  period of approximately  four years. The estimated
     future  costs for this  program have been  determined  based on  historical
     customer  redemption patterns applicable to outstanding coupons and average
     gift costs.

                                       27
<PAGE>


            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)


6.   INVENTORIES
<TABLE>
<CAPTION>
                                                               1997      1996
                                                               ----      ----
            <S>                                            <C>        <C>

            Raw materials................................   $   546   $   537
            Work-in-process..............................     2,748     2,258
            Finished goods...............................     9,820    10,656
            Promotional and packing material.............     2,044     2,087
                                                            -------   -------
                                                            $15,158   $15,538
                                                            =======   =======
</TABLE>

7.   PROPERTY AND EQUIPMENT


                                                               1997      1996
                                                               ----      ----


            Land and buildings...........................   $ 7,015   $ 6,627
            Machinery and equipment......................    20,683    19,086
            Furniture and fixtures.......................     2,213     1,937
            Leasehold improvements.......................     3,735     3,759
            Automobiles..................................       635       628
                                                            -------   -------
                                                             34,281    32,037
            Less accumulated depreciation
              and amortization ..........................    17,020    14,615
                                                            -------   -------
                                                            $17,261   $17,422
                                                            =======   =======


     Property and equipment  includes  assets  acquired  under  capital  leases,
     principally   machinery   and   equipment   having  a  net  book  value  of
     approximately  $6,566  and  $6,418  as  of  December  31,  1997  and  1996,
     respectively.  Related accumulated depreciation and amortization was $6,063
     and $4,636, respectively. Depreciation and amortization expense for capital
     lease  assets  for  1997,  1996 and 1995 was  $1,542,  $1,529  and  $1,077,
     respectively.

8.   OTHER ASSETS


                                                           1997        1996
                                                           ----        ----
            Software, net of accumulated
             amortization of approximately
             $5,881 and %5,638, respectively............   $312        $549
            Deposits....................................     14           9
            Miscellaneous other.........................     71          89
                                                           ----        ----
                                                           $397        $647
                                                           ====        ====


9.   OTHER EXPENSES (INCOME)


     Included in other expenses (income) are the following:

                                                        1997      1996     1995
                                                        ----      ----     ----

         Loss (gain) on foreign exchange.............   $225     $ (39)    $ --
         Multistate group administrative expenses....    300        --       --
         Miscellaneous expenses (income).............      4        (2)      (2)
                                                        ----     -----     ----
                                                        $529     $ (41)    $ (2)
                                                        ====     =====     ====


                                       28
<PAGE>



            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)


10.  LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                        1997        1996
                                                                                        ----        ----
         <S>                                                                          <C>         <C>
         Amounts due under revolving credit and term loan agreement...............    $ 63,000    $ 68,450
         13.75% Senior Subordinated Notes due August 2002 ........................      68,549      68,337
         Serial bonds issued by the South Carolina Jobs-Economic Development
            Authority with interest rates ranging from 5.8% to 7.1% payable
            beginning July 1993 in quarterly principal payments and
            semi-annual payments to the trustee of the bonds.  Bonds are
            collateralized by a letter of credit and a building addition
            in South Carolina.....................................................         875         992
                                                                                       -------     -------
         Total long-term debt.....................................................     132,424     137,779
         Less current portion.....................................................       3,117       8,637
                                                                                      --------    --------
         TOTAL LONG-TERM PORTION..................................................    $129,307    $129,142
                                                                                      ========    ========
</TABLE>

On October 17, 1994, the Company  entered into a revolving  credit and term loan
agreement  (the  "Agreement")  with a group of banks which was  restructured  on
November  20,  1997.  Outstanding  borrowings  at December 31, 1997 and 1996 are
$63,000 and $68,450,  respectively. The facility is secured by substantially all
of the assets of Hosiery Corporation of America. The facility is also subject to
the continuing guarantees of the subsidiaries of Hosiery Corporation of America.
The  revolving  credit  and term loan  portions  of the  facility  have  maximum
borrowings of $20,000 and $65,000,  respectively.  The revolving credit facility
expires on February 1, 2002.  The  Company can borrow  based on a formula  which
comprises the sum of 80% of accounts  receivable and 50% of inventory.  Interest
under the revolving  credit facility is payable at the banks' prime lending rate
plus 0.5%.  There were no  borrowings  outstanding  under the  revolving  credit
facility at December  31, 1997 and 1996.  The term loan is payable in  quarterly
installments  ranging from $750 to $5,000,  with a final payment due February 1,
2002. Interest under the term loan is generally payable quarterly and is charged
at a premium  of 0.5% over the Base  Rate or 1.5%  over the  Eurodollar  Rate as
defined in the  Agreement.  The rate in effect at December  31, 1997 ranged from
7.38% to 7.44%.  Additionally,  fees are charged on the average  daily amount of
unused commitment and are payable  quarterly.  Under the terms of the Agreement,
certain  restrictions  are placed on  additional  borrowings,  the  purchase  of
property and  equipment,  the payment of cash  dividends and the  disposition of
assets.  The Company has also agreed to  maintain  certain  financial  ratios as
defined in the Agreement.
                                       29
<PAGE>



            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)


10.  LONG-TERM DEBT (continued)

     During 1994, the Company sold the 13.75% Senior  Subordinated Notes, with a
     principal  amount  of  $70,000,  at a  discount,  which  discount  is being
     amortized  using  the  interest  method  over the  life of the  notes at an
     effective interest rate of 14.38%.  Interest is payable semi-annually.  The
     Notes were sold in  denominations  of one thousand  dollars,  each of which
     contained one share  (collectively  the "Shares") of the Company's  Class A
     Non Voting Common Stock, par value $.01 per share. The Notes and the Shares
     were  immediately  detachable.  Beginning  October 1, 1997, the Notes, or a
     portion thereof,  are subject to redemption at the option of the Company at
     specified  redemption  prices  ranging  from 100% to 112% of the  aggregate
     principal  amounts of Notes so redeemed.  Upon the occurence of a Change of
     Control,  as  defined,  each  holder of the Notes  shall  have the right to
     require the Company to repurchase  such holder's  Notes at a purchase price
     equal to 101% of the aggregate principal amount thereof. Under the terms of
     the agreement,  certain  restrictions are placed on additional  borrowings,
     the purchase of property and  equipment,  the payment of cash dividends and
     the disposition of assets.

     The Company was in  compliance  with all debt  covenants  noted above as of
     December 31, 1997.

     The Company was  contingently  liable for outstanding  letters of credit in
     the amount of approximately $2,292 as of December 31, 1997.

     On January 17, 1995,  the Company  purchased an interest  rate cap for $149
     from Bankers Trust Company. This cap protects $30,000 of the Term Loan Debt
     from an increase in interest  rates over 10%. The cap is based on the LIBOR
     and pays the excess interest over 10%. The term of the interest rate cap is
     three years.

     Maturities of long-term  debt consisted of the following as of December 31,
     1997:


                1998................................................... $  3,117
                1999...................................................    7,617
                2000...................................................   13,117
                2001...................................................   20,117
                2002...................................................   88,166
                Thereafter.............................................      290
                                                                        --------
                                                                        $132,424
                                                                        ========
                                       30
<PAGE>



            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)


11.  INCOME TAXES

     The provision for income taxes (benefit) consists of the following:

                                                         1997     1996    1995
                                                         ----     ----    ----
        Federal:
              Current................................   $2,640  $ 3,474  $2,432
              Deferred...............................    3,297   (5,215)  2,053
                                                        ------  -------  ------
                                                         5,937   (1,741)  4,485
                                                        ------  -------  ------
        States:
              Current................................      451      179     246
              Deferred...............................     (146)     172    (171)
                                                        ------  -------  ------
                                                           305      351      75
                                                        ------  -------  ------
                                                        $6,242  $(1,390) $4,560
                                                        ======  =======  ======

     The components of net deferred tax liabilities consisted of the following:

                                                                 1997      1996
                                                                 ----      ----
        Deferred tax liabilities:
             Deferred customer acquisition costs............. $ 9,810   $ 7,692
             Accounts receivable.............................   6,422     6,346
             Property and equipment..........................     (31)      327
             Other assets....................................   3,982     2,614
             Other current assets............................     227       165
             Accrued coupon redemption costs.................     289       289
             State deferred taxes............................   1,019     1,164
                                                              -------   -------
                                                               21,718    18,597
                                                              -------   -------
        Deferred tax assets:
             Accrued expenses................................    (727)     (757)
             Stock option....................................  (9,821)   (9,821)
             Other...........................................     (15)      (14)
                                                              -------   -------
                                                              (10,563)  (10,592)
                                                              -------   -------
                                                              $11,155   $ 8,005
                                                              =======   =======
<TABLE>
     The following is a  reconciliation  of the federal  statutory  rate and the
     Company's effective tax rate:
<CAPTION>

                                                           1997                      1996                       1995
                                                 -----------------------   -----------------------   -----------------------
        <S>                                        <C>         <C>           <C>          <C>           <C>         <C>
        Tax provision (benefit) at
          statutory rate .......................   $6,064      34.0%         $(1,937)     (34.0)%       $4,099      34.0%
        State taxes, net of federal benefit.....      202       1.1              232        4.1            160       1.3
        Other...................................      (24)     (0.1)             315        5.5            301       2.5
                                                   ------      ----          -------      -----         ------      ----
        Provision (benefit) for income taxes....   $6,242      35.0%         $(1,390)     (24.4)%       $4,560      37.8%
                                                   ======      ====          =======      =====         ======      ====
</TABLE>


12.  REDEEMABLE EQUITY SECURITIES

     In  connection  with the  Recapitalization,  the Company  issued 2,826
     shares of voting common stock,  $.01 par value, to management  stockholders
     for cash. The Company is obligated to redeem  these  shares from the
     management  stockholders upon the death,  disability or  termination  of
     employment  of the holder.  The redeemable common stock was recorded at
     fair value on the date of issuance, less

                                       31
<PAGE>



            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)

12.  REDEEMABLE EQUITY SECURITIES (continued)

     issuance costs,  totaling $45. During 1995, the Company, the Company issued
     an additional 4,048 shares of voting common stock, $.01 par value, for cash
     under the same basic  terms.  The  redeemable  common stock was recorded at
     fair value on the date of issuance,  less issuance costs,  totaling $63. In
     connection with the issuance of redeemable  common shares in 1995,  certain
     agreements  were  amended  and  executed  in order  that  14,643  shares of
     preferred  stock  issued  for cash in 1995 and 10,218  shares of  preferred
     stock  issued for cash in October 1994 would be  redeemable  under the same
     basic terms of the redeemable common stock. Each preferred share has a $.01
     par value, a stated value at liquidation of $10 and cumulative dividends of
     25% of additional shares of PIK preferred stock or fractions  thereof.  The
     redeemable  preferred  stock  was  recorded  at fair  value  on the date of
     issuance or amendment providing for their redemption,  less issuance costs,
     totaling $224.  The excess of the preference  value over the carrying value
     is being accreted by periodic  charges to Additional  Paid-In  Capital over
     the life of the issue. The redemption  provisions expire the earlier of the
     fifth anniversary of the October 17, 1994  Recapitalization  or the closing
     of an initial public offering for the Company's common stock.

     In 1996,  two officers of the Company  were granted  4,434 shares of voting
     common stock,  $.01 par value, as additional  compensation.  The Company is
     obligated to redeem  these shares under the same basic terms as  previously
     issued  redeemable  stock. The redeemable common stock was recorded at fair
     value on the date of issuance.  This  resulted in an increase in redeemable
     equity securities of approximately $300.

13.  TREASURY STOCK TRANSACTION

     Pursuant  to the  Recapitalization  Agreement  (see  Note 3),  the  Company
     repurchased from the Stockholder for  approximately  $199.0 million,  which
     includes approximately $0.9 million in post-closing adjustments, all of
     its then  outstanding  shares of Preferred  Stock (5,460 Class A shares and
     9,425  Class B shares)  and 17,337  shares of its then  outstanding  Common
     Stock. These shares along with all previously  acquired shares of Preferred
     and Common Stock were then retired.  During 1995,  additional  post closing
     adjustments  totaling $88 were made to the purchase  price  relating to the
     retired treasury shares.

14.  LEASE COMMITMENTS

     The Company leases premises under  cancelable and  noncancelable  operating
     leases with lease terms expiring  through 2007.  Future minimum payments by
     year and in the  aggregate  under all  noncancelable  capital and operating
     leases having  initial or remaining  terms of one year or more consisted of
     the following at December 31, 1997:

       Year ending                                           Capital  Operating
       December 31,                                           Leases    Leases
       ------------                                          -------  ---------
       1998............................................       $1,778    $1,889
       1999............................................        1,574     1,452
       2000............................................        1,169     1,034
       2001............................................        1,055       978
       2002............................................          786       973
       Thereafter......................................          370     4,301
                                                              ------   -------
                                                               6,732   $10,627
       Amount representing imputed interest............          591   =======
                                                              ------
       Present value of net minimum lease payments.....        6,141
       Less current portion............................        1,550
                                                              ------
                                                              $4,591
                                                              ======

     Rental expense under all operating  leases for the years ended December 31,
     1997,  1996  and  1995,  was  approximately   $1,887,  $1,593  and  $1,281,
     respectively.

                                       32
<PAGE>



            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)


15.  COMMITMENTS AND CONTINGENCIES

     The Company has entered into employment  agreements with certain members of
     management.

     The  Company  has  agreed to pay Kelso an annual  fee of $263 each year for
     financial  advisory  services  and to  reimburse  Kelso  for  out-of-pocket
     expenses incurred.  Non-officer directors of the Company,  other than those
     directors who are affiliated with Kelso, will be paid an annual retainer of
     $20. In addition,  all  out-of-pocket  expenses of  non-officer  directors,
     including  those  directors  who are  affiliated  with  Kelso,  related  to
     meetings  attended,   will  be  reimbursed  by  the  Company.   Non-officer
     directors, including those directors affiliated with Kelso, will receive no
     additional  compensation  for their  services as  directors  of the Company
     except as described above.

     The Company is involved in, or has been involved in, litigation  arising in
     the normal course of its  business.  The Company can not predict the timing
     or outcome of these claims and proceedings.  Currently,  the Company is not
     involved in any litigation  which is expected to have a material  effect on
     the  financial  position of the business or the results of  operations  and
     cash flows of the Company except as discussed below.

     In 1984, as a result of a lawsuit  brought by the Federal Trade  Commission
     ("FTC"),   the  Federal   District  Court  for  the  Eastern   District  of
     Pennsylvania issued a consent  injunction,  which sets forth specific rules
     with which the Company must comply in  conducting  its mail order  business
     and  permanently  enjoins the Company,  its  successors  and  assigns,  its
     officers,  agents,  representatives  and  employees,  and anyone  acting in
     concert with the Company from violating various FTC and Postal Service laws
     and  regulations.  The FTC had previously made inquiries about some aspects
     of the  Company's  promotional  materials  prompting  the  Company to adopt
     revised  promotional  materials  which,  the  Company  believes  but cannot
     assure, will meet the concerns expressed by the FTC.

     The  Company  had  received  inquiries  from  the  FTC  and  sixteen  state
     regulatory  groups  (the  "States")  concerning  aspects  of the  Company's
     promotional  materials,  including  whether  the  terms  of  the  Company's
     promotional offers are sufficiently disclosed in such materials.  Eleven of
     the  States,  acting as a  multi-state  group,  sought  to  impose  certain
     disclosure requirements on the Company's promotional materials.

     The Company has reached an agreement with the multistate group in which the
     Company  agreed  to  certain   modifications  and   clarifications  of  its
     promotional  materials.  The agreement  became effective as of September 1,
     1997. The Company's  promotional  materials for all of 1997 already include
     the majority of the  modifications  and,  consequently,  the Company  feels
     these  modifications and  clarifications  will have no additional  negative
     impact  on the  Company's  response  rates.  However,  there  may  be  some
     additional minor  modifications which will need to be made to the Company's
     promotional materials to fully satisfy the terms of the Company's agreement
     with the multistate group, and no assurances can be given that such changes
     will  not  have  a  further  effect  on the  Company's  response  rate.  In
     accordance with the agreement,  the Company paid $300,000 in administrative
     expenses and fees during 1997.  The agreement also requires that refunds be
     made to  customers  under  certain  circumstances  for a six-month  period.
     However,  such  refunds are not  expected  to be material to the  Company's
     financial condition or results of operations.


                                       33
<PAGE>




            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)


15.  COMMITMENTS AND CONTINGENCIES (continued)

     The Company is hopeful that these  modifications  and  clarifications  will
     also  satisfy  the  inquiries  from the FTC and the  states not part of the
     multistate group;  however,  no assurances can be given in this regard. The
     modifications  the Company has already made to its  solicitation  materials
     has had a material adverse effect on its domestic response rates.  However,
     response  rates are only one of several  factors that affect the  Company's
     results of  operations.  State  regulators  from time to time  contact  the
     Company with inquiries  regarding the Company's  promotional  materials and
     state  regulators  could  require   additional  changes  to  the  Company's
     promotional materials, and no assurance can be given that such changes will
     not be  significant  or will  not have a  material  adverse  effect  on the
     Company's future financial condition or results of operations.


16.  PROFIT SHARING PLAN

     The Company has a profit  sharing plan  covering all employees and those of
     its  subsidiaries.  Eligible  employees can participate as of January 1 and
     July 1 after twelve months of service. Employee contributions are made on a
     pretax  basis  under  Section  401(k) of the  Internal  Revenue  Code.  The
     Company's contribution is at the discretion of the Board of Directors.  The
     expense associated with the employer  contribution was approximately  $514,
     $480 and $442 in 1997, 1996 and 1995, respectively.

     All  contributions  and  investments are held in a trust for the benefit of
     plan   participants.   All  employees  are  100%  vested  in  their  pretax
     contributions  and  earnings  thereon,  but  become  vested in the  Company
     contributions  and earnings at a rate based on years of service,  with full
     vesting after five years.

17.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company  values the financial  instruments as required by SFAS No. 107,
     Disclosures  about  Fair  Value of  Financial  Instruments.  The  following
     methods and assumptions  were used to estimate the fair value of each class
     of financial instrument:

     Cash  and Cash  Equivalents,  Accounts  Receivable,  Accounts  Payable  and
     Accrued  Expenses.  The  carrying  amount of these  items are a  reasonable
     estimate  of their  fair  values  because  of the short  maturity  of these
     instruments.

     Long-term  Debt  including  Current  Maturities.  The  fair  value  of  the
     Company's long-term debt is based on the quoted market price on the
     subordinated notes and on current interest  rates that are available to the
     Company for debt not quoted on an  exchange.  At  December  31,  1997 the
     Company had a carrying  amount of long-term  debt of $132,424 and an
     estimated fair value of $139,475.

18.  STOCK OPTION PLAN

     On June 28,  1996,  the Board of  Directors  approved  and  adopted a stock
     option  plan  (the  "Option  Plan"),  providing  for the  grant to  certain
     employees of the Company and its  subsidiaries of options to purchase up to
     215,369  shares of Common Stock.  On June 28, 1996,  the Board of Directors
     granted options to purchase an aggregate of 215,369 shares of Common Stock.
     The exercise price with respect to 199,458 shares is $30.00 per share.  The
     exercise  price with  respect to 15,911  shares will be the price per share
     obtained in an initial public  offering.  All options vested on the date of
     such grant and are only  exercisable upon an initial public offering of the
     Common Stock or certain change of control  events.  Options expire 10 years
     from the date of the grant of such option,  subject to earlier  termination
     by the Board of Directors.

                                       34
<PAGE>



            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)


18.  STOCK OPTION PLAN (continued)

     A summary of the status of the  Company's  stock option plan as of December
     31,  1997 and  changes  during  the year  ending on that date is  presented
     below:

                                        Options with       Options with Exercise
                                        Exercise Price     Price Less Than the
                                        Equal to Market    Market Price of Stock
                                        Price of Stock     at Date of Grant
                                        on Grant Date
                                        -----------------  ---------------------
                                                 Weighted               Weighted
                                                  Average                Average
                                                 Exercise               Exercise
                                        Shares      Price     Shares       Price
                                        ------   --------     ------    --------

     Outstanding at January 1, 1996        -0-                   -0-
     Granted                            15,911    $145.00    199,458      $30.00
     Exercised                              --                    --
     Cancelled                              --         --         --          --
                                        ------    -------    -------      ------

     Outstanding at December 31, 1996   15,911    $145.00    199,458      $30.00
                                                  =======                 ======
     Granted                                --                    --
     Exercised                              --                    --
     Cancelled                              --         --         --          --
                                        ------     ------    -------      ------

     Outstanding at December 31, 1997   15,911     $96.09    199,458      $30.00
                                        ======     ======    =======      ======

     Options exercisable at
      December 31, 1996 and 1997           -0-                   -0-
                                        ======               =======
     Weighted average fair value of
      options granted during 1996      $145.00               $145.00
                                       =======               =======


     At December 31, 1997,  there were no options  available  for future  grants
     under the Option Plan.

                                       35
<PAGE>



            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)


18.  STOCK OPTION PLAN (continued)

     The following table summarizes  information about stock options outstanding
     at December 31, 1997:

                                    Options Outstanding
                           --------------------------------------
                                           Weighted
                                           Average       Weighted
                              Number       Remaining     Average
               Exercise    Outstanding     Contractual   Exercise
                Prices     at 12/31/97     Life          Price
               --------    -----------    -----------    --------

                $ 30.00      199,458      8.5 years      $ 30.00
                  96.09       15,911      8.5 years        96.09
                             -------
                             215,369
                             =======

     The Company applies Accounting Principles Board Opinion No. 25, "Accounting
     for Stock Issued to Employees,"  in accounting  for its plan.  Accordingly,
     the difference between the fair market value of the Common Stock, which for
     financial  reporting  purposes was based on the estimated fair value at the
     date of grant, and the exercise price of such options, has been recorded as
     compensation expense totaling $22,938 in the Company's financial statements
     for the year  ending  December  31,  1996.  Had  compensation  cost for the
     Company's stock option plan been determined  based on the fair value at the
     grant dates,  consistent  with the method of SFAS No. 123,  "Accounting for
     Stock-Based  Compensation,"  the  Company's  net loss  for the year  ending
     December  31,  1996,  would have been  increased  to the pro forma  amounts
     indicated below:

     Net loss:

                  As reported             ($4,306)
                                          =======

                  Pro forma               ($5,321)
                                          =======

     The fair value of each option  granted during 1996 is estimated on the date
     of grant using the  Black-Scholes  option-pricing  model with the following
     assumptions:  (i) no dividend  yield,  (ii) no expected  volatility  as the
     Company's stock is not publicly  traded,  (iii) risk-free  interest rate of
     6.46%, and (iv) expected life of 5.5 years.


                                       36
<PAGE>


            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)


19.  RELATED PARTIES TRANSACTIONS

     In connection with the  Recapitalization,  certain members of the Company's
     management  were  granted  restricted   pay-in-kind   preferred  stock  and
     restricted  common  stock of $1,022  and $478,  respectively.  Compensation
     associated  with the grant of these shares was  measured by the  difference
     between the aggregate price of the restricted shares and the aggregate fair
     value of the shares on the  measurement  date.  Such  compensation is being
     recognized  ratably over the  six-year  period for which  services  must be
     performed  in order for these  individuals  to receive  the shares  without
     restriction. The Company is recognizing compensation expense over six years
     commencing  October 17,  1994,  which is the date the Company  effected the
     Recapitalization  and granted the restricted shares.  Compensation  expense
     related to these  shares for the period  ended  December  31, 1997 and 1996
     totaled $250 in each year.

     In  connection  with the  Recapitalization,  on October 17,  1994,  certain
     designees of Kelso  acquired  shares of the  Company's  Common  Stock.  The
     proceeds from the sale of these shares were received subsequent to December
     31, 1994.

     During 1994 and 1995,  certain  officers of the Company  acquired shares of
     both the Company's common and preferred stock. In 1996, two officers of the
     Company were  granted  shares of common  stock as  additional  compensation
     totalling approximately $300. These shares are included in the accompanying
     balance sheets as redeemable equity securities.

     Kelso  provides  financial  advisory  services to the Company for an annual
     fee. Payment for these services and reimbursement of expenses totalled $270
     in 1997, $268 in 1996 and $308 in 1995.

20.  PREFERRED STOCK

     The PIK Preferred Stock is entitled to cumulative dividends, payable solely
     in additional  shares of PIK Preferred  Stock,  at an estimated rate of 25%
     per  annum  when,  as and if  declared  by the  Board of  Directors  of the
     Company.  Cumulative  dividends  on  preferred  shares  that  have not been
     declared since the Recapitalization  total approximately 4.2 million shares
     of preferred  stock.  The PIK Preferred Stock has an aggregate  liquidation
     preference of approximately  $37.4 million plus the liquidation  preference
     of additional  shares of PIK Preferred Stock issued in payment of dividends
     on the PIK  Preferred  Stock and the  liquidation  preference in respect of
     accumulated  and  unpaid  dividends,  whether  or  not  declared.  The  PIK
     Preferred  Stock is  redeemable at the option of the Company in whole or in
     part at any time for a redemption price equal to the liquidation preference
     thereof plus all accumulated and unpaid dividends, whether or not declared,
     to the date of  redemption.  In addition,  the PIK  Preferred  Stock has no
     voting rights,  except that the PIK Preferred Stock is entitled to vote, as
     a separate class, in the event of any merger, consolidation, or sale of all
     or  substantially  all  of  the  Company's  assets,  any  amendment  to the
     Company's  Restated  Certificate of Incorporation  or any  authroization or
     issuance by the Company of capital  stock  ranking  senior to or pari passu
     with the PIK  Preferred  Stock with  respect to  dividends  or  liquidation
     preference or securities  convertible  into or  exchangeable or exercisable
     for such capital stock.

                                       37

<PAGE>



            HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in thousands, except per share data)


21.  QUARTERLY INFORMATION (UNAUDITED)

     Summarized quarterly financial data for 1997 and 1996 are set forth below:


                             March     June    September   December    Total
                             -----     ----    ---------   --------    -----
1997

Net Revenues..............  $45,274   $49,589   $39,414    $44,405   $178,682
Gross Profit..............   22,234    25,532    22,285     26,512     96,563
Operating Income..........    5,276     9,509     8,866     12,203     35,854
Net Income................      464     3,025     2,686      5,418     11,593

1996

Net Revenues..............  $40,099   $42,623   $38,611    $41,430   $162,763
Gross Profit..............   19,187    22,783    21,996     23,613     87,579
Operating Income (Loss)...    6,135   (12,779)   10,208      8,879     12,443
Net Income (Loss).........      933   (10,545)    3,486      1,820     (4,306)

                                       38
<PAGE>



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

      None.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The  Company's  executive  officers and  directors,  as well as additional
information with respect to those persons, are set forth in the table below.

Name                    Age     Position
----                    ---     --------
John F. Biagini         54      Chairman, Chief Executive Officer and President
Darrell Edwards         39      Vice President and Director of Marketing
Robert M. Henry         50      Senior Vice President, Systems and Operations
Arthur Hughes           56      Vice President and Chief Financial Officer
William J. Kelly        48      Senior Vice President, International Operations
Hans Lengers            52      President, U.S. Textile Corporation and Director
Frank K. Bynum, Jr.     35      Director
Michael B. Goldberg     51      Director
Joseph A. Murphy        54      Director


      Directors  shall be  elected  by a  plurality  of the votes cast at annual
meetings  of  stockholders  (except  in the case of  vacancies  on the  Board of
Directors).  All  directors of the Company serve for the term for which they are
elected or until their successors are duly elected and qualified or until death,
retirement,  resignation,  or removal. All executive officers hold office at the
pleasure  of  the  Board  of  Directors.  See  "--Stockholders   Agreement"  and
"--Employment Agreements."

      Non-officer  directors of the Company,  other than those directors who are
affiliated with Kelso, will be paid on annual retainer of $20,000.  In addition,
all out-of-pocket expenses of non-officer  directors,  including those directors
who are affiliated with Kelso,  related to meetings  attended will be reimbursed
by the Company. Non-officer directors, including those directors affiliated with
Kelso,  will receive no additional  compensation for their services as directors
of the Company except as described  above.  Officers of the Company who serve as
directors do not receive compensation for their services as directors other than
the compensation they receive as officers of the Company.

      There are no family  relationships  among directors and executive officers
of the Company.  For certain  information  regarding the stock  ownership of the
Company, see "Security Ownership of Certain Beneficial Owners and Management."

      The  business  experience  for at least the last five years of each of the
directors and executive officers is as follows:

      Mr.  Biagini  has  been  the  Chairman,   Chief  Executive  Officer  and
President  of the Company  since  consummation  of the  Recapitalization.  Mr.
Biagini  served as  President  and Chief  Operating  Officer  since June 1992.
From March 1988 to June 1992,  Mr.  Biagini was Vice President of Marketing of
the Company.

      Mr.  Edwards has been the Vice  President  and  Director of Marketing of
the Company since  consummation  of the  Recapitalization.  Mr. Edwards served
as Vice  President  and Director of  Marketing  since he joined the company in
October 1992.

                                       39
<PAGE>




      Mr. Henry has been Senior Vice  President,  Systems and  Operations,  of
the Company since July 1996.  From  September  1995 until June 1996, Mr. Henry
was  Senior  Vice  President,  Business  Development.  From  1993 to 1995,  he
served as Chairman,  Marketing Services,  for Bates Advertising U.S. From 1990
to 1993, Mr. Henry was Vice Chairman and Chief Operating  Officer of McCaffrey
and McCall Advertising.

      Mr. Hughes has been the Vice  President and Chief  Financial  Officer of
the Company  since  August  1995.  Mr.  Hughes  served as Vice  President  and
Controller of the Company from 1990 to August 1995.

      Mr. Kelly has been Senior Vice President,  International  Operations, of
the Company since July 1996.  From  December  1993 until June 1996,  Mr. Kelly
was  Vice  President,   Systems  and  Operations.  From  November  1988  until
December 1993, Mr. Kelly was Vice President, Systems and Programming.

      Mr.  Lengers has been the  President of U.S.  Textile  Corporation  (the
Company's  wholly-owned  manufacturing  subsidiary)  and  a  Director  of  the
Company since 1978, and is one of the founders of U.S. Textile Corporation.

      Mr. Bynum has been a Director of the Company since the  consummation  of
the  Recapitalization.  Mr.  Bynum has been a Vice  President  of Kelso  since
July 1991,  and was an Associate  of Kelso from October 1987 to July 1991.  He
is a director  of Cygnus  Publishing,  Inc.,  Hillside  Broadcasting  of North
Carolina,  IXL Holdings,  Inc.,  21st Century  Newspapers,  Inc. and Universal
Outdoor Holdings, Inc.

      Mr.  Goldberg has been a Director of the Company since  consummation  of
the  Recapitalization.  Mr.  Goldberg  has been a Managing  Director  of Kelso
since October 1991.  Mr.  Goldberg  served as a Managing  Director and jointly
managed  the  merger  and   acquisitions   department   at  The  First  Boston
Corporation  from  1989 to May 1991.  Mr.  Goldberg  was a partner  at the law
firm of Skadden,  Arps, Slate,  Meagher & Flom from 1980 to 1989. Mr. Goldberg
is a director of Consolidated Vision Group, Inc., Endo  Pharmaceuticals,  Inc.
and Netspeak Corporation.

      Mr. Murphy has been a Director of the Company since  consummation of the
Recapitalization.  Mr.  Murphy  joined the Company in September  1980 as Chief
Operating  Officer.  In December  1983,  Mr.  Murphy was promoted to President
and Chief  Executive  Officer and was  simultaneously  elected to the Board of
Directors.  In June  1992,  Mr.  Murphy  ceased  serving as  President  of the
Company but  continued to serve as Chairman  and Chief  Executive  Officer,  a
position from which he resigned prior to consummation of the Recapitalization.

      In  connection  with the  transactions  effected  by the  Recapitalization
Agreement, the Company paid Kelso a fee of $2.625 million for financial advisory
services and  reimbursed it for  out-of-pocket  expenses  incurred in connection
with rendering such services.  In addition,  the Company has agreed to pay Kelso
an annual fee of  $262,500  each year for  financial  advisory  services  and to
reimburse it for out-of-pocket expense incurred.  The Company has also agreed to
indemnify  Kelso  against  certain  claims,  losses,  damages,  liabilities  and
expenses which may arise, in connection  with rendering such financial  advisory
services.

      The Company has a Compensation  Committee,  which currently  consists of
three  directors:  John  Biagini,  Frank Bynum and Michael  Goldberg.  Messrs.
Bynum and  Goldberg are neither  officers nor  employees of the Company or any
of its affiliates.

                                       40
<PAGE>



Stockholders Agreement

      The Stockholders Agreement provides, among other things, that, (subject to
changes  that may be made from and after such time with  respect to the  members
and size of the Board of Directors in  accordance  with the  Company's  Restated
Certificate of Incorporation and By-Laws), the Company's Board of Directors will
consist of five members, including (i) two officers of the Company designated by
Kelso  from  certain  management  stockholders  of the  Company,  (ii) two other
individuals  designated  by Kelso (who may be affiliates of Kelso) and (iii) the
Stockholder.  In  addition,  Kelso and the  Stockholder  agreed  pursuant to the
Stockholders  Agreement that (i) so long as the  Stockholder  and certain of his
transferees  collectively  own 10% or more of the outstanding  Common Stock, the
Stockholder shall be a director of the Company and (ii) so long as Kelso and its
affiliates  collectively  are  the  largest  stockholders  of  the  Company  and
collectively  own at least 35% of the  outstanding  stock of the Company,  Kelso
shall be entitled to elect a majority of the Board of  Directors of the Company.
Under the Company's Restated Certificate of Incorporation and By-Laws, the Board
of  Directors  shall  consist of not less than three (3) nor more than eight (8)
members, and following  consummation of the Recapitalization shall be fixed from
time to time by resolution of the Board of Directors  (the "Board  Resolution"),
or by resolution  adopted by the vote of a majority of the  stockholders  of the
Common  Stock  or by  consent  executed  on  behalf  of such  stockholders  (the
"Stockholder Resolution"); provided, that in the event of a conflict between the
Board  Resolution and the Stockholder  Resolution,  the  Stockholder  Resolution
shall govern.  The Stockholders  Agreement also limits transfers of Common Stock
and Class A Common Stock by certain  parties  thereto,  and provides for certain
tag-along,  drag-along and registration  rights. (The Stockholders  Agreement is
dated as of October 17, 1994. The original  signatories thereto are the Company;
the Stockholder,  Joseph A. Murphy;  Kelso Investment  Associates V, L.P.; Kelso
Equity Partners V, L.P.; as well as John F. Biagini, CEO of the Company and Hans
Lengers, President of U.S. Textile Corporation.)

                                       41
<PAGE>



ITEM 11.  EXECUTIVE COMPENSATION

      The following table sets forth the total compensation  earned by the Chief
Executive Officer and the four most highly compensated executive officers of the
Company  for the  fiscal  year ended  December  31,  1997,  as well as the total
compensation earned by such individuals for the two previous fiscal years.

SUMMARY COMPENSATION TABLE
--------------------------
                                                        Long-Term
                              Annual Compensation      Compensation
                              -------------------      ------------

                                                        Securities       All
                                                        Underlying      Other
Name                        Year    Salary   Bonus(b)   Options(c)  Compensation
----                        ----    ------   --------   ----------  ------------
John F. Biagini             1997   $372,745  $500,000         --     $ 7,119(a)
  Chairman of the Board,    1996    352,794   400,000     94,676       7,164(a)
  Chief Executive Officer   1995    340,622   250,000         --       7,182(a)
  and President

Hans Lengers                1997    423,754        --         --       2,230(a)
  President, U.S. Textile   1996    419,439        --     47,339       1,789(a)
  Corporation               1995    402,663        --         --       1,800(a)

Robert M. Henry             1997    261,146    53,700         --          --
  Senior Vice President,    1996    253,869    16,500     17,344          --
  Systems and Operations    1995     74,687        --         --          --

William J. Kelly            1997    232,551    40,000         --       7,119(a)
  Senior Vice President,    1996    222,842    30,000     17,344       7,164(a)
  International Operations  1995    210,652    24,250         --       7,182(a)

Arthur Hughes               1997    220,615    50,000         --       7,119(a)
  Vice President and        1996    159,587    50,000     21,322       7,164(a)
  Chief Financial Officer   1995    133,786    34,200         --       4,833(a)

----------------
(a) Amounts  represent  Company  contributions  to the 401(k)  Plan,  which is a
    defined contribution plan.
(b) Represents amounts awarded as cash/stock bonuses.
(c) Represents options granted to certain officers under the Company's
    Stock Option Plan.

Long-Term Compensation

Management Stock Purchase and Restricted Stock Award Agreements

      Prior to the closing of the Recapitalization,  Mr. Biagini and Mr. Lengers
entered into  Management  Stock Purchase and Restricted  Stock Award  Agreements
with the Company  (the  "Management  Stock  Agreements"),  pursuant to which Mr.
Biagini  was  granted  18,841  restricted  shares  of Common  Stock  and  68,120
restricted  shares of PIK  Preferred  Stock,  and Mr.  Lengers was granted 9,421
restricted  shares of Common Stock and 34,060 restricted shares of PIK Preferred
Stock in  addition  to the  shares  of  Common  Stock  and PIK  Preferred  Stock
purchased by Messrs.  Biagini and Lengers. The value of the restricted shares of
Common Stock and PIK Preferred  Stock granted to Mr.  Biagini and Mr. Lengers is
$1,000,000 and $500,000,  respectively.  The Common Stock was sold at $16.92 per
share and the PIK Preferred  Stock at $10.00 per share to the original  investor
group.  Compensation  with  respect  to the grant of shares  will be  recognized
ratably over the six-year  period for which  services must be performed in order
for Messrs.  Biagini and Lengers to receive the shares without  restriction.  No
dividends  will be paid  on any  restricted  stock.  Additionally,  in 1995  the
management group was offered limited opportunities to purchase stock at the same
price as  Messers.  Biagini and Lengers  which  resulted in net  proceeds to the
Company of $190,000.

                                       42
<PAGE>




                        FISCAL YEAR-END OPTION VALUES

                         Number of Securities
                        Underlying Unexercised         Value of Unexercised
                              Options at               In-the-Money Options
                         December 31, 1997 (#)       at December 31, 1997 ($)
                        ----------------------       ------------------------

Name                    Exercisable/Unexercisable    Exercisable/Unexercisable
----                    -------------------------    -------------------------
John F. Biagini                 0/94,676                  0/5,731,391
Hans Lengers                    0/47,339                  0/2,865,728
Arthur Hughes                   0/21,322                  0/1,146,265
William J. Kelly                0/17,344                  0/1,146,265
Robert Henry                    0/17,344                  0/1,146,265

      There is no public  market for the common stock of the Company.  The value
utilized  for the  In-the-Money  Options as of December  31, 1997 was based on a
valuation  completed by an independent  appraiser and reviewed by management for
reasonableness.

No options were granted or exercised during 1997.

Employment Agreements

      In August 1980, Hans Lengers entered into an Employment Agreement with the
Company's manufacturing  subsidiary,  U.S. Textile Corporation ("U.S. Textile"),
pursuant to which he is employed as  President  and Chief  Executive  Officer of
U.S.  Textile  and to manage  and  operate  its  business  and  affairs  for his
lifetime,  such agreement having been amended on September 12, 1994. Mr. Lengers
is not entitled to receive  compensation  upon the voluntary  termination of his
employment with U.S.  Textile.  In addition,  the Company may abrogate the terms
and conditions of the Employment  Agreement for good cause as defined by the law
of North  Carolina,  and in any event,  the Employment  Agreement will terminate
upon Mr. Lengers'  death,  adjudicated  incompetency,  bankruptcy or physical or
mental inability to perform his duties thereunder.  The agreement provides for a
base salary of $5,000 per month and additional  compensation  in the amount that
25.0% of the U.S. Textile net profits exceed such base  compensation,  such that
the sum of the base  compensation  and  this  additional  compensation  does not
exceed $250,000 per annum, adjusted each year for cost of living increases.  The
Consumer Price Index for Urban Wage Earners and clerical  workers is used as the
index to compute cost of living  increases.  The ceiling for Mr. Lengers' salary
in 1996 was $419,439. In addition, Mr. Lengers has agreed during the time of his
employment not to devote any of his time and efforts to the affairs of any other
business in direct competition with U.S. Textile.

      In September  1995,  Robert M. Henry entered into an Executive  Employment
Agreement  with the  Company  pursuant  to which he is  employed  as Senior Vice
President,  Systems and Operations of the Company.  The term of the agreement is
indefinite.  The agreement  provides for an initial base salary of $250,000.  In
addition,  Mr. Henry is entitled to receive a bonus the amount of which is based
on achieving  objectives  defined by the  President and the  performance  of the
Company  against  annual  corporate  targets.  Mr.  Henry  is also  entitled  to
participate in all standard employee benefits provided by the Company, to use an
automobile  provided by the Company,  and to participate in the Company's  Stock
Option Plan on terms and conditions enjoyed by other executive officers.

      The  aforementioned  employment  agreements  require  a  successor  to the
employer thereunder to assume the respective  obligations of such employer under
the applicable agreement.

Compensation  Committee Interlocks and Insider  Participations in Compensation
Decisions

      Mr. Biagini was the Chairman,  President and Chief Executive  Officer of
the Company during the last fiscal year.  Messrs.  Goldberg and Bynum are both
general partners of the general partner of KIAV,  general partners of KEPV and
are Managing Directors of Kelso.

                                       43
<PAGE>




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

      The  following  table sets  forth  information  as of March 15,  1998 with
respect  to  the  beneficial   ownership  of  shares  of  Common  Stock  of  all
stockholders  of the Company who are known by the  Company to  beneficially  own
more than 5% of any such class, by each director,  by each executive  officer of
the Company  named in the summary  compensation  table and by all  directors and
executive  officers of the Company as a group,  as determined in accordance with
Rule 13d-3(i) under the Securities Exchange Act of 1934, as amended.  The Common
Stock  set  forth in the  following  table  includes  voting  Common  Stock  and
non-voting Class A Common Stock. Except as indicated in the footnotes below, all
shares of Common Stock are voting Common Stock. Prior to the consummation of the
Recapitalization,  all of the issued and outstanding  shares of Common Stock and
Old Preferred Stock were owned by the Stockholder.

                                                    Number of     Percentage of
                                                    Shares of     Shares of
Name and Address of                                 Common        Common Stock
Beneficial Owner                                    Stock         Outstanding
-------------------                                 ---------     -------------

Kelso Investment Associates V, L.P. (a)(b)........   995,932         70.71%
Kelso Equity Partners V, L.P. (a)(b)..............   995,932         70.71%
Joseph S. Schuchert(b)............................       (d)            (d)
Frank T. Nickell(b)(c)............................       (d)            (d)
Thomas R. Wall, IV(b)(c)..........................       (d)            (d)
George E. Matelich(b).............................       (d)            (d)
Michael B. Goldberg(b)(c)(e)......................       (d)            (d)
David I. Wahrhaftig (b)(c)........................       (d)            (d)
Frank K. Bynum, Jr.(b)(c)(e)......................       (d)            (d)
Joseph A. Murphy(f)...............................   292,600         20.77%
John F. Biagini(f)(g)(h)..........................    23,681          1.68%
Hans Lengers(f)(g)(h).............................    11,841           .84%
William J. Kelly(f)(g)............................       188           .01%
Robert Henry(f)(g)................................       942           .07%
Arthur C. Hughes(f)(g)............................       471           .03%
All directors and executive officers of the
Company as a group(f)(g)..........................   332,170         23.58%
---------------
(a) As part of the 1994  Recapitalization,  KIAV and KEPV acquired  respectively
    960,634  and 40,026  shares of Common  Stock,  representing  68.6% and 0.9%,
    respectively,  of the shares of Common Stock outstanding.  Subsequent to the
    1994  Recapitalization,  KEPV  transferred  4,728  shares of Common Stock to
    certain  family  trusts of Messrs.  Wall and Goldberg for which Mr.  Nickell
    serves as trustee. The Kelso Affiliates,  due to their common control, could
    be deemed to beneficially own each of the other's shares,  but disclaim such
    beneficial ownership.
(b) The business  address for such  person(s)  is c/o Kelso & Company,  320 Park
    Avenue, 24th Floor, New York, New York 10022.
(c) Excludes  4,728  shares of Common  Stock owned by certain  family  trusts of
    Messrs.  Wall and Goldberg,  which may be deemed to be beneficially owned by
    each of  Messrs.  Wall and  Goldberg,  but each  disclaims  such  beneficial
    ownership.  Mr. Nickell serves as trustee for these family trusts of Messrs.
    Wall and Goldberg, and as such these shares may be deemed to be beneficially
    owned by Mr. Nickell, but Mr. Nickell disclaims such beneficial ownership.
(d) Messrs. Schuchert,  Nickell, Wall, Matelich, Goldberg,  Wahrhaftig and Bynum
    may be deemed to share  beneficial  ownership  of shares of Common Stock and
    PIK  Preferred  Stock  owned of record by KIAV and KEPV,  by virtue of their
    status as  general  partners  of the  general  partner  of KIAV and  general
    partners of KEPV. Messrs.  Schuchert,  Nickell,  Wall,  Matelich , Goldberg,
    Wahrhaftig  and Bynum  share  investment  and voting  power with  respect to
    securities owned by the KIAV and KEPV.  Messrs.  Schuchert,  Nickell,  Wall,
    Matelich,  Goldberg,  Wahrhaftig and Bynum disclaim beneficial  ownership of
    shares of Common Stock and PIK  Preferred  Stock owned of record by KIAV and
    KEPV.
(e) Mr.  Goldberg and Mr. Bynum are  directors of the Company.
(f) The business address of such person(s) is Hosiery Corporation of America,
    Inc., 3369 Progress Drive, Bensalem, Pennsylvania  19020.
(g) Each of such persons may hold options granted under the option plan.
    Shares of Common  Stock  subject to such  options are not  reflected  in the
    table.
(h) In addition,  prior to the closing of the Recapitalization,  Messrs. Biagini
    and Lengers  acquired in the aggregate  approximately  3.0% of the shares of
    PIK Preferred  Stock issued in the  Recapitalization.  The amounts of Common
    Stock beneficially owned by Messrs.  Biagini and Lengers as reflected in the
    above table and PIK Preferred Stock acquired by Messrs.  Biagini and Lengers
    as described in the preceding  sentence  include  grants made by the Company
    prior to the  consummation of the  Recapitalization  to Messrs.  Biagini and
    Lengers of an aggregate of 28,262  shares of Common Stock and  approximately
    2.7% of the shares of PIK Preferred  Stock,  in each case subject to certain
    restrictions.

                                       44
<PAGE>



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Set forth  below is a  summary  of  certain  agreements  and  arrangements
entered  into  by the  Company  and  related  parties  in  connection  with  the
Recapitalization.

Investor Relationships

      Kelso affiliates  beneficially own 70.7% of the shares of common equity of
the Company as described under "Security  Ownership of Certain Beneficial Owners
and  Management".  The Company has agreed to indemnify  Kelso and its affiliates
against  certain  claims,  losses,  damages,  liabilities and expenses which may
arise in connection with the transactions  contemplated by the  Recapitalization
Agreement.  The  Company  has also agreed to pay Kelso an annual fee of $262,500
each year for financial  advisory services and to reimburse it for out-of-pocket
expenses incurred, and to indemnify it against certain claims, losses,  damages,
liabilities  and expenses  which may arise,  in connection  with  rendering such
services.  Kelso's  out-of-pocket  expenses  in  connection  with  its  services
rendered   during   1997  and  1996  were   approximately   $8,000  and  $5,000,
respectively.

      Certain  Kelso  affiliates  are parties to a  stockholders  agreement.  In
addition,  certain affiliates of Kelso, the Company and certain investors in the
Company's  stock who are  designees  of Kelso  entered  into  Letter  Agreements
(collectively,  the "Letter  Agreements"),  each of which,  among other  things,
provides for certain  restrictions  on the transfer of stock by such  investors.
The Company has a stockholders agreement which provides, among other things, for
certain restrictions on the transfer of the Company's stock.

The Recapitalization and Related Transactions

      The   Recapitalization   Agreement  contains  customary   representations,
warranties,  indemnities  and  conditions.  In  addition,  the  Recapitalization
Agreement  provides that the Stockholder,  on the one hand, and Company,  on the
other,  will, subject to certain  limitations set forth therein,  indemnify each
other and their respective stockholders,  subsidiaries, affiliates, officers and
directors and their  respective  successors  and assigns,  from,  against and in
respect of any damages, losses, deficiencies,  liabilities,  costs and expenses,
incurred as a result of any (i) misrepresentations or breaches of warranties set
forth in the Recapitalization Agreement or in any certificate delivered pursuant
thereto and (ii) non-fulfillment of certain agreements or covenants set forth in
the Recapitalization Agreement. The representations and warranties and covenants
and  agreements to which such  indemnification  relates are standard and include
representations   and   warranties   with   respect  to   ownership   of  stock,
capitalization,  financial statements,  absence of defaults under agreements and
violations  of law  and  similar  matters.  In  addition,  the  Recapitalization
Agreement  provides for similar  indemnification by the Stockholder with respect
to certain other matters, including, among other things, claims by third parties
resulting  from or arising  out of certain  activities  in  connection  with the
Stockholder's  auction and sale of the Company and certain liabilities  incurred
as a result of the operations (or relating to the assets) which were transferred
to the Stockholder prior to the Recapitalization (as described below) or arising
out of such transfer. Under the Recapitalization Agreement, such indemnification
is subject to certain baskets and deductibles and, in general,  has an aggregate
limit of $15 million.

      The  Recapitalization  Agreement also provided for the Stockholder and the
Company to enter into an Escrow Agreement pursuant to which, among other things,
$10  million  of  the  aggregate  purchase  price  paid  by the  Company  to the
Stockholder  pursuant to the Repurchase is held in escrow to provide a source of
payment to  satisfy  the  Stockholder's  indemnification  obligations  under the
Recapitalization  Agreement.  In addition,  the  Stockholder  has pledged to the
Company  the shares of Common  Stock  which were not  purchased  by the  Company
pursuant to the Repurchase and which the Stockholder  continues to own following
the consummation of the  Recapitalization  (such shares represent  approximately
21% of the Company's Common Stock outstanding  following the consummation of the
Recapitalization).

                                       45
<PAGE>




      In connection with the  Recapitalization,  the Company  transferred to the
Stockholder  certain  assets  consisting  primarily  of the  stock of all of its
non-hosiery related subsidiaries, some of which are inactive businesses, certain
receivables,  equipment leased to one of the non-hosiery  subsidiaries,  certain
life insurance  policies,  four owned or leased  automobiles  and three owned or
leased personal  computers.  None of the assets  transferred to the Stockholder,
except the life insurance policies and loans thereon, automobiles and computers,
were used in the Company's hosiery business.

                                       46
<PAGE>



                                   PART IV

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

A. The following documents are filed as a part of this Report:

   (1) and (2)  Financial  Statements  and Financial  Statement  Schedule--see
   Index to Financial Statements and Financial Statement Schedule appearing on
   Page 15.

   (3)  Exhibits, including those incorporated  by reference. The following is a
     list of exhibits filed as part of this Annual Report on Form 10-K. Where so
     indicated  by  footnote,   exhibits   which  were   previously   filed  are
     incorporated  by reference.  For exhibits  incorporated  by reference,  the
     location of the exhibit in the previous filing is indicated.

             EXHIBITS                    INCORPORATION BY REFERENCE
             --------                    --------------------------

        3.1  Restated Certificate of     Exhibit 3.1 to Registration
             Incorporation of the        Statement No. 33-87392 on Form S-1
             Company                     dated May 15, 1995

        3.2  Certificate of              Exhibit  3.2  to   Registration
             Designation, Powers,        Statement No. 33-87392 on
             Preferences and Rights of   Form S-1 Dated May 15, 1995
             Pay-in-Kind
             Preferred Stock

        3.3  Amendment to the Restated   Exhibit  3.3  to Registration
             Certificate of              Statement No. 33-87392 on
             Incorporation of            Form S-1 dated May 15, 1995
             the Company

        3.4  Amendment to the Restated   Exhibit  3.1 to Report 10-Q for
             Certificate of              the quarter ended
             Incorporation of            September 30, 1995
             the Company

        3.5  By Laws of the Company      Exhibit  3.4  to   Registration
                                         Statement No. 33-87392 on Form S-1
                                         dated May 15, 1995

        4.1  Indenture dated as of       Exhibit  4.1  to   Registration
             October 17, 1994 between    Statement No. 33-87392
             the  Company and United     on Form S-1 dated May 15, 1995
             States Trust Company of
             New York, as Trustee

        4.2  Credit Agreement dated      Exhibit 4.1 to Registration Statement
             as of October 17, 1994,     No. 33-87392 on Form S-1 dated
             among the Company;          May 15, 1995
             National Westminster Bank
             PLC, as Co-Agent; Nations
             Bank of North Carolina,
             N.A., as Co-Agent;
             Bankers Trust Company, as
             Agent; and the financial
             institutions listed on
             the signature pages
             thereto

        *4.3 Amended and Restated Credit
             Agreement   dated   as   of
             November 20, 1997 among the
             Company;  various lending
             institutions and Bankers
             Trust Company, as Agent

                                       47
<PAGE>




             EXHIBITS                    INCORPORATION BY REFERENCE
             --------                    --------------------------

      10.1   Executive Employment        Exhibit  10.2  to  Registration
             Agreement between           Statement No. 33-87392 on Form
             Hosiery Corporation of      S-1 dated May 15, 1995
             America, Inc. and Arthur
             C. Hughes, dated as of
             August 3, 1992

      10.2   Employment Agreement        Exhibit  10.3  to   Registration
             between U.S. Textile        Statement No. 33-87392 on Form
             Corporation and Hans        S-1 dated May 15, 1995
             Lengers, dated as of
             August 29, 1980, and an
             Amendment thereto among
             U.S. Textile Corporation.,
             the Company and Hans
             Lengers, dated as of
             September 12, 1994

      10.3   Executive Employment        Exhibit 10.4 to Registration
             Agreement between the       Statement No. 33-87392 on Form
             Company and Robert J.       S-1 dated May 15, 1995
             Mooney, dated as of
             September 16, 1993

      10.4   Executive Employment        Exhibit 10.4 to Form 10-K dated
             Agreement between the       March 26, 1996
             Company and Robert M.
             Henry, dated as of
             August 7, 1995

      10.5   Management Stock            Exhibit 10.5 to Form 10-K dated
             Subscription                March 26, 1996
             Agreement dated
             August 14, 1995

      10.6   Stock Option Plan           Exhibit 10.3 to Form 10-Q dated
                                         August 12, 1996

      10.7   Executive Employment        Exhibit 10.1 to Form 10-Q dated
             Agreement between the       November 12, 1996
             Company and Suzanne M.
             Roper, dated as of July
             30, 1996

      *21.1  Subsidiaries of the
             Registrant

      *27.0  Financial Data Schedule



      *  Filed herewith.


B.    Reports on Form 8-K filed during the quarter ended December 31, 1997:

      None.





                                       48
<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  on the 24th day of
March, 1998.

                                    HOSIERY CORPORATION OF AMERICA, INC.

                                          /s/ ARTHUR C. HUGHES
                                    BY:  ___________________________
                                          Arthur C. Hughes
                                          Vice President and Chief
                                           Financial Officer

      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 the 24th day of March, 1998.

Signatures                          Title
----------                          -----

/s/ JOHN F. BIAGINI
______________________________      Chairman of the Board, Chief Executive
John F. Biagini                     Officer and President (Principal Executive
                                    Officer)



______________________________      President, U.S. Textile Corporation and
Hans Lengers                        Director



/s/ ARTHUR C. HUGHES
______________________________      Vice President and Chief Financial Officer
Arthur C. Hughes                    (Principal Financial and Accounting Officer)



/s/ FRANK K. BYNUM, JR.
______________________________      Director
Frank K. Bynum, Jr.


/s/ MICHAEL B. GOLDBERG
______________________________      Director
Michael B. Goldberg



______________________________      Director
Joseph A. Murphy



By:  __________________________
        (Name)
         Attorney-in-Fact for each of the
         persons indicated

                                       49
<PAGE>



INDEPENDENT AUDITORS' REPORT


To the Board of Directors of
  Hosiery Corporation of America, Inc.
Bensalem, Pennsylvania

We have audited the consolidated  financial statements of Hosiery Corporation of
America,  Inc., and its subsidiaries (the "Company") as of December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997, and
have  issued our report  thereon  dated  March 6, 1998;  such report is included
elsewhere in this Form 10-K. Our audits also included the consolidated financial
statement  schedule  of the  Company  referred  to in Item 8. This  consolidated
financial statement schedule is the responsibility of the Company's  management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such consolidated  financial statement schedule,  when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.





Deloitte & Touche LLP
Philadelphia, Pennsylvania

March 6, 1998


                                      S-1
<PAGE>



SCHEDULE I

<TABLE>
                      HOSIERY CORPORATION OF AMERICA, INC.
                        VALUATION AND QUALIFYING ACCOUNTS
                             (Dollars in thousands)

<CAPTION>

                                                                      Balance at    Charged to    Amounts   Balance at
                                                                     Beginning of   Costs and     Written     End of
                                                                        Period      Expenses        Off       Period
                                                                     ------------   ----------    -------   ----------

<S>                                                                  <C>            <C>           <C>        <C>
YEAR ENDED DECEMBER 31, 1997
     Allowance for Uncollectible Accounts ........................   $     1,540   $    10,791   $ 10,883    $1,448
                                                                     ===========   ===========   ========    ======


YEAR ENDED DECEMBER 31, 1996
     Allowance for Uncollectible Accounts.........................   $     1,263   $    10,057   $  9,780    $1,540
                                                                     ===========   ===========   ========    ======


YEAR ENDED DECEMBER 31, 1995
     Allowance for Uncollectible Accounts.........................   $       923   $     7,788   $  7,448    $1,263
                                                                     ===========   ===========   ========    ======
</TABLE>





                                      S-2
<PAGE>



                                EXHIBIT INDEX


             EXHIBITS
             --------


         4.3 Amended and Restated Credit
             Agreement dated as of November 20,
             1997 among the Company; various
             lending institutions and Bankers
             Trust Company, as Agent


        21.1 Subsidiaries of the Registrant


        27.0 Financial Data Schedule