UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K
(Mark one)

( X ) ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1997

                                       OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period for __________________ to

________________

Commission file number      0-21340

                              MARTIN COLOR-FI, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


          South Carolina                                          57-0879569
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                            Identification Number)

         306 Main Street
       Edgefield, South Carolina                                 29824
(Address of principal executive                               (Zip Code)
 offices)

Registrant's telephone number, including area code:  (803) 637-7000

Securities registered pursuant to Section 12(b) of the Act:  None


Securities registered pursuant to Section 12(g) of the Act:

         Common Stock
         (Title of Class)

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

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

     Aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant, computed on the basis of $4.375 per share (the closing price of such
stock on February 28, 1998 on The Nasdaq Stock Market): $12,537,718 For purposes
of the foregoing  calculation only, all directors and executive  officers of the
registrant have been deemed affiliates.

     The number of shares of the  registrant's  Common Stock  outstanding  as of
March 30, 1998 was 6,730,284.


                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of  Registrant's  Proxy  Statement for the 1998 Annual  Meeting of
Stockholders  (the  "Proxy  Statement")(to  be  filed  with the  Securities  and
Exchange  Commission on or before April 30, 1998) are  incorporated by reference
in Part III hereof.









Exhibit Index on sequentially numbered page 44


<PAGE>



                              MARTIN COLOR-FI, INC.
                              Cross Reference Sheet


                                                                        Page No.
Part I -

         Item 1.  Business.....................................................3
         Item 2.  Properties...................................................7
         Item 3.  Legal Proceedings............................................8
         Item 4.  Submission of Matters to a Vote of Security Holders..........8

Part II -

         Item 5.  Market For Registrant's Common Equity and Related
                  Stockholder Matters..........................................9
         Item 6.  Selected Financial Data......................................9
         Item 7.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations.........................11
         Item 8.  Financial Statements and Supplementary Data.................16
         Item 9.  Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure.........................43

Part III -

         Item 10. Directors and Executive Officers of the Registrant..........43
         Item 11. Executive Compensation.............................  .......43
         Item 12. Security Ownership of Certain Beneficial
                  Owners and Management.......................................43
         Item 13. Certain Relationships and Related Transactions..............43

Part IV -

         Item 14. Exhibits, Financial Statement Schedules and Reports
                  on Form 8-K.................... ............................44

Signatures....................................................................49

Exhibit Index.................................................................44


2

<PAGE>

                                     PART I

     This Annual  Report on Form 10-K  contains  forward-looking  statements  as
defined by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements  should be read with the cautionary  statements and important factors
included in this Form 10-K. (See Item 7. - Management's  Discussion and Analysis
of   Financial   Condition   and   Results  of   Operations,   Safe  Harbor  for
Forward-Looking   Statements.)  Forward-looking  statements  include  statements
concerning plans, objectives,  goals,  strategies,  future events or performance
and underlying  assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified,  without
limitation,  by the  use  of the  word  "anticipates,"  "estimates,"  "expects,"
"intends,"  "plans,"  "predicts,"  "projects,"  and  similar  expressions.   The
Company's expectations,  beliefs and projections are expressed in good faith and
are  believed  by the  Company to have a  reasonable  basis,  including  without
limitation,  management's  examination  of  historical  operating  trends,  date
contained in the Company's  records and other data available from third parties,
but  there  can be no  assurance  that  management's  expectations,  beliefs  or
projections will result or be achieved or accomplished.


Item 1. Business


     General

     Martin Color-Fi, Inc. is a South Carolina corporation incorporated in 1988.
The  principal  business of Martin  Color-Fi,  Inc.  (which,  together  with its
subsidiaries,  is herein  referred to as the  "Company")  is the  production  of
polyester  fiber  and  pellets  from  recycled  plastic   materials   (primarily
polyethylene terephthalate, or "PET"), such as beverage bottles, polyester fiber
waste,  film waste and off-class  packaging  resin. The Company uses these waste
materials  to produce  polyester  fibers of  varying  sizes (or  "deniers")  and
pelletized plastics for a wide range of markets. Examples of end use markets for
the Company's fiber products include automotive fabrics,  carpet,  apparel, home
furnishings,  industrial materials and construction  reinforcement  materials. A
significant  portion of the Company's  pellet  production is used internally for
manufacturing  fiber,  and the  Company  sells  the  balance  into the  plastics
industry.


     Products and Markets

     The  following  table  presents the combined net sales (in  thousands)  and
percentage  of net sales by business  of the Company for the periods  indicated.
For purposes of this data, intercompany transactions have been eliminated.
<TABLE>
<CAPTION>

                                                            1997                         1996                         1995
                                                    ---------------------------  ---------------------         ---------------------
                                                    Net             % of           Net           % of            Net          % of
                                                    Sales           Total         Sales          Total          Sales          Total
                                                    -----           -----         -----          -----          -----          -----

<S>                                                 <C>            <C>           <C>            <C>            <C>            <C>
Fibers and Recycling Division ...............       $ 62,648        52.0%        $ 69,873        61.1%         $ 82,101        70.2%
Carpet Division .............................         40,348        33.5%          30,871        27.0%           22,262        19.0%
Yarn Division ...............................         11,582         9.6%           8,959         7.8%            8,412         7.2%
Pigments and Additives ......................          5,924         4.9%           4,713         4.1%            4,195         3.6%
                                                    --------        -----        --------        -----         --------        -----
                                                    $120,502         100%        $114,416         100%         $116,970         100%
                                                    ========        =====        ========        =====         ========        =====
</TABLE>



     Fibers and Recycling Division

     During 1997,  the  principal  products of the Company were fibers which are
marketed to a broad spectrum

                                        3

<PAGE>



of fiber  related  markets.  The Company  focuses its  marketing  efforts on the
development  of market  niches  where its  ability to  manufacture  products  to
customer specifications regarding color, cut length, denier, texture, finish and
lot  size  are  its  key  competitive  advantages.  The  Company  currently  has
production  capacity of  approximately  148 million pounds of fiber annually and
approximately 125 million pounds of pellets  annually.  In the fourth quarter of
1995,  the  Company  refocused  on the  core  business  of  this  division,  the
production and sale of fibers,  and began  de-emphasizing  the external plastics
sales and trading and contract processing areas of this division.

     Fibers

     The  Company  produces  polyester  fibers  in  deniers  from 1.5 to 1000 in
various  cut  lengths  for use in numerous  end  markets,  including  automotive
fabrics,   floor   coverings,   home   furnishings,   industrial,   construction
reinforcement  and apparel.  The Company also produces a small quantity of nylon
and  polypropylene  fiber.  The  following  chart  sets  forth  the  approximate
percentages  of the Company's  total  shipments of fiber products in pounds with
respect to its primary  markets for the past eight quarters and  illustrates the
Company's market diversification and ability to shift production as necessary to
quickly respond to changing market conditions and demands.

<TABLE>
<CAPTION>

                                                     Percentage of Pounds of Fiber Shipped
                                    --------------------------------------------------------------------
                                    1st     2nd      3rd      4th      1st      2nd     3rd      4th
                                    Quarter Quarter  Quarter  Quarter  Quarter  Quarter Quarter  Quarter
End Markets                         1997    1997     1997     1997     1996     1996    1996     1996
--------------------------------------------------------------------------------------------------------
<S>                                 <C>     <C>      <C>      <C>      <C>      <C>     <C>      <C>
Automotive Fabrics                   21%     23%      22%      25%      20%      20%     19%      25%
Floor Coverings                      10%     10%       5%       6%       7%       8%      7%       5%
Home Furnishings & Domestic:
   Fiberfill (slick)                 17%     12%      18%      12%      19%      15%     14%      16%
   Fiberfill (high loft)             19%     20%      14%      15%      17%      17%     18%      17%
   Other                              4%      8%      10%      12%      11%      12%      9%       8%
Industrial                           24%     21%      24%      22%      22%      20%     28%      23%
Construction Reinforcement            2%      4%       6%       5%       3%       5%      4%       4%
Apparel                               3%      2%       1%       3%       1%       3%      1%       2%
                                    -----   -----    -----    -----    -----    -----   -----    -----
                                    100%    100%     100%     100%     100%     100%    100%     100%
</TABLE>

     Plastics

     The Company produces pellets for internal use and for sale to manufacturers
of plastic  products such as non-food  containers,  strapping,  oil  containers,
plastic trays,  laundry powder scoops,  paint roller trays and for sale to other
fiber  producers.  A  significant  portion of its pellet  production is utilized
internally as a raw material for the Company's fiber  manufacturing.  During the
latter  part of 1995,  the  Company  exited  the  market  for sale of pellets to
customers  because of unfavorable  market  conditions  including higher cost and
reduced  availability  of raw  materials,  and the resulting  lower gross profit
margins. The Company is continuing to evaluate this area of the business and has
not reached a final  decision  about  whether,  or the extent to which,  it will
continue to operate in this area of the business.  The revenue and net income in
1997 related to this area was not material.  Operations do, however, continue on
a very limited basis.


     Trading and Contract Processing

     The Company  engages in the trading of synthetic  fibers and plastics.  The
Company utilizes the

                                        4

<PAGE>



contacts  developed  through  marketing  its  products  and  purchasing  its raw
materials as an  introduction  to sources and customers for products it does not
produce.  These products are  distributed  through the Company's sales channels.
During the latter part of 1995, the Company  significantly  reduced this area of
the business due to lower profit margins and now is limited to the sale of waste
by-products from its fiber operation. The Company is continuing to evaluate this
area of the business and has not reached a final decision about whether,  or the
extent to which,  it will continue to operate in this area of the business.  The
revenue and net income in 1997 related to this area was not material.

     The  Company  also  provides  processing  services  on a contract  basis to
selected  customers to maximize  utilization  of its  production  capacity.  The
Company receives raw materials from these customers on a consignment  basis and,
for a fee,  converts  them  to  finished  products  which  meet  the  customer's
specifications.  During  1995,  the  Company  exited  these  markets  due to the
expiration of all existing contracts. The Company is continuing to evaluate this
area of the business and has not reached a final decision about whether,  or the
extent to which,  it will  continue  to  operate  in this area of the  business.
Operations do,  however,  continue on a very limited basis.  The revenue and net
income in 1997 related to this area was not material.

     Carpet Division

     Through its wholly owned subsidiary, Buchanan Industries, Inc., the Company
manufactures  specialty  carpets  under  the  Forum  Contract  Carpet  name  for
hospitality,  restaurant,  health care and corporate  markets.  Under the Condor
name the Company manufactures carpets for the manufactured housing, recreational
vehicle and  automotive  industries.  The  Division  produces  approximately  10
million square yards of carpet annually.

     Yarn Division

         Through its wholly owned subsidiary, Palmetto Spinning Corporation, the
Company  processes spun yarns,  continuous  filament twisted and heat set yarns,
and space dyed yarns for use in a variety of  applications  such as residential,
commercial and automotive carpets,  craft, rug, bath rug and industrial markets.
The Yarn  Division  produces  both single and plied heat set yarns.  The Company
processes nylon, polyester, polypropylene, olefin acrylic and rayon fibers, both
natural and predyed,  in a wide variety of carpet deniers.  The Division has the
production  capacity  to produce  approximately  13  million  pounds of spun and
filament yarns annually.

     Pigments and Additives Division

     Through its wholly owned subsidiary,  Custom  Colorants,  Inc., the Company
produces  pigments and additives  used in the  manufacture  of fiber and plastic
pellets.  The Company  markets these products to fiber  extrusion  companies for
various  applications  and  also  utilizes  these  products  internally  for its
production of fiber and pellets.

     Marketing, Customer Dependency and Seasonality

         The Company markets its products  through a direct sales force which is
assigned  to  the  areas  of  either  textile  fibers,  plastics,   construction
reinforcement,  carpet sales,  pigments and additives or yarn.  The Company also
utilizes sales agents in  international  markets for fiber and pigment sales and
certain domestic markets for carpet sales. The sales representative in each area
of sales is then assigned a geographic area of responsibility. The Company has a
diverse customer base and does not experience seasonality in sales volume.



                                        5

<PAGE>



     Raw Materials

     Fibers and Recycling Division

     The Company uses plastic  waste  products such as  post-consumer  polyester
beverage bottles, post-industrial fiber waste, film producer waste and off-class
packaging  resins as its primary raw  materials to  manufacture  textile  staple
fiber and plastic  pellets.  In recent years, the cost of plastic waste products
used  by the  Company  has  been  less  than  the  cost of  using  petrochemical
feedstocks. The Company's raw material costs compare favorably to comparable raw
material costs of producers that use virgin petrochemical feedstocks,  but there
can be no assurance  that the cost of the Company's  raw  materials  will remain
lower than the cost of petrochemical  feedstocks in the future. Beginning in the
latter  part of 1995 and  through  the first  quarter of 1998,  the  Company has
focused on post-  industrial  fiber waste,  film  producer  waste and  off-class
packaging  resins as its  primary  raw  material  sources  and has  reduced  its
reliance on post-consumer  PET beverage bottles as a raw material source because
industrial fiber waste,  film producer waste and off-class  packaging resins are
currently less expensive than  post-consumer PET beverage  bottles.  The Company
changes the mix of raw materials used based on a number of factors which include
cost, availability and end-products to be produced.

     The Company generally maintains raw material  inventories of at least 35 to
52 million pounds,  which is adequate for approximately  three to four months of
production.  Beginning in the latter part of 1995 and through the first  quarter
of 1998,  the supply of raw  material  returned to normal  levels from the lower
levels experienced during a significant portion of 1995.

     Other Divisions

     The Company's Yarn Division primarily uses polyester staple fiber and nylon
fiber supplied internally from the Fibers and Recycling  Division.  Other fibers
used are supplied by third party suppliers.  The Carpet Division  primarily uses
yarn from the Yarn  Division  and from third party  suppliers.  The Pigments and
Additives  Division  purchases raw material from third party suppliers also. The
Company has not experienced and does not foresee a problem with  availability of
raw material from third party suppliers.

     Competition

     The Company faces  competition  both from other recyclers of waste plastics
as well as major producers of synthetic  fibers from  petrochemical  feedstocks.
Four virgin domestic polyester fiber producers manufacture  approximately ninety
(90%) percent of the industry  output.  Many of the Company's  competitors  have
greater financial resources than the Company.

     The demand for  synthetic  fibers and related  products  tends to vary with
general  economic  conditions  in the  United  States  and the level of  foreign
imports.  An increase in foreign  imports  can result in  generally  lower sales
prices and more intense  competition  among major fiber producers,  particularly
for commodity products. For example, the Company's average sales price per pound
for all of its fiber products  ranged from a low of $0.6301 in 1991 to a high of
$0.826 in 1995.

     The  Company  competes on the basis of price,  quality,  and its ability to
produce  custom  orders of  solution-dyed  fibers on  relatively  short  notice.
Although  the  Company has  increased  its sales of higher  value  solution-dyed
fibers, it also has increased its overall production capacity.  As a result, the
Company  continues to sell a majority of its  production as commodity  products,
such  as  dry  or  slippery  fiberfill,  which  are  subject  to  greater  price
competition.

     The yarn,  carpet  and  pigment  and  additive  markets  have  historically
displayed  price and volume  cyclicality.  The markets are subject to changes in
consumer preferences and spending and retail sales patterns, which are driven by
general economic  conditions.  Consequently,  a downturn in the domestic economy
could adversely affect the

                                        6

<PAGE>



Company's business.

     Research and Development

     The  Company  does  not  have  significant  expenditures  in  research  and
development activities.

     Foreign Activities

     The Company  exports to  international  markets,  primarily  Europe,  South
America and Canada,  through its Fibers and Recycling  Division and Pigments and
Additives  Division.  See Note 11 to the Consolidated  Financial  Statements for
additional information relating to the Company's foreign activities.

     Trademarks and Patents

     Although the Company has several trademarks and patents, none is considered
by the Company to be material to the Company's business at the present time.

     Employees

     As of December 31, 1997, the Company employed  approximately  1012 persons,
of whom approximately 217 employees were in management, sales and administration
and the balance of whom were involved in the manufacturing  process. None of the
Company's  employees  are  covered by a  collective  bargaining  agreement.  The
Company believes it has a good relationship with its employees.

     Environmental Compliance

     Except to the extent  described  below, the Company believes its facilities
are in  compliance  in all  material  respects  with all  laws  and  regulations
pertaining to  environmental  protection.  The nature of the  Company's  present
operations  is such  that it does  not  expect  expenditures  for  environmental
compliance to be material.

     In December,  1993,  the  Company's  wholly owned  subsidiary,  Star Fibers
Corp., acquired a plant site in Edgefield, South Carolina (the "Star Facility"),
under which certain  groundwater  contamination  exists.  All evidence indicates
that the contamination  resulted from contamination on an adjacent property.  In
connection  with  the  acquisition  of  the  Star  Facility,   the  Company  was
indemnified from liability with respect to the  pre-existing  contamination by a
party believed by the Company to be financially  responsible,  and believes that
it will have no material  liability as a result of any contamination at the Star
Facility.


Item 2.  Properties

     The location and general  description of the principal  properties owned or
leased  (the  majority  of which are  leased  on a month to month  basis) by the
Company as of December 31, 1997 are set forth in the table below:
<TABLE>
<CAPTION>

Location                   Principal Function                 Square Footage            Ownership
--------                   ------------------                 --------------            ---------

<S>                        <C>                                  <C>                     <C>
Edgefield, South Carolina  Corporate/Sales                        7,500                 Leased

Edgefield, South Carolina  Fiber Manufacturing, Recycling       200,000                 Owned
                             Operations and Warehousing

Edgefield, South Carolina  Warehousing                           70,400                 Leased

                                        7

<PAGE>




Trenton, South Carolina    Fiber Manufacturing, Recycling       407,350                 Owned
                              Operations and Warehousing

Sumter, South Carolina     Fiber Manufacturing, Recycling       405,000                 Owned
                              Operations and Warehousing

Sumter, South Carolina     Warehousing                          248,700                 Leased

Dalton, Georgia            Pigments and Additives                35,000                 Leased
                              Manufacturing and Warehousing

Pensacola, Florida         Pigments and Additives                 9,500                 Leased
                              Manufacturing and Warehousing

Elkhart, Indiana           Carpet Warehousing and
                              Distribution Center                32,000                 Owned

Dalton, Georgia            Carpet Manufacturing and
                                       Warehousing              187,000                 Owned

Dalton, Georgia            Carpet Warehousing                   103,000                 Leased

Laurens, South Carolina    Yarn Manufacturing and
                              Warehousing                       123,670                 Owned
</TABLE>

     The  Company  considers  the  facilities  suitable  and  adequate  for  its
operations.
----------------------------------


Item 3.  Legal Proceedings


     In March 1995,  litigation  was commenced by a  shareholder  of the Company
against the Company and James F. Martin, Chairman and Chief Executive Officer of
the  Company,  in the United  States  District  Court for the  District of South
Carolina,  Greenville Division. In the litigation,  the plaintiff alleged, among
other things,  that the Company  failed to prepare its  financial  statements in
accordance with generally  accepted  accounting  principles and issued false and
misleading  business and financial  information  to the  investing  public which
misstated  the  Company's  financial  condition,   earnings  and  prospects,  in
violation of the Federal securities laws and common law. The plaintiff sought to
have  the  action   certified  as  a  class  action  on  behalf  of  non-insider
shareholders  who  purchased the common stock of the Company from April 21, 1993
through February 28, 1995. A definitive written settlement agreement was reached
with the class  plaintiff  under which the  Company's  settlement  liability was
fixed at $2,000,000.  By order dated March 12, 1997, the United States  District
Court certified the class in the matter, appointed the class plaintiffs' counsel
as settlement administrator and gave preliminary approval to the settlement. The
settlement  was  funded by the  Company on March 20,  1997.  In  exchange  for a
written  release,  the Company's  insurance  carrier  provided  $850,000 of this
amount.  Final  settlement  of the matter was approved by the Court on September
10, 1997.


Item 4.  Submission of Matters to a Vote of Security Holders

     None.

                                        8

<PAGE>




                                     PART II


Item 5.  Market for Registrant's Common Equity and Related
         Stockholder Matters


     The Company's  Common Stock is traded on The Nasdaq Stock Market  (National
Market) under the symbol MRCF.  The following  table sets forth high and low bid
information  for the  Common  Stock on The  Nasdaq  Stock  Market for the fiscal
periods indicated.  Such over-the counter market quotations reflect  interdealer
prices, without retail mark-up,  mark-down or commission and may not necessarily
represent actual transactions.

     No dividends have been declared nor does the Company  anticipate  declaring
any dividends in the near future.  Certain  covenants  under the Company's  loan
agreements  restrict its ability to pay  dividends.  See Note 6 to the Company's
Consolidated Financial Statements.

     As of March 30, 1998, the Company had approximately 1400 stockholders based
on the number of holders of record and an estimate  of the number of  individual
participants represented by security position listings.


                                                         1997
                                                ----------------------
                                                High              Low
                                                ----------------------

First Quarter                                   8 3/4             6 5/8
Second Quarter                                  8 1/4             7 1/8
Third Quarter                                   8 1/2             7 1/4
Fourth Quarter                                  8 5/8             4 1/2

For the Year                                    8 3/4             4 1/2


                                                         1996
                                                ----------------------
                                                High              Low
                                                ----------------------

First Quarter                                   5 1/4             3 1/4
Second Quarter                                  6                 4 3/4
Third Quarter                                   6 3/8             4 5/8
Fourth Quarter                                  8 1/4             5 3/4

For the Year                                    8 1/4             3 1/4



Item 6.  Selected Financial Data

     The following table sets forth selected income  statement,  pro forma,  and
balance  sheet data of the Company.  The selected  income  statement and balance
sheet data for each of the five years in the period ended

                                        9
<PAGE>

December 31, 1997 are derived from the financial  statements of the Company. The
audited  financial  statements for the three most recent years appear  elsewhere
herein.  The pro forma  information  is unaudited and reflects the effect of the
income tax provision  that would have been made for year ended December 31, 1993
if the Company's  income had been taxable to the Company rather than directly to
its  shareholders  during a portion of the year. The data presented below should
be read in  conjunction  with the audited  financial  statements,  including the
related notes thereto, included elsewhere in this report.

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                --------------------------------------------------------------------
                                                                    1997         1996          1995          1994          1993
                                                                ---------     ---------     ---------     ---------      --------
                                                                                   (In thousands, except per share data)
Statements of Income Data:
<S>                                                             <C>           <C>           <C>           <C>            <C>
Net sales ...........................................           $ 120,502     $ 114,416     $ 116,970     $ 102,493      $ 73,971
   Cost of sales ....................................             100,590        91,453        95,265        89,229        63,051
                                                                ---------     ---------     ---------     ---------      --------

Gross profit ........................................              19,912        22,963        21,705        13,264        10,920
   Selling, general and administrative
     expenses .......................................              14,733        12,026        12,611         9,624         5,153
                                                                ---------     ---------     ---------     ---------      --------

Operating income ....................................               5,179        10,937         9,094         3,640         5,767
   Interest expense, net ............................              (4,334)       (4,335)       (4,658)       (3,366)       (2,055)
   Other income .....................................                 464           234           244           141           121
                                                                ---------     ---------     ---------     ---------      --------

Income before income taxes ..........................               1,309         6,836         4,680           415         3,833
Provision for income taxes ..........................                 281         2,402         1,724           204         2,183
                                                                ---------     ---------     ---------     ---------      --------

Income before extraordinary item ....................               1,028         4,434         2,956           211         1,650
Extraordinary item:  Extinguishment of debt
   (less applicable income tax benefit of $68)  .....                   -             -             -          (117)            -
                                                                ---------     ---------     ---------     ---------      --------
Net income ..........................................           $   1,028     $   4,434     $   2,956     $      94      $  1,650
                                                                =========     =========     =========     =========      ========
Income before extraordinary item
   per share (5) ....................................           $    0.15     $    0.67     $    0.44     $    0.03      $   0.28
                                                                =========     =========     =========     =========      ========
Net income per share (5) ............................           $    0.15     $    0.67     $    0.44     $    0.01      $   0.28
                                                                =========     =========     =========     =========      ========

Net income per share -
   assuming dilution (5) ............................           $    0.15     $    0.65     $    0.44     $    0.01      $   0.28
                                                                =========     =========     =========     =========      ========

Pro forma net income data:
Net income before income taxes and
   extraordinary item, as reported ..................           $   1,309     $   6,836     $   4,680     $     415      $  3,833
Pro forma income tax provision (1) ..................                 281         2,402         1,724           204         1,403
                                                                ---------     ---------     ---------     ---------      --------

Pro forma income before
   extraordinary item ...............................               1,028         4,434         2,956           211         2,430
Pro forma extraordinary item, net of
   income tax benefit ...............................                   -             -             -          (117)            -
                                                                ---------     ---------     ---------     ---------      --------

Pro forma net income (1) ............................           $   1,028     $   4,434     $   2,956     $      94      $  2,430
                                                                =========     =========     =========     =========      ========

Pro forma income before extraordinary
   item per share ...................................           $    0.15     $    0.67     $    0.44     $    0.03      $   0.41
                                                                =========     =========     =========     =========      ========

Pro forma net income per share (1)(2)(5) ............           $    0.15     $    0.67     $    0.44     $    0.01      $   0.41
                                                                =========     =========     =========     =========      ========

Weighted average shares outstanding (4) .............               6,705         6,660         6,657         6,590      $  5,985
                                                                =========     =========     =========     =========      ========
</TABLE>
                                                        10

<PAGE>

<TABLE>
<CAPTION>

                                                                                           December 31,
                                                        ----------------------------------------------------------------------------
                                                          1997              1996              1995             1994             1993
                                                        --------          --------          --------         --------         ------
                                                                                          (In thousands)

Balance Sheet Data:

<S>                                                     <C>              <C>              <C>              <C>              <C>
Working capital ...............................         $ 38,424         $ 30,479         $ 27,969         $ 10,910         $ 11,126
Property, plant and equipment, net ............           42,772           42,873           40,214           39,294           27,055
Total assets ..................................          115,847          102,616           94,966           93,678           71,491
Total short-term debt(3) ......................            9,149            6,725            4,472           24,577           24,604
Total long-term debt(3) .......................           51,065           44,429           45,168           30,315           16,624
Shareholders' equity ..........................           31,432           30,173           25,632           22,656           21,008
</TABLE>

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

(1)  For the period from January 1, 1993 until April 21,  1993,  the Company was
     an  S   Corporation   for  federal  and  state  income  tax  purposes  and,
     accordingly,  was not  subject to  corporate  income  taxes.  The pro forma
     information  has been  computed as if the Company were subject to corporate
     income  taxes for all  periods  presented,  based on the tax laws in effect
     during the respective periods.

(2)  Supplemental  earnings  per share for 1993,  assuming  the  initial  public
     offering  (which was effected April 21, 1993) was consummated on January 1,
     1993, would be $0.41 per share.

(3)  Includes notes payable to shareholders for period ending 1993.

(4)  On March 2, 1993, the Company  effected a 6.01083-for-1  stock split of its
     outstanding  common  shares.  Accordingly,   the  weighted  average  shares
     outstanding have been restated to reflect the stock split.

(5)  Per share  amounts in prior years have been  restated to conform  with FASB
     No. 128 "Earnings per Share".


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

     Safe Harbor for Forward-Looking Statements

     Statements  included in  Management's  Discussion and Analysis of Financial
Condition and Results of  Operations  which are not  historical  in nature,  are
intended to be, and are hereby  identified as, "forward looking  statements" for
purposes of the safe harbor  provided by Section 21E of the Securities  Exchange
Act of 1934,  as amended.  The Company  cautions  readers that  forward  looking
statements, including without limitation, those relating to the Company's future
business  prospects,   revenues,  working  capital,  liquidity,  capital  needs,
interest costs, and income,  are subject to certain risks and uncertainties that
could cause  actual  results to differ  materially  from those  indicated in the
forward looking statements,  due to several important factors herein identified,
among others,  and other risks and factors  identified  from time to time in the
Company's reports filed with the Securities and Exchange Commission.

                                       11

<PAGE>

     Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

     Results of Operations

     Net Sales.  Net sales  increased  5.3% to $120.5  million in the year ended
December 31, 1997, from $114.4 million in the year ended December 31, 1996. This
net sales  increase  is  primarily  related to an  increase  in net sales of the
Pigment, Yarn and Carpet Divisions,  after intercompany  eliminations,  to $57.9
million in the year ended  December  31,  1997,  from $44.5  million in the year
ended  December 31,  1996.  The increase  resulted  primarily  from an increased
volume of sales in the Carpet Division.

     Net  sales  in the  Fibers  Division  decreased  by $7.2  million  due to a
decrease in PET fiber sales.  PET fiber sales decreased due to a decrease in the
average PET fiber sales price per pound to $0.675 in the year ended December 31,
1997,  from  $0.766 in the year ended  December  31,  1996.  The  decrease  was,
however,  partially offset by an increase in shipments to 94.8 million pounds in
the year ended  December  31, 1997,  from 92.9 million  pounds in the year ended
December 31, 1996.

     Gross  Profit.  Gross profit  decreased  13.3% to $19.9 million in the year
ended December 31, 1997, as compared to $23.0 million in the year ended December
31, 1996. As a percentage of net sales,  gross profit decreased to 16.5% in 1997
compared to 20.1% in 1996. The decrease in the gross profit  percentage  relates
directly to the  decreases in gross profit  percentage  in the Fibers and Carpet
Divisions  offset by slight  increases  in the Pigment and Yarn  Divisions.  The
Carpet Division  incurred a significant  decrease in gross profit percentage due
to  unfavorable  manufacturing  variances  and the  discounted  sale  of  excess
inventory.

     Selling,  General and Administrative.  Selling,  general and administrative
expenses  ("SG&A") were $14.7  million,  or 12.2% of net sales in the year ended
December 31, 1997,  as compared to $12.0  million,  or 10.5% of net sales in the
year  ended   December   31,  1996.   The  increase  in  selling,   general  and
administrative  expenses is due primarily to the increase in net sales discussed
above primarily related to the Carpet Division. The increase in SG&A expenses as
a  percentage  of net sales is due to the sales  growth of the  Carpet  Division
which incurs higher selling, general and administrative expenses for its revenue
than the other divisions.

     Interest  Expense.  Interest  expense was $4.3  million for the years ended
December 31, 1997 and December 31, 1996.  For the year ended  December 31, 1997,
the increase in the average  outstanding debt balance compared to the year ended
December 31, 1996 was offset by a decrease in the weighted average interest rate
and a higher interest capitalization.

     Income Tax  Provision.  The income tax expense for the year ended  December
31, 1997, was $281 thousand compared to $2.4 million for the year ended December
31,  1996.  The change is directly  due to the  decrease in pretax  income and a
decrease in the effective income tax rate.

     Net Income and Net Income Per Share.  Net income  decreased to $1.0 million
or $0.15  per share for the year  ended  December  31,  1997,  compared  to $4.4
million or $0.67 per share for the year ended  December 31,  1996.  The decrease
related directly to decreases in gross profit and gross profit percentage and an
increase in selling, general and administrative expenses.


     Financial Condition

     Current  assets  increased to $66.3 million at December 31, 1997 from $53.3
million at December 31, 1996. The increase was primarily  related to an increase
in accounts  receivable by $3.2 million,  and an increase in inventories by $9.8
million.  The change in accounts receivable resulted directly from higher fourth
quarter sales

                                       12

<PAGE>

in 1997 of $31.4 million versus $27.7 million in the fourth quarter of 1996. The
increase in inventories  was primarily  related to an increase in inventories at
the Carpet  Division due directly to the growth in sales volume  during the year
which required a larger inventory.

     The  decrease  in other  assets  is due  directly  to an  amount  which was
reimbursed  via an insurance  contract for the stop loss portion  related to the
Company's  health  insurance  plan.  The Company is self insured up to a certain
amount and has an insurance policy for amounts greater than a stated amount.

     Current liabilities  increased by $5.0 million primarily due to an increase
in the  current  portion of debt by $2.4  million  and an  increase  in accounts
payable and accrued expenses by $2.6 million.

     The increase in accounts payable and accrued expenses was primarily related
to  the  increase  in   inventories   and  the  timing  of  purchases  and  cash
disbursements.  The increase in debt relates  directly to the growth in accounts
receivable and inventory discussed above.

     Outlook

     Demand for  polyester  fibers is expected to remain  relatively  stable for
1998.  The  large  declines  in  worldwide  selling  prices of  polyester  fiber
throughout  1996 and 1997 are expected to stabilize for 1998.  The strong demand
for the Company's  carpet  production  that has been  experienced  over the last
three years is expected to decrease in 1998. The Company has based its plans for
1998 on these  expectations.  These matters are,  however,  beyond the Company's
control and could vary substantially from the Company's expectations.



     Year Ended December 31, 1996 Compared to Year Ended December 31, 1995


     Results of Operations

     Net Sales.  Net sales  decreased  2.2% to $114.4  million in the year ended
December 31, 1996,  from $117.0 million in the year ended December 31, 1995. Net
sales in the  Fibers  Division  decreased  to $69.9  million  in 1996 from $82.1
million  in 1995.  Net sales  from PET fiber  before  intercompany  eliminations
decreased  $3.9  million  due  primarily  to a decrease in the average PET fiber
sales  price  per pound to  $0.766  in 1996  from  $0.826  in 1995  offset by an
increase in shipments to 92.9 million  pounds in 1996 from 90.9 million in 1995.
Net sales  from  shipments  of nylon  fiber,  pellets,  trading  materials,  PET
plastics, and chemical polymer sales decreased to $1.6 million in 1996 from $8.7
million in 1995 which was directly related to a decrease in shipments for all of
the areas.  The decrease in shipments  is a result of  management's  decision to
temporarily exit these markets due to market conditions. Operations do, however,
continue in the Fibers Division on a very limited basis.

     Net sales of the Pigment,  Yarn and Carpet  Divisions,  after  intercompany
eliminations, increased to $44.5 million in 1996 from $34.9 million in 1995. The
increase  relates  primarily  to increased  sales of the Carpet  Division due to
volume growth.

     Gross  Profit.  Gross  profit  increased  6.0% to $23.0  million in 1996 as
compared to $21.7 million in 1995.  As a percentage  of net sales,  gross profit
increased to 20.1% in 1996 compared to 18.6% in 1995.  The increase in the gross
profit  percentage  relates directly to the increases in gross profit percentage
in the Fibers,  Pigment,  and Yarn Divisions  offset by a slight decrease in the
gross profit percentage in the Carpet Division.

     Selling,  General and Administrative.  Selling,  general and administrative
expenses ("SG&A") were $12.0 million,  or 10.5% of net sales in 1996 compared to
$12.6 million, or 10.8% of net sales in 1995. The decrease

                                       13

<PAGE>

is a result of an accrual of $1.2 million in 1995 which is the amount  estimated
to be paid for the  settlement  of a  lawsuit  which  was not  present  in 1996.
Excluding the settlement  accrual in 1995, the SG&A expenses as a percent of net
sales would have been 9.8%. The increase as a percent of net sales excluding the
settlement  accrual  in 1995 was due to the fact that the Carpet  Division  is a
distribution company and has higher selling, general and administrative expenses
as a percent of its net sales than the rest of the Company  and this  division's
sales grew by $8.6 million in 1996 compared to 1995.

     Interest  Expense.  Interest expense decreased to $4.3 million in 1996 from
$4.7  million in 1995,  due  primarily  to a decrease  in the  weighted  average
interest  rate during the year ended  December  31,  1996,  compared to the year
ended December 31, 1995.

     Income Tax Provision. Income tax expense for 1996 increased to $2.4 million
compared to $1.7 million for 1995. The increase is primarily due to the increase
in pretax income.

     Net Income and Net Income Per Share.  Net income  increased to $4.4 million
or $0.67 per share in 1996 compared to a net income of $3.0 million or $0.44 per
share in 1995. The increase related directly to the increase in gross profit and
gross profit  percentage  and decreases in selling,  general and  administrative
expenses and interest expense.


     Liquidity and Capital Resources

     The  Company  used cash in  operations  of $4.3  million for the year ended
December 31, 1997,  compared to cash generated  from  operations of $5.7 million
for the year ended  December 31, 1996.  The increase in cash used in  operations
was primarily the result of increases in net operating  assets and  liabilities,
primarily an increase in inventories and accounts  receivable,  partially offset
by an increase in accounts payable and accrued expenses.

     Net cash used in investing  activities amounted to $4.9 million in the year
ended December 31, 1997, compared to $7.1 million in the year ended December 31,
1996.  The Company  decreased its investment in property,  plant,  and equipment
during the year ended  December 31, 1997,  by $2.6 million  compared to the year
ended December 31, 1996.

     Net cash provided by financing  activities amounted to $9.2 million for the
year ended  December  31,  1997,  compared  to $1.6  million  for the year ended
December 31, 1996. The change occurred primarily due to the increase in net cash
used in operating activities discussed above.

     The Company's loan agreements with financial  institutions contain a number
of  restrictive  covenants.  See  Note 6 of Notes to  Financial  Statements.  At
December 31, 1997, the Company was in violation of certain loan covenants  under
a debt  agreement with  NationsBank.  The Bank, in a letter dated March 4, 1998,
agreed to waive those violations.

     In March of 1997, the Company entered into a $5 million capital expenditure
term loan to fund $2 million of 1996 capital expenditures, which were previously
funded  under the  revolving  line of credit  agreement,  and $3 million of 1997
capital expenditures.

     On  March 4,  1998,  the  Company  amended  its  revolving  line of  credit
agreement  to  increase  its  borrowings  from $30  million,  or an agreed  upon
borrowing base to $32.5 million,  or an agreed upon borrowing base until June 2,
1998.

     The Company believes that the financial resources available to it under its
revolving line of credit and other internally generated funds will be sufficient
to adequately meet its foreseeable working capital and capital

                                       14

<PAGE>



expenditures  requirements.  The  internally  generated  funds will primarily be
generated from a reduction in inventories.

     Year 2000

     The Company has made an initial  assessment  of certain  computer  systems'
compatibility with the "Year 2000" issue and has determined that it will need to
modify or replace  portions of its  software so that its  computer  systems will
function properly with respect to dates in the Year 2000 and beyond. The Company
presently  believes that with modifications to existing software and conversions
to new  software,  the Year 2000  issue  will not pose  significant  operational
problems for its computer  systems.  The Company will utilize both  internal and
external resources to reprogram,  or replace, and test the software for the Year
2000 modifications.  Management does not currently expect the total costs of the
Year 2000  conversion  project to be material to the financial  condition of the
Company  taken as a whole.  The costs of the  project  and the date on which the
Company  believes  it will  complete  the Year 2000  modifications  are based on
management's best estimates,  which were derived utilizing assumptions of future
events,  including the continued availability of certain resources,  third party
modification  plans and other factors.  However,  there can be no guarantee that
these  estimates  will be achieved  and actual  results  could differ from those
anticipated. Specific factors that might cause material differences include, but
are not limited to, the availability and cost of personnel trained in this area,
the  ability to locate and  correct  all  relevant  computer  codes and  similar
uncertainties.


                                       15

<PAGE>






Item 8.  Financial Statements and Supplementary Data




                              Martin Color-Fi, Inc.

                        Consolidated Financial Statements






List of Financial Statements

Report of Independent Auditors.............................................17

Audited Consolidated Financial Statements

    Consolidated Balance Sheets............................................18
    Consolidated Statements of Income......................................20
    Consolidated Statements of Shareholders' Equity........................21
    Consolidated Statements of Cash Flows..................................22
    Notes to Consolidated Financial Statements.............................25



                                       16

<PAGE>








                Report of Ernst & Young LLP, Independent Auditors


The Board of Directors and Shareholders
Martin Color-Fi, Inc.


We have audited the accompanying consolidated balance sheets of Martin Color-Fi,
Inc. as of December 31, 1997 and 1996, and the related  consolidated  statements
of income,  shareholders'  equity and cash flows for each of the three  years in
the period  ended  December  31, 1997.  Our audits also  included the  financial
statement schedule listed in the Index at Item 14(a). These financial statements
and  schedule  are  the   responsibility  of  the  Company's   management.   Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated financial position of Martin
Color-Fi,  Inc. at December 31, 1997 and 1996, and the  consolidated  results of
its  operations,  and its cash  flows for each of the three  years in the period
ended  December 31, 1997,  in  conformity  with  generally  accepted  accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly in all material respects the information set forth therein.



                                                    ERNST & YOUNG LLP


Greenville, South Carolina
February 13, 1998,
except for the last paragraph of Footnote 6,
as to which the date is March 4, 1998


                                       17

<PAGE>





                              Martin Color-Fi, Inc.

                           Consolidated Balance Sheets

                    (In Thousands, except Share Related Data)


<TABLE>
<CAPTION>

                                                                             December 31,
                                                                    1997                   1996
                                                                 --------                --------

Assets
Current assets:
<S>                                                              <C>                     <C>
  Cash ......................................................    $    259                $    272
  Accounts receivable, less allowance of $200
    in 1997 and $150 in 1996 ................................      15,789                  12,622
  Inventories (Note 4) ......................................      48,430                  38,678
  Prepaid expenses ..........................................       1,179                     881
  Income tax receivable .....................................         611                       -
  Other assets ..............................................           -                     856
                                                                 --------                --------

Total current assets ........................................      66,268                  53,309

Property, plant and equipment, net (Note 5) .................      42,772                  42,873

Goodwill (net of accumulated amortization of $732
  and $500 for 1997 and 1996, respectively) .................       5,446                   5,091

Other assets ................................................       1,361                   1,343
                                                                 --------                --------

Total assets ................................................    $115,847                $102,616
                                                                 ========                ========
</TABLE>



                                       18

<PAGE>





                              Martin Color-Fi, Inc.

                     Consolidated Balance Sheets (continued)

                    (In Thousands, except Share Related Data)


<TABLE>
<CAPTION>

                                                                                December 31,
                                                                          1997                1996
                                                                        --------            --------

Liabilities and shareholders' equity

Current liabilities:
<S>                                                                     <C>                 <C>
  Accounts payable and accrued expenses .........................       $ 18,695            $ 16,105
  Current portion of debt (Note 6) ..............................          9,149               6,725
                                                                        --------            --------

Total current liabilities .......................................         27,844              22,830

Deferred income taxes (Note 9) ..................................          5,506               5,184

Long-term portion of debt (Note 6) ..............................         51,065              44,429

Shareholders' equity:
  Common stock, no par value:
    Authorized shares - 50,000,000 in 1997 and 1996
    Issued and outstanding shares - 6,730,284 and
      6,681,479 in 1997 and 1996, respectively ..................            832                 832
  Additional paid-in capital ....................................         20,092              19,861
  Retained earnings .............................................         10,508               9,480
                                                                        --------            --------

Total shareholders' equity ......................................         31,432              30,173
                                                                        --------            --------

Total liabilities and shareholders' equity ......................       $115,847            $102,616
                                                                        ========            ========
</TABLE>




See accompanying notes.


                                                        19

<PAGE>





                              Martin Color-Fi, Inc.

                        Consolidated Statements of Income

                    (In Thousands, except Share Related Data)


<TABLE>
<CAPTION>

                                                                                   Year Ended December 31,
                                                                      1997                    1996               1995
                                                                  -----------             -----------         -----------


<S>                                                               <C>                     <C>                 <C>
Net sales ...............................................         $   120,502             $   114,416         $   116,970
Cost of sales ...........................................             100,590                  91,453              95,265
                                                                  -----------             -----------         -----------

Gross profit ............................................              19,912                  22,963              21,705
Selling, general and administrative expenses ............              14,733                  12,026              12,611
                                                                  -----------             -----------         -----------

Operating income ........................................               5,179                  10,937               9,094
Interest expense ........................................              (4,334)                 (4,335)             (4,658)
Other income ............................................                 464                     234                 244
                                                                  -----------             -----------         -----------

Income before income taxes ..............................               1,309                   6,836               4,680

Provision for income taxes (Notes 2 and 9) ..............                 281                   2,402               1,724
                                                                  -----------             -----------         -----------


Net income ..............................................         $     1,028             $     4,434         $     2,956
                                                                  ===========             ===========         ===========

Net income per share ....................................         $      0.15             $      0.67         $      0.44
                                                                  ===========             ===========         ===========

Net income per share - assuming dilution ................         $      0.15             $      0.65         $      0.44
                                                                  ===========             ===========         ===========


Weighted average shares outstanding (Note 2) ............           6,705,464               6,660,356           6,657,483
                                                                  ===========             ===========         ===========
</TABLE>



See accompanying notes.


                                       20

<PAGE>





                              Martin Color-Fi, Inc.

                 Consolidated Statements of Shareholders' Equity

                    (In Thousands, except Share Related Data)

<TABLE>
<CAPTION>
                                                                                                                Notes
                                                                                 Additional                   Receivable
                                                           Common Stock           Paid-In      Retained          from
                                                      Shares        Amount        Capital      Earnings      Shareholders      Total
                                                     ---------     ---------     ---------     ---------     -------------   -------

<S>                                                  <C>           <C>           <C>           <C>                <C>        <C>
Balance at December 31, 1994 ...................     6,657,483     $     832     $  19,754     $   2,090          ($20)      $22,656

  Net reduction in notes receivable from
    shareholders ...............................             -             -             -             -            20            20
  1995 net income ..............................             -             -             -         2,956             -         2,956
                                                     ---------     ---------     ---------     ---------          ----       -------

Balance at December 31, 1995 ...................     6,657,483           832        19,754         5,046             0        25,632

  Exercise of stock options ....................        23,996             -           107             -             -           107
  1996 net income ..............................             -             -             -         4,434             -         4,434
                                                     ---------     ---------     ---------     ---------          ----       -------

Balance at December 31, 1996 ...................     6,681,479           832        19,861         9,480             0        30,173

  Exercise of stock options ....................        48,805             -           231             -             -           231
  1997 net income ..............................             -             -             -         1,028             -         1,028
                                                     ---------     ---------     ---------     ---------          ----       -------

Balance at December 31, 1997 ...................     6,730,284     $     832     $  20,092     $  10,508     $       0     $  31,432
                                                     =========     =========     =========     =========     =========     =========

</TABLE>


See accompanying notes.




                                       21

<PAGE>





                              Martin Color-Fi, Inc.

                      Consolidated Statements of Cash Flows

                                 (In Thousands)


<TABLE>
<CAPTION>

                                                                                                Year Ended December 31,
                                                                                     1997                1996               1995
                                                                                   --------            --------            --------

Operating activities
<S>                                                                                <C>                 <C>                 <C>
Net income .............................................................           $  1,028            $  4,434            $  2,956
Adjustments to reconcile net income to net cash
  provided by operating activities:
    Depreciation and amortization ......................................              4,535               4,222               3,951
    Provision for doubtful accounts ....................................                113                  71                  38
    Deferred income taxes ..............................................                322               1,123                 929
    Loss on sale of equipment ..........................................                 34                  27                  85
    Changes in operating assets and liabilities:
      Accounts receivable ..............................................             (3,280)             (2,290)              3,633
      Income tax receivable ............................................               (611)                 51                 913
      Inventories ......................................................             (9,752)             (1,756)             (4,489)
      Other assets .....................................................                976                (417)                461
      Prepaid expenses .................................................               (298)               (229)               (178)
      Accounts payable and accrued expenses ............................              2,590                 506               2,830
                                                                                   --------            --------            --------


Net cash (used in) provided by operating activities ....................             (4,343)              5,742              11,129

Investing activities
Purchases of property, plant and equipment .............................             (4,031)             (6,653)             (4,809)
Purchase of assets from Dye Pigments and
  Custom Colorants, Inc. and Custom Polymer
  Additives and Colors, Inc. ...........................................               (575)               (575)               (600)
Deposits on purchase of equipment ......................................               (239)               (139)               (678)
Net proceeds from sale of equipment ....................................                 38                 206                 210
Other ..................................................................                (66)                 94                (281)
                                                                                   --------            --------            --------

Net cash used in investing activities ..................................             (4,873)             (7,067)             (6,158)
</TABLE>




                                       22

<PAGE>





                              Martin Color-Fi, Inc.

                Consolidated Statements of Cash Flows (continued)

                                 (In Thousands)


<TABLE>
<CAPTION>

                                                                                               Year Ended December 31,
                                                                                     1997                1996                1995
                                                                                   --------            --------            --------

Financing activities
<S>                                                                                <C>                 <C>                 <C>
Borrowings under line of credit ........................................           $ 40,654            $ 40,407            $ 42,409
Payments on line of credit .............................................            (30,697)            (37,734)            (46,085)
Additional loan costs ..................................................                (88)                (36)                (38)
Proceeds from issuance of long-term debt ...............................              5,133               3,000               3,000
Principal payments on long-term debt ...................................             (6,030)             (4,159)             (4,576)
Proceeds from net shareholder debt .....................................                  -                   -                  20
Proceeds from issuance of common stock .................................                231                 107                   -
                                                                                   --------            --------            --------

Net cash provided by (used in) financing activities ....................              9,203               1,585              (5,270)
                                                                                   --------            --------            --------

Net increase (decrease) in cash and cash equivalents ...................                (13)                260                (299)

Cash at beginning of year ..............................................                272                  12                 311
                                                                                   --------            --------            --------

Cash at end of year ....................................................           $    259            $    272            $     12
                                                                                   ========            ========            ========

Supplemental disclosures of cash flow
information
Cash paid during the year for interest (net of
  amounts capitalized) .................................................           $  4,284            $  4,347            $  4,697
Income taxes paid ......................................................                607               1,203                 874
</TABLE>


                                       23

<PAGE>





                              Martin Color-Fi, Inc.

                Consolidated Statements of Cash Flows (continued)

                                 (In Thousands)



Supplemental Schedule of Noncash Investing and Financing Activities

In 1997, 1996, and 1995, the Company recorded additional goodwill, other assets,
and liabilities  totaling  approximately $575 in 1997 and 1996, and $600 in 1995
related  to  contingent   consideration   determined  in  those  years  for  the
acquisition of the assets of Dye Pigments and Custom Colorants,  Inc. and Custom
Polymer Additives and Colors, Inc. which occurred during 1993.





See accompanying notes.

                                       24

<PAGE>





                              Martin Color-Fi, Inc.

                   Notes to Consolidated Financial Statements
                        (In Thousands Except Share Data)

                                December 31, 1997



1. Nature of Business

Martin Color-Fi,  Inc. (the "Company") is a recycler of reclaimed plastics.  The
Company uses these waste  materials  to produce  polyester  and other  synthetic
fibers and pellets  for a wide range of markets  throughout  various  geographic
regions, including the automotive and furniture industries. In addition, through
its wholly  owned  subsidiaries,  the Company  manufactures  synthetic  yarn and
tufted carpet.  The Company  insures part of its accounts  receivable,  performs
ongoing  credit  evaluations  of its customers  and  generally  does not require
collateral.  The Company maintains an allowance for doubtful accounts at a level
which management believes is sufficient to cover probable credit losses.


2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated  financial  statements  include the accounts of the Company and
all  wholly  owned  subsidiaries.  All  significant  intercompany  balances  and
transactions have been eliminated.

Use of Estimates

In preparing the consolidated  financial statements in conformity with generally
accepted accounting principles,  management makes estimates and assumptions that
affect the  reported  amounts  of assets  and  liabilities  and  disclosures  of
contingent  assets and liabilities at the date of the financial  statements,  as
well as the  reported  amounts of  revenues  and  expenses  during the  reported
period. Actual results could differ from these estimates.

Inventories

Inventories  are  stated  at the  lower  of  cost,  determined  by the  specific
identification method, or market using the aggregate method.


                                       25

<PAGE>





                              Martin Color-Fi, Inc.

                   Notes to Consolidated Financial Statements
                        (In Thousands Except Share Data)



2. Summary of Significant Accounting Policies (continued)

Property, Plant and Equipment

Property,  plant and  equipment  is recorded at cost.  For  financial  reporting
purposes,  depreciation  is  computed  by  the  straight-line  method  over  the
estimated useful lives of the assets.  For income tax purposes,  depreciation is
computed  principally by an accelerated method using recovery periods allowed by
the Internal Revenue Code.

The Company records  impairment  losses on long-lived  assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted  cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.

Intangible Assets

Costs in excess of identified net assets acquired in business  combinations  are
amortized  by the  straight-line  method over 25 years.  The  carrying  value of
goodwill  is  reviewed  at each  balance  sheet date to  determine  if it may be
impaired.  If this review  indicates that goodwill will not be  recoverable,  as
determined based on the undiscounted  cash flows of the entity acquired over the
remaining  amortization  period, the Company's carrying value of the goodwill is
reduced by the estimated shortfall of discounted cash flows.

Loan costs are  amortized  over the life of the related  loan.  Amortization  of
these costs was approximately $89, $60, and $46 for the years ended December 31,
1997, 1996, and 1995, respectively.

Revenue Recognition

Sales are generally  recorded when products are shipped to customers.  Provision
for normal sales allowances are made at the time of sale and classified as sales
reductions.

Advertising Costs

The Company  expenses all  advertising  costs as incurred in accordance with the
provisions of SOP 93-7 "Reporting on Advertising Costs".  Advertising costs were
$474, $271, and $281 for 1997, 1996, and 1995, respectively.

                                       26

<PAGE>

                              Martin Color-Fi, Inc.


             Notes to Consolidated Financial Statements (continued)
                        (In Thousands Except Share Data)



2. Summary of Significant Accounting Policies (continued)

Earnings Per Share

In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
per Share".  Statement 128 replaced the calculation of primary and fully diluted
earnings  per share with basic and diluted  earnings per share.  Unlike  primary
earnings per share,  basic earnings per share  excludes any dilutive  effects of
options, warrants and convertible securities. All earnings per share amounts for
all periods have been presented,  and where appropriate,  restated to conform to
the Statement 128 requirements.

Stock Options

The Company accounts for stock options under Accounting Principles Board Opinion
25, "Accounting for Stock Issued to Employees." (See Note 10.)

Reclassifications

Certain  reclassifications  have  been  made  to the  1996  and  1995  financial
statements to conform to the 1997 presentation.

New Accounting Standards

The Financial  Accounting  Standards  Board has issued SFAS No. 130,  "Reporting
Comprehensive  Income,"  which is effective for financial  statements for fiscal
years ending after December 31, 1997.  This standard  establishes  standards for
the  reporting and display of  comprehensive  income which is defined under SFAS
No. 130 as "the change in equity (net assets) during a period from  transactions
and other events and circumstances  from nonowner sources." The Company plans to
implement  SFAS No. 130 during the first quarter of fiscal year 1998 and,  based
on  current  circumstances,  does not  believe  the effect of  adoption  will be
material.

The  Financial   Accounting  Standards  Board  has  also  issued  SFAS  No.  131
"Disclosures  about Segments of an Enterprise and Related  Information" which is
effective for years  beginning  after  December 15, 1997.  SFAS 131  establishes
standards  for  the way  that  business  enterprises  report  information  about
operating  segments  in annual  financial  statements  and  requires  that those
enterprises  report selected  information  about  operating  segments in interim
financial reports.  It also establishes  standards for related disclosures about
products and services,  geographic areas, and major customers.  The Company will
adopt the new requirements  retroactively in 1998.  Management  anticipates that
the adoption of this statement may affect the disclosure of segment information.




                                       27

<PAGE>





                              Martin Color-Fi, Inc.

             Notes to Consolidated Financial Statements (continued)
                        (In Thousands Except Share Data)



3. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>

                                                                                                Year Ended December 31,
                                                                                    1997                 1996               1995
                                                                                  ----------          ----------          ----------

Numerator:
<S>                                                                               <C>                 <C>                 <C>
  Numerator for earnings per share .....................................          $    1,028          $    4,434          $    2,956

  Effect of dilutive securities:
    Subordinated 5% convertible note payable ...........................                   -                 105                 100
    Subordinated 6% convertible note payable ...........................                   -                   -                   7
                                                                                  ----------          ----------          ----------


  Numerator for earnings per share
    assuming dilution - after assumed conversions ......................          $    1,028          $    4,539          $    3,063

Denominator:
  Denominator for earnings per share -
    weighted-average shares ............................................           6,705,464           6,660,356           6,657,483

  Effect of dilutive securities:
    Employee stock options .............................................              29,014              18,465                   -
    Subordinated 5% convertible note payable ...........................                   -             286,364             286,364
    Subordinated 6% convertible note payable ...........................                   -                   -              18,004
                                                                                  ----------          ----------          ----------


  Dilutive potential common shares .....................................              29,014             304,829             304,368
    Denominator for earnings per share
      assuming dilution - adjusted weighted-average
      shares and assumed conversions ...................................           6,734,478           6,965,185           6,961,851
                                                                                  ==========          ==========          ==========


  Earnings per share ...................................................          $     0.15          $     0.67          $     0.44
                                                                                  ==========          ==========          ==========



  Earnings per share - assuming dilution ...............................          $     0.15          $     0.65          $     0.44
                                                                                  ==========          ==========          ==========
</TABLE>






                                       28

<PAGE>






                             Martin Color-Fi, Inc.

             Notes to Consolidated Financial Statements (continued)
                        (In Thousands Except Share Data)



3. Earnings Per Share (continued)

Debt of $2,100 at December 31, 1997,  ($3,150 at December 31, 1996)  convertible
into common  stock at $11 per share was  outstanding  during  1997,  but was not
included in the  computation  of earnings per share  assuming  dilution  because
adding  after-tax  interest to the  numerator  resulted  in an effect  which was
antidilutive.


4. Inventories

Inventories consist of the following:

                                                           December 31,
                                                        1997              1996
                                                      --------         --------

Raw materials .................................       $28,868            $25,963
Finished goods ................................        19,562             12,715
                                                      -------            -------


                                                      $48,430            $38,678
                                                      =======            =======



5. Property, Plant and Equipment

Property, plant and equipment consist of the following:

                                                             December 31,
                                                        1997              1996
                                                      --------         --------

Land and buildings ............................       $ 14,354         $ 13,794
Machinery and equipment .......................         45,891           38,714
Furniture and fixtures ........................          4,389            3,523
Machinery and equipment under construction ....            658            5,359
                                                      --------         --------

                                                        65,292           61,390
Accumulated depreciation ......................        (22,520)         (18,517)
                                                      --------         --------

Net property, plant and equipment .............       $ 42,772         $ 42,873
                                                      ========         ========



                                       29

<PAGE>





                              Martin Color-Fi, Inc.

             Notes to Consolidated Financial Statements (continued)
                        (In Thousands Except Share Data)



5. Property, Plant and Equipment (continued)

Depreciation  expense of approximately  $4,049,  $3,761, and $3,594 was recorded
for the years ended December 31, 1997, 1996, and 1995, respectively.

Interest of  approximately  $338,  $234,  and $55 was  capitalized on qualifying
assets for the years ended December 31, 1997, 1996, and 1995, respectively.

At December 31, 1997, the Company had commitments to spend approximately $199 to
purchase other machinery and equipment.

6. Debt

The  Company's  revolving  line of credit  agreement  with a bank  provides  for
borrowings not to exceed the lesser of $30,000 or an agreed upon borrowing base.
The borrowing  base is  calculated  based on accounts  receivable  and inventory
balances. The line of credit bears interest at the lower of prime or an adjusted
LIBOR rate based on the Company's  "leverage ratio", as defined in the revolving
line of credit agreement,  adjusted monthly.  At December 31, 1997, the interest
rate was adjusted  LIBOR plus 240 basis  points,  or 8.26%.  This  agreement was
amended  effective  September 30, 1997, which extended the maturity date to June
2, 1999. A single  principal  payment is due at maturity,  with interest payable
monthly. At December 31, 1997, the balance outstanding was $29,900.  The Company
anticipates  making  payments  on the  loan in 1998  based on a  borrowing  base
formula;  therefore  $3,000 of the amount  outstanding  at December 31, 1997, is
classified as a current  liability.  The unused line of credit available is $100
at December 31, 1997. At December 31, 1997,  under the revolving  line of credit
agreement,  the  Company  has  available  letters  of  credit  in the  aggregate
principal amount up to $100. There were no amounts  outstanding under letters of
credit at December 31, 1997.

The Company also has term loan agreements, amended effective September 30, 1997,
with a bank which  provides for  borrowings  up to $41,310.  The term loans bear
interest at the lower of prime plus 1/8% or an adjusted  LIBOR rate based on the
Company's  "leverage  ratio",  as  defined in the term loan  credit  agreements,
adjusted  monthly.  At December 31, 1997,  the interest rate was adjusted  LIBOR
plus 265  basis  points,  or  8.51%.  The  terms of the  loans  include  monthly
principal payments of approximately $401 plus interest. The loans also require a
principal  payment each year equal to 25% of the  previous  years' net income if
the debt to tangible  net worth is greater  than 1.75 to 1. The loans  mature on
June 2, 1999.

The agreements with the bank contain several  restrictive  covenants  requiring,
among  other  matters,  a  minimum  debt  service  ratio,  a  maximum  ratio  of
indebtedness to net worth, and restrictions on the payment of dividends.
The loans are collateralized by all Company assets.


                                       30

<PAGE>


                              Martin Color-Fi, Inc.


             Notes to Consolidated Financial Statements (continued)
                        (In Thousands Except Share Data)



6. Debt (continued)

The following is a summary of debt:

<TABLE>
<CAPTION>

                                                                                                       December 31,
                                                                                                   1997          1996
                                                                                                 -------       -------

<S>                                                                                              <C>           <C>
Term loan with a bank ....................................................................       $23,178       $27,868

Term loan with a bank ....................................................................         4,866             -

Revolving line of credit with a bank .....................................................        29,900        19,943

Subordinated  convertible note payable to the former owners of Palmetto Spinning
  Corporation.  The note  provides  for  quarterly  interest  payments at 5% and
  annual principal payments of $1,050 beginning on June 13, 1997, with the
  note maturing on June 13, 1999 .........................................................         2,100         3,150

Note payable to former shareholder in monthly installments of $3, which includes
  principal plus interest at 8%, due
  June 2003 ..............................................................................           170           193
                                                                                                 -------       -------

                                                                                                  60,214        51,154

Less current portion .....................................................................         9,149         6,725
                                                                                                 -------       -------

                                                                                                 $51,065       $44,429
                                                                                                 =======       =======
</TABLE>

On March 4, 1998, the debt agreements with the bank discussed above were amended
effective  September  30,  1997.  The  amendments  provided  for  changes in the
borrowing base formula and increased the borrowings  under the revolving line of
credit not to exceed  $32,500  or an agreed  upon  borrowing  base until June 2,
1998.  At  December  31,  1997,  the Company was in  violation  of certain  loan
covenants under the debt agreements.  The bank, in a letter dated March 4, 1998,
agreed to waive these violations.

                                       31

<PAGE>





                              Martin Color-Fi, Inc.

             Notes to Consolidated Financial Statements (continued)
                        (In Thousands Except Share Data)



6. Debt (continued)

Maturities of debt after December 31, 1997, are as follows:


         1998                                            $ 9,149
         1999                                             50,948
         2000                                                 30
         2001                                                 33
         2002                                                 35
         Thereafter                                           19
                                                         -------

                                                         $60,214
                                                         =======


7. Profit Sharing Plan

The  Company's  defined  contribution  profit-sharing  plan covers all  eligible
employees of the Company.  The plan provides for voluntary  contributions at the
election of the employee. The Company's contribution is one-half or seventy-five
percent of the employees'  contribution up to a maximum matching contribution of
two and one-half  percent or three and  three-fourths  percent of the employee's
salary.  The Company's matching  contribution  percentage is determined based on
the investment  vehicle  selected by the employee.  Additionally,  the Company's
Board of Directors can authorize a discretionary  contribution to the plan. This
discretionary  amount was $25,  $25,  and $75 for the years ended  December  31,
1997, 1996, and 1995, respectively. For the years ended December 31, 1997, 1996,
and 1995,  the Company made total  contributions  (including  the  discretionary
amount) to the plan of $290, $295, and $350, respectively.

8. Leases

On  February 1, 1995,  the  Company  entered  into a lease  agreement  for a new
Corporate  Office  facility from an entity  controlled by the Chairman and Chief
Executive  Officer  of the  Company.  The term of the  lease is for 12 years and
requires monthly  payments of  approximately  $4. Rent expense for the Corporate
Office in 1997, 1996, and 1995 was $50, $50, and $46, respectively.

The majority of the Company's  remaining leases for its facilities and equipment
are with unrelated parties under monthly  operating leases.  The Company has the
option to purchase one of its warehouse facilities for $2,100 upon giving notice
within  60  days  of the end of the  lease  term.  Total  rent  expense  for all
operating leases was $1,997, $1,508, and $1,558 for the years ended December 31,
1997, 1996, and 1995, respectively.


                                       32

<PAGE>





                              Martin Color-Fi, Inc.

             Notes to Consolidated Financial Statements (continued)
                        (In Thousands Except Share Data)


8. Leases (continued)

Future  minimum  rental  payments  under  noncancelable  operating  leases as of
December 31, 1997, are as follows:


         1998                                  $  979
         1999                                     659
         2000                                     544
         2001                                     332
         2002                                      95
         Thereafter                               255
                                               ------

                                               $2,864
                                               ======




                                       33

<PAGE>





                              Martin Color-Fi, Inc.

             Notes to Consolidated Financial Statements (continued)
                        (In Thousands Except Share Data)



9. Income Taxes

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:


<TABLE>
<CAPTION>

                                                                                                                December 31,
                                                                                                       1997                    1996
                                                                                                      ------                  ------

Deferred tax liabilities:
<S>                                                                                                   <C>                     <C>
  Tax over book depreciation .......................................................                  $7,201                  $6,984
  Other ............................................................................                     675                     531
                                                                                                      ------                  ------

Total deferred tax liabilities .....................................................                   7,876                   7,515

Deferred tax assets:
  Tax inventory value over book ....................................................                     186                     218
  Allowance for doubtful accounts and accruals .....................................                     207                     532
  Alternative minimum tax credits ..................................................                     937                     941
  Net operating loss carryforwards .................................................                     925                     640
  Job tax credits ..................................................................                     115                       -
                                                                                                      ------                  ------

Total deferred tax assets ..........................................................                  $2,370                  $2,331
                                                                                                      ------                  ------

Net deferred tax liabilities over tax assets .......................................                  $5,506                  $5,184
                                                                                                      ======                  ======
</TABLE>



At December 31, 1997, the Company has federal net operating  loss  carryforwards
of $2,064 and state net operating loss carryforwards of $4,224 which expire from
2001 to 2011.

                                       34

<PAGE>





                              Martin Color-Fi, Inc.

             Notes to Consolidated Financial Statements (continued)
                        (In Thousands Except Share Data)



9. Income Taxes (continued)

The Company's  effective income tax rate differs from the U.S. statutory rate as
follows:
<TABLE>
<CAPTION>

                                                                             Year Ended December 31,
                                                        1997                          1996                       1995
                                                 Amount       Percent         Amount         Percent      Amount        Percent
                                                -------       -------         -------        -------      -------       -------

<S>                                             <C>                <C>        <C>               <C>       <C>               <C>
Tax expense at U.S.
  statutory rate .......................        $   445            34         $ 2,324           34        $ 1,591           34
State income taxes,
  net of Federal benefit ...............             25             2              78            1             91            2
Change in effective state
  income tax rate,
  including net operating
  losses and credits ...................           (189)          (15)              -            -              -            -
Other ..................................              -             -               -            -             42            1
                                                -------          ----         -------          ---        -------         ----

                                                $   281            21         $ 2,402           35        $ 1,724           37
                                                =======          ====         =======          ===        =======         ====
</TABLE>


The following  information  reflects the  components of the provision for income
taxes in 1997, 1996, and 1995:

                                                   Year Ended December 31,
                                              1997            1996         1995
                                              -----         ------        ------

         Income tax provision:
           Current:
             Federal ................        $  (47)        $1,201        $  753
             State ..................             6             78            42
           Deferred .................           322          1,123           929
                                              -----         ------        ------


                                              $ 281         $2,402        $1,724
                                              =====         ======        ======





                                       35

<PAGE>






                              Martin Color-Fi, Inc.

             Notes to Consolidated Financial Statements (continued)
                        (In Thousands Except Share Data)



10. Shareholders' Equity

Stock Options

The Company has elected to follow  Accounting  Principles  Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related  interpretations
in accounting for its employee stock options  because,  as discussed  below, the
alternative fair value accounting  provided for under SFAS No. 123,  "Accounting
for Stock- Based  Compensation,"  requires use of option  valuation  models that
were not  developed for use in valuing  employee  stock  options.  Under APB 25,
because the exercise  price of the Company's  employee  stock options equals the
market  price of the  underlying  stock on the date of  grant,  no  compensation
expense is recognized.

The Company has three stock option plans for the purpose of providing incentives
for retaining  qualified and competent  employees or for rewarding employees for
past   performance.   The  1993  and  1994  Incentive  Stock  Option  and  Stock
Appreciation Rights Plans (the "Qualified Plans") permit the grant of options to
purchase an  aggregate  of up to 600,000  shares of common stock of the Company.
The  Qualified  Plans also  provide  for the  granting  of up to  600,000  stock
appreciation  rights ("SARs") in tandem with stock options.  Under the Qualified
Plans,  incentive stock options (Incentive Stock Options qualify for special tax
treatment  under Section 422 of the Internal  Revenue Code of 1986, as amended),
non-qualified  options  or SARs may be  issued  at the  discretion  of the Stock
Option Committee of the Board of Directors.  The 1993 Non-Qualified Stock Option
Plan (the  "Non-Qualified  Plan") permits the grant of stock options to purchase
an  aggregate  of up to  16,000  shares of common  stock of the  Company  (Stock
options  issued under the  Non-Qualified  Plan do not qualify for  favorable tax
treatment  under  Section 422 of the Internal  Revenue  Code of 1986).  No stock
appreciation rights have been granted under either plan as of December 31, 1997.

Participants  under these  plans  include  employees,  executive  officers,  key
employees and former  employees of the Company.  The per share exercise price of
each stock  option  issued  under the  Qualified  Plan is not less than the fair
market value of the stock on the date of the grant,  or in case of a shareholder
owning more than 10% of the outstanding  stock of the Company,  the price is not
less than  110% of such fair  market  value on the date of grant.  The  exercise
price of each stock option issued under the  Non-Qualified  Plan is not required
to be at the fair  market  value of the  stock  on the  date of  grant.  Options
granted under the 1993 Qualified Plan have five-year  terms and options  granted
under the 1994 Qualified Plan have ten-year terms. All options vest one-third at
the  end  of six  months,  eighteen  months,  and  thirty  months  of  continued
employment.


                                       36

<PAGE>





                              Martin Color-Fi, Inc.

             Notes to Consolidated Financial Statements (continued)
                        (In Thousands Except Share Data)



10. Shareholders' Equity (continued)

The following table summarizes stock option  transactions during 1997, 1996, and
1995.
<TABLE>
<CAPTION>

                                             December 31, 1997              December 31, 1996              December 31, 1995
                                                        Weighted                       Weighted                        Weighted
                                                        Average                        Average                         Average
                                                        Exercise                       Exercise                        Exercise
                                           Shares       Price             Shares       Price             Shares        Price
                                           -------      ------            -------      ------            -------       -------
<S>                                        <C>          <C>               <C>          <C>               <C>           <C>
Options outstanding
  at beginning of
  period ...........................       295,501      $ 7.12            244,500      $ 9.10            235,000       $ 11.38
Granted ............................       224,000      $ 6.88            163,500      $ 4.25             84,000       $  4.63
Canceled ...........................       (65,176)     $ 7.95            (88,503)     $ 8.57            (74,500)      $ 11.23
Exercised ..........................       (48,805)     $ 4.72            (23,996)     $ 4.47                  -             -
                                           -------      ------            -------      ------            -------       -------

Options outstanding
  at end of period .................       405,520      $ 7.14            295,501      $ 7.12            244,500       $  9.10
                                           -------      ------            -------      ------            -------       -------

Options exercisable
  at end of period .................       240,793      $ 7.52            184,789      $ 8.50            159,640       $ 10.16
                                           -------      ------            -------      ------            -------       -------

Options available
  for grant at end
  of period ........................       137,679                        296,503                        371,500
                                           -------                        -------                        -------

Weighted average fair
  value of options
  granted during the year ........          $ 2.55                       $   2.72                        $  2.97
                                            ------                       --------                        -------
</TABLE>
                                       37

<PAGE>





                              Martin Color-Fi, Inc.

             Notes to Consolidated Financial Statements (continued)
                        (In Thousands Except Share Data)



10. Shareholders' Equity (continued)

Pro forma information regarding net income and earnings per share is required by
SFAS No. 123,  which also requires that the  information be determined as if the
Company has  accounted  for its employee  stock  options  granted  subsequent to
December 31, 1994, under the fair value method of that Statement. The fair value
for these  options  was  estimated  at the date of grant  using a  Black-Scholes
option pricing model with the following  weighted-average  assumptions for 1997,
1996,  and 1995,  respectively;  risk-free  interest rates of 6.5%,  5.75%,  and
5.75%; no dividend yield; volatility factors of the expected market price of the
Company's common stock of 0.42, 0.43, and 0.43; and a weighted-average  expected
life of the option of 3 years, 7 years, and 7 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the options'  vesting  period.  The  Company's  pro
forma   information   follows  (in  thousands  except  for  earnings  per  share
information):
<TABLE>
<CAPTION>

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

<S>                                                                              <C>                 <C>                   <C>
Pro forma net income ...............................................             $   761             $   4,280             $   2,910
Pro forma earnings per share .......................................             $  0.11             $    0.64             $    0.44
Pro forma earnings per share, assuming dilution ....................             $  0.11             $    0.61             $    0.42
</TABLE>

Exercised  prices for options  outstanding  at December  31,  1997,  ranged from
$4.25-$13.00.  The weighted-average  remaining contractual life of those options
is 4.7 years.


                                       38

<PAGE>





                              Martin Color-Fi, Inc.

             Notes to Consolidated Financial Statements (continued)
                        (In Thousands Except Share Data)



10. Shareholder's Equity (continued)

Shareholders' Agreement

The Company  entered into a  shareholders'  agreement upon the effective date of
its initial public offering in 1993. All shares of the Corporation's stock owned
by the  shareholders  prior to and upon the  effective  date of the offering are
considered  restricted  shares.  The  transfer,  pledge or sale of the shares is
subject  to the  terms of the  agreement.  The  Company  has the  right of first
refusal to purchase  the shares.  If the Company does not exercise the option to
purchase the offered  shares then the  shareholder  who desires to sell can sell
the shares as permitted by law.


11. Geographic Sales Information

The Company's net sales by major geographic areas in 1997, 1996, and 1995 are as
follows:


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


         Domestic ............     $114,750           $105,876          $103,484
         Foreign .............        5,752              8,540            13,486
                                   --------           --------          --------

                                   $120,502           $114,416          $116,970
                                   ========           ========          ========



12.  Fair Values of Financial Instruments

The fair values of the  Company's  financial  instruments  at December 31, 1997,
approximate the carrying values,  except for the  subordinated  convertible note
payable due to former owners of Palmetto Spinning Corporation at a fixed rate of
interest of 5% (see Note 6). The fair value of this  obligation  is estimated to
be $2,037 based on a discounted  cash flow analysis using the Company's  current
borrowing rates for other borrowing  arrangements tied to the market. The effect
on the  market  value of this  obligation  of the  convertible  feature  of this
obligation was not practicable to determine.


                                       39

<PAGE>





                              Martin Color-Fi, Inc.

             Notes to Consolidated Financial Statements (continued)

                        (In Thousands Except Share Data)



13. Litigation

On March 16,  1995,  the  Company  was served  with a lawsuit  by a  shareholder
alleging  violations  of  Federal  securities  laws and  related  state laws and
seeking an unspecified amount of damages. The shareholder  requested to have the
case certified as a class action on behalf of other non-insider shareholders.

A definitive written  settlement  agreement was reached with the class plaintiff
under which the Company's  settlement  liability  was fixed at $2,000.  By order
dated March 12, 1997, the United States  District  Court  certified the class in
the matter,  appointed the class plaintiffs' counsel as settlement administrator
and gave  preliminary  approval to the settlement.  The settlement was funded by
the Company on March 20, 1997. In exchange for a written release,  the Company's
insurance  carrier provided $850 of the settlement  amount.  Final settlement of
the matter was approved by the court on September 10, 1997.

                                       40

<PAGE>





                                   Schedule II

                              MARTIN COLOR-FI, INC.

                        Valuation and Qualifying Accounts
                                 (in thousands)


<TABLE>
<CAPTION>

====================================================================================================================================
                                                                 Balance                   Additions
                                                                    at            Charged to    Charged to                Balance
                                                                 Beginning        Costs and     Other                     at End
Classification                                                   of Period        Expenses      Accounts     Deductions   of Period
-----------------------------------------------------------------------------------------------------------------------------------


Year ended December 31, 1997
<S>                                                                <C>              <C>                      <C>    <C>       <C>
Allowance for doubtful
   accounts ..........................................             $150             $113           -         ($ 63) (1)       $ 200
                                                                   ====             ====       =====         =====            =====

Year ended December 31, 1996
Allowance for doubtful
   accounts ..........................................             $150             $ 71           -         ($ 71) (1)       $ 150
                                                                   ====             ====       =====         =====            =====

Year ended December 31, 1995
Allowance for doubtful
   accounts ..........................................             $200             $ 55           -        ($ 105) (1)       $ 150
                                                                   ====             ====       =====         =====            =====
</TABLE>

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

          (1)  Uncollectible accounts written off, net of recoveries.





                                       41

<PAGE>








             Summary of Quarterly Results of Operations (Unaudited)



The following is a summary of the quarterly  results of operations for the years
ended December 31, 1997 and 1996.

<TABLE>
<CAPTION>

                                                                       Quarter Ended
                                    --------------------------------------------------------------------
                                    March 30           June 29         September 28     December 31           TOTAL
                                    ----------------------------------------------------------------------------------
                                                              (In thousands, except per share data)

1997

<S>                                 <C>               <C>               <C>              <C>              <C>
Net sales .......................   $ 27,176          $ 32,349          $ 29,532         $ 31,445         $ 120,502
Gross profit ....................      5,801             6,349             5,539            2,223            19,912
Operating profit (loss) .........      2,532             2,938             1,542           (1,833)            5,179
Net income (loss) ...............      1,200             1,311               471           (1,954)            1,028
Net income (loss) per share
   Basic ........................       0.18              0.20              0.07            (0.29)             0.15*
   Assuming Dilution ............       0.18              0.19              0.07            (0.29)             0.15
</TABLE>



* The sum of quarterly net income (loss) per share-information is different from
annual net income per share-information due to rounding.



<TABLE>
<CAPTION>

                                                                       Quarter Ended
                                        ----------------------------------------------------------------------------
                                          March 31     June 30         September 29     December 31           TOTAL
                                        -----------------------------------------------------------------------------
                                                              (In thousands, except per share data)

1996

<S>                                 <C>               <C>               <C>              <C>              <C>
Net sales ......................    $ 25,623          $ 29,582          $ 31,521         $ 27,690         $ 114,416
Gross profit ...................       3,703             5,367             7,589            6,304            22,963
Operating profit (loss) ........         941             2,536             4,193            3,267            10,937
Net income (loss) ..............         (75)              932             2,005            1,572             4,434
Net income (loss) per share
   Basic .......................       (0.01)             0.14              0.30             0.24              0.67
   Assuming Dilution ...........       (0.01)             0.14              0.29             0.23              0.65
</TABLE>



The Company made a year-end  adjustment  in 1997  resulting  from a change in an
estimate  that was material to the results of the fourth  quarter.  The physical
inventory adjustment in excess of amounts provided,  after applicable income tax
reductions,  reduced net income by approximately $834. These adjustments reduced
fourth quarter net income per share by $0.12.


                                       42

<PAGE>






Item 9.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure

         None.



                                    PART III



Item 10.  Directors and Executive Officers of the Registrant

         The information  contained  under the captions  "Election of Directors"
and  "Executive  Officers  and  other  Key  Employees"  in the  Company's  Proxy
Statement  for the 1998  Annual  Meeting  of  Stockholders  to be filed with the
Securities  and  Exchange  Commission  on or  before  April  30,  1998  and  the
information  regarding  compliance within Section 16(a) of the Security Exchange
Act of 1934 under "Section 16(a) Beneficial  Ownership Reporting  Compliance" in
the 1998 Proxy Statement are hereby incorporated by reference herein.



Item 11.  Executive Compensation

         The information  contained under the captions  "Executive  Compensation
and Other  Information"  and  "Stock  Option  Plan"  (page 7 through  11) in the
Company's  Proxy  Statement for the 1998 Annual  Meeting of  Stockholders  to be
filed with the Securities and Exchange Commission on or before April 30, 1998 is
hereby incorporated by reference herein.



Item 12.  Security Ownership of Certain Beneficial Owners and Management

         The  information  contained  under the caption  "Security  Ownership of
Certain  Beneficial  Owners and Management" in the Company's Proxy Statement for
the 1998 Annual  Meeting of  Stockholders  to be filed with the  Securities  and
Exchange  Commission  on or before  April 30,  1998 is  hereby  incorporated  by
reference herein.



Item 13.  Certain Relationships and Related Transactions

         The  information  contained under the caption  "Compensation  and Stock
Option   Committee   Interlocks   and  Insider   Participation"   and   "Certain
Relationships  and  Transactions"  in the Company's Proxy Statement for the 1998
Annual  Meeting of  Stockholders  to be filed with the  Securities  and Exchange
Commission  on or before  April 30,  1998 is hereby  incorporated  by  reference
herein.



                                       43

<PAGE>







                                     PART IV


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


Exhibit Number    Description


   (a)  1.        Financial Statements

                  Consolidated   statements   of  income  for  the  years  ended
                  December 31, 1997, 1996 and 1995

                  Consolidated balance sheets at December 31, 1997 and 1996

                  Consolidated statements  of  shareholders equity for the years
                  ended December 31, 1997, 1996 and 1995

                  Consolidated  statements  of  cash  flows for the years  ended
                  December 31, 1997, 1996 and 1995

                  Notes to consolidated financial statements

                  Consolidated  schedules for the years ended December 31, 1997,
                  1996 and 1995:

                           II -  Valuation and qualifying accounts


        2.        Financial Statement Schedule

                  The  financial  statement  schedule  listed above to financial
                  statements is filed as part of this annual report.


        3.        Exhibits


        3.1       Restated    Articles   of   Incorporation   of   the   Company
                  (incorporated by reference to Exhibit 3.1 of the Company's S-1
                  Registration  Statement  filed  March  4,  1993,  as  amended,
                  Registration No. 33-59124

                                       44

<PAGE>





                  ("the S-1 Registration Statement")).

        3.2       First Amendment to Restated  Articles of  Incorporation of the
                  Company  (incorporated  by reference to Exhibit 3.2 of the S-1
                  Registration Statement).

        3.3       Amended and Restated  Bylaws of the Company  (incorporated  by
                  reference to Exhibit 3.3 of the S-1 Registration Statement).

        3.4       First  Amendment to Amended and Restated Bylaws of the Company
                  (incorporated  by  reference to Exhibit 4.5 to the 1994 second
                  quarter 10-Q).

       10.1       Loan and  Security  Agreement  dated July 14, 1994 between the
                  Company and NationsBank of South Carolina,  N.A. (incorporated
                  by reference to Exhibit 10.1 to the  Company's  Report on Form
                  10-Q for the period  ended  October  2, 1994 (the "1994  third
                  quarter 10-Q")).

       10.2       Revolving Loan and Promissory Note dated July 14, 1994 between
                  the  Company  and   NationsBank   of  South   Carolina,   N.A.
                  (incorporated  by  reference to Exhibit 10.2 of the 1994 third
                  quarter 10-Q).

       10.3       Term Loan and Promissory  Note dated July 14, 1994 between the
                  Company and NationsBank of South Carolina,  N.A. (incorporated
                  by reference to Exhibit 10.3 of the 1994 third quarter 10-Q).

       10.4       First  Amendment to Loan  Documents and Agreement  dated as of
                  February 15, 1995 between the Company and its subsidiaries and
                  NationsBank, National Association (Carolinas), as successor to
                  NationsBank of South Carolina, N.A. (incorporated by reference
                  to Exhibit 10.4 of the 1994 third quarter 10-Q).

       10.11      Lease  for   corporate   offices  (now  the  sales   offices),
                  Edgefield, South Carolina, dated November 20, 1992 between the
                  Company  and James F. Martin  (incorporated  by  reference  to
                  Exhibit Number 10.13 of the S-1 Registration Statement).

       10.14      Amended lease for corporate  offices (now the sales  offices),
                  Edgefield,  South  Carolina  dated  March 1, 1994  between the
                  Company  and James F. Martin  (incorporated  by  reference  to
                  Exhibit 10.21 of the Company's  Annual Report on Form 10-K for
                  the year ended December 31, 1993 (the "1993 10-K")).

       10.15      1993 Incentive Stock Option and Stock Appreciation Rights Plan
                  (incorporated by reference to Exhibit 4.1 of the Registration
                  Statement on Form S-8, Registration No. 333-15019).

       10.16      Noncompetition Agreements between Registrant and U. Benjamin
                  Tanner, Samuel C. Stevens, Jr., Russell T. Lyon, Heyward C.
                  Addy, Henry M. Poston and James F. Martin (incorporated by
                  reference to Exhibit 10.21 of the S-1 Registration Statement).


                                       45

<PAGE>





       10.17      Form of Shareholder Tax Indemnity  Agreement  (incorporated by
                  reference   Exhibit  Number  10.22  of  the  S-1  Registration
                  Statement).

       10.18      1993   Non-Qualified   Stock   Option   Plan  of  the  Company
                  (incorporated  by reference to Exhibit 4.1 of the Registration
                  Statement on Form S-8, Registration No. 333-15017).

       10.19      Amended  Corporate  Buy-Sell  Agreement dated January 31, 1994
                  (incorporated  by reference to Exhibit  10.16 of the Company's
                  1993 10-K).

       10.20      Employee  401(k)  Profit  Sharing  Plan dated  January 1, 1994
                  (incorporated by reference to Exhibit 10.17 of the 1993 10-K).

       10.21      Employment  Agreement  dated July 14, 1994,  between G. Robert
                  Buchanan  and  Buchanan  Industries,   Inc.  (South  Carolina)
                  (incorporated by reference to Exhibit 10.20 to the 1994 second
                  quarter 10-Q).

       10.22      Employment   Agreement  dated  July 13,  1994  between W. Fred
                  Davis,  Jr.   and  Martin  Color-Fi,   Inc.  (incorporated  by
                  reference  to Exhibit 10.19 to the 1994  second quarter 10-Q).

       10.24      Lease for corporate office,  Edgefield,  South Carolina, dated
                  February  1,  1995,   between   the   Company  and   Edgefield
                  Properties,  Inc.  (incorporated by reference to Exhibit 10.24
                  to the  Company's  Report  on Form 10-Q for the  period  ended
                  April 2, 1995).

       10.26      Amended and Restated Loan and Security  Agreement dated August
                  9, 1995 between the Company and NationsBank of South Carolina,
                  N.A.  (incorporated  by  reference  to  Exhibit  10.26  to the
                  Company's  Report on Form 10-Q for the  period  ended  July 2,
                  1995 (the "1995 second quarter 10-Q")).

       10.27      Amended and Restated  Revolving  Credit  Promissory Note dated
                  August 9, 1995  between the Company and  NationsBank  of South
                  Carolina,  N.A. (incorporated by reference to Exhibit 10.27 to
                  the 1995 second quarter 10-Q).

       10.28      Amended and Restated Term Loan Promissory Note dated August 9,
                  1995,  between the Company and  NationsBank of South Carolina,
                  N.A.  (incorporated  by reference to Exhibit 10.28 to the 1995
                  second quarter 10-Q).

       10.29      1994 Incentive Stock Option and Stock Appreciation Rights Plan
                  (incorporated by reference to Exhibit 4.1 to the  Registration
                  Statement on Form S-8, Registration No. 333-15029).

       10.30      Amendment to Employment Agreement dated July 14, 1994, between
                  G.  Robert  Buchanan  and  Buchanan  Industries,  Inc.  (South
                  Carolina),  dated December 14, 1995 (incorporated by reference
                  to Exhibit 10.30 to the  Company's  Annual Report on Form 10-K
                  for the year ended

                                       46

<PAGE>





                  December 31, 1995 (the "1995 10-K")).

       10.31      Letter  Agreement,  dated October 25, 1996,  Modifying Amended
                  and  Restated  Loan and  Security  Agreement,  dated August 9,
                  1995, with  NationsBank,  N.A.  (incorporated  by reference to
                  Exhibit 10 to the Company's Report on Form 10-Q for the period
                  ended September 29, 1996).

       10.32      Second Amended and Restated Loan and Security  Agreement dated
                  December  16, 1996 between the Company and  NationsBank,  N.A.
                  (incorporated  by reference to Exhibit  10.32 to the Company's
                  Annual  Report on Form 10-K for the year  ended  December  31,
                  1996 (the "1996 10-K")).

       10.33      Second Amended and Restated  Revolving Credit  Promissory Note
                  dated  December 16, 1996 between the Company and  NationsBank,
                  N.A.  (incorporated  by  reference  to  Exhibit  10.33  of the
                  Company's 1996 10-K).

       10.34      Second Amended and Restated Term Loan Promissory Note dated
                  December 16, 1996 between the Company and NationsBank, N.A.
                  (incorporated by reference to Exhibit 10.34 of the Company's
                  1996 10-K).

       10.35      Letter  Agreement,  dated February 18, 1997,  Modifying Second
                  Amended  and  Restated  Loan  and  Security  Agreement,  dated
                  December 16, 1996, with  NationsBank,  N.A.  (incorporated  by
                  reference to Exhibit 10.35 of the Company's 1996 10-K).

       10.36      Third Amended and Restated Loan and Security Agreement,  dated
                  March  27,  1997   between   the   Company  and   NationsBank,
                  N.A.(incorporated   by  reference  to  Exhibit  10.36  of  the
                  Company's 1996 10-K).

       10.37      1997 Term Loan Promissory  Note,  dated March 27, 1997 between
                  the Company and NationsBank, N.A.(incorporated by reference to
                  Exhibit 10.37 of the Company's 1996 10-K).

       10.38      Letter Agreement,  dated May 2, 1997,  Modifying Third Amended
                  and  Restated  Loan and  Security  Agreement,  dated March 27,
                  1997, with  NationsBank,  N.A.  (incorporated  by reference to
                  Exhibit  10.38 to the  Company's  Report  on Form 10-Q for the
                  period ended March 30, 1997).

       10.39      Letter Agreement,  dated June 2, 1997, Modifying Third Amended
                  and  Restated  Loan and  Security  Agreement,  dated March 27,
                  1997, with  NationsBank,  N.A.  (incorporated  by reference to
                  Exhibit  10.39 to the  Company's  Report  on form 10-Q for the
                  period ended June 29, 1997 (the "1997 second quarter 10-Q")).

       10.40      Letter  Agreement,  dated  August  6,  1997,  Modifying  Third
                  Amended and Restated Loan and Security Agreement,  dated March
                  27, 1997, with NationsBank, N.A. (incorporated by reference to
                  Exhibit 10.40 to the 1997 second quarter 10-Q).

       10.41      Fourth Amended and Restated Loan and Security Agreement, dated
                  September  30,  1997,  between the  Company  and  NationsBank,
                  N.A.(incorporated   by  reference  to  Exhibit  10.41  to  the
                  Company's Report on form 10-Q for the period ended
                  September 28, 1997 (the "1997 third quarter 10-Q")).
                                       47

<PAGE>



       10.42      Third Amended and Restated  Revolving  Credit  Promissory Note
                  dated September 30, 1997, between the Company and NationsBank,
                  N.A.(incorporated  by reference  to Exhibit  10.42 to the 1997
                  third quarter 10-Q).

       10.43      Letter  Agreement,  dated  October 1, 1997,  Modifying  Fourth
                  Amended  and  Restated  Loan  and  Security  Agreement,  dated
                  September 30, 1997, with  NationsBank,  N.A.  (incorporated by
                  reference to Exhibit 10.43 to the 1997 third quarter 10-Q).

       10.44      Letter  Agreement,  dated January 20, 1998,  Modifying  Fourth
                  Amended  and  Restated  Loan  and  Security  Agreement,  dated
                  September 30, 1997, with NationsBank, N.A.

       10.45      1998  Amendment  to  the  Fourth  Amended  and  Restated  Loan
                  Agreement and Other  Documents dated March 4, 1998 between the
                  Company and NationsBank, N.A.

       10.46      1998 Overline Promissory Note, dated March 4, 1998 between the
                  Company and NationsBank, N.A.

       21.1       Subsidiaries  of  Registrant  (incorporated  by  reference  to
                  Exhibit 21.1 to the  Company's  Annual Report on Form 10-K for
                  the year ended December 31, 1994).

       23.1       Consent of Ernst & Young LLP

       27         Financial Data Schedule

(b)               Reports on Form 8-K

                  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 March 24, 1998.

                                MARTIN COLOR-FI, INC.

                                \s\ James F. Martin
                        By:     _________________________________________
                                JAMES F. MARTIN, Chief Executive Officer

                                \s\ Bret J. Harris
                        By:     _________________________________________
                                BRET J. HARRIS, 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 in the capacities indicated on March 24, 1998.

Signatures                            Title

s/James F. Martin
______________________________        Chairman of the Board, President &
James F. Martin                       Chief Executive Officer

s/Gregory W. Anderson
______________________________        Corporate Counsel, Secretary &
Gregory W. Anderson                   Director

s/Bret J. Harris
______________________________        Chief Financial Officer, Treasurer &
Bret J. Harris                        Director

______________________________        Director
W. Fred Davis, Jr.

______________________________        Director
James C. Hite

______________________________        Director
Jack J. Jackson

s/George L. Rainsford
______________________________        Director
George L. Rainsford

s/Bettis C. Rainsford
______________________________        Director
Bettis C. Rainsford

______________________________        Director
Jerry E. Trapnell

* Principal Financial and Accounting Officer

                                       49

<PAGE>





                                  EXHIBIT INDEX


<TABLE>
<CAPTION>

                                                                                                       Sequential
Exhibit Number    Description                                                                          Page Numbers


<S>     <C>                                                                                               <C>
        3.1       Restated Articles of Incorporation of the Company (incorporated by
                  reference to Exhibit 3.1 of the Company's S-1 Registration Statement
                  filed March 4, 1993, as amended, Registration No. 33-59124
                  ("the S-1 Registration Statement")).                                                    *

        3.2       First Amendment to Restated Articles of Incorporation of the Company
                  (incorporated by reference to Exhibit 3.2 of the S-1 Registration Statement).           *

        3.3       Amended and Restated Bylaws of the Company (incorporated by
                  reference to Exhibit 3.3 of the S-1 Registration Statement).                            *

        3.4       First  Amendment to Amended and Restated Bylaws of the Company
                  (incorporated by reference to Exhibit 4.5 to the 1994 second
                  quarter 10-Q).                                                                          *

       10.1       Loan and  security  Agreement  dated July 14, 1994 between the
                  Company and NationsBank of South Carolina,  N.A. (incorporated
                  by reference to Exhibit 10.1 to the  Company's  Report on Form
                  10-Q for the period  ended  October 2,  1994  (the "1994 third
                  quarter 10-Q")).                                                                        *

       10.2       Revolving Loan and Promissory Note dated July 14, 1994 between the
                  Company and NationsBank of South Carolina, N.A. (incorporated by
                  reference to Exhibit 10.2 of the 1994 third quarter 10-Q).                              *

       10.3       Term Loan and Promissory Note dated July 14, 1994 between the Company
                  and NationsBank of South Carolina, N.A. (incorporated by reference
                  to Exhibit 10.3 of the 1994 third quarter 10-Q).                                        *

       10.4       First  Amendment to Loan  Documents and Agreement  dated as of
                  February 15, 1995 between the Company and its subsidiaries and
                  NationsBank, National Association (Carolinas), as successor to
                  NationsBank of South Carolina, N.A. (incorporated by reference
                  to Exhibit 10.4 of the 1994 third quarter 10-Q).                                        *

       10.11      Lease for corporate offices (now the sales offices), Edgefield,
                  South Carolina, dated November 20, 1992 between the Company and
                  James F. Martin (incorporated by reference to Exhibit Number 10.13
                  of the S-1 Registration Statement).                                                     *

       10.14      Amended lease for corporate  offices (now the sales  offices),
                  Edgefield,  South  Carolina  dated  March 1, 1994  between the
                  Company  and James F. Martin  (incorporated  by  reference  to
                  Exhibit 10.21 of the Company's  Annual Report on Form 10-K for
                  the year ended December 31, 1993
                  (the "1993 10-K")).                                                                     *

                                       50

<PAGE>


       10.15      1993 Incentive Stock Option and Stock Appreciation Rights Plan
                  (incorporated by reference to Exhibit 4.1 of the Registration
                  Statement on Form S-8, Registration No. 333-15019).                                     *

       10.16      Noncompetition Agreements between Registrant and U. Benjamin
                  Tanner, Samuel C. Stevens, Jr., Russell T. Lyon, Heyward C.
                  Addy, Henry M. Poston and James F. Martin (incorporated by
                  reference to Exhibit 10.21 of the S-1 Registration Statement).                          *

       10.17      Form of Shareholder Tax Indemnity Agreement (incorporated by
                  reference Exhibit Number 10.22 of the S-1 Registration Statement).                      *

       10.18      1993 Non-Qualified Stock Option Plan of the Company (incorporated
                  by reference to Exhibit 4.1 of the Registration Statement on Form S-8,
                  Registration No. 333-15017).                                                            *

       10.19      Amended  Corporate  Buy-Sell  Agreement dated January 31, 1994
                  (incorporated by reference to Exhibit 10.16 of the Company's
                  1993 10-K).                                                                             *

       10.20      Employee 401(k) Profit Sharing Plan dated January 1, 1994
                  (incorporated by reference to Exhibit 10.17 of the 1993 10-K).                          *

       10.21      Employment Agreement dated July 14, 1994, between G. Robert
                  Buchanan and Buchanan Industries, Inc. (South Carolina) (incorporated
                  by reference to Exhibit 10.20 to the 1994 second quarter 10-Q).                         *

       10.22      Employment Agreement dated July 13, 1994 between W. Fred Davis, Jr.
                  and Martin Color-Fi, Inc. (incorporated by reference to Exhibit
                  10.19 to the 1994 second quarter 10-Q).                                                 *

       10.24      Lease for corporate office, Edgefield, South Carolina, dated
                  February 1, 1995, between the Company and Edgefield Properties, Inc.
                  (incorporated by reference to Exhibit 10.24 to the Company's Report
                  on Form 10-Q for the period ended April 2, 1995).                                       *

       10.26      Amended and Restated Loan and Security  Agreement dated August
                  9, 1995 between the Company and NationsBank of South Carolina,
                  N.A.  (incorporated  by  reference  to  Exhibit  10.26  to the
                  Company's  Report on Form 10-Q for the  period  ended  July 2,
                  1995 (the "1995 second quarter 10-Q")).                                                 *


       10.27      Amended and Restated Revolving Credit Promissory Note dated
                  August 9, 1995 between the Company and NationsBank of South Carolina,
                  N.A. (incorporated by reference to Exhibit 10.27 to the 1995 second
                  quarter 10-Q).                                                                          *

       10.28      Amended and Restated Term Loan Promissory Note dated August 9,
                  1995,  between the Company and  NationsBank of South Carolina,
                  N.A.

                                       51

<PAGE>





                  (incorporated by reference to Exhibit 10.28 to the 1995 second
                  quarter 10-Q).                                                                          *

       10.29      1994 Incentive Stock Option and Stock Appreciation Rights Plan
                  (incorporated by reference to Exhibit 4.1 to the Registration
                  Statement on Form S-8, Registration No. 333-15029.)                                     *

       10.30      Amendment to Employment Agreement dated July 14, 1994, between
                  G. Robert Buchanan and Buchanan Industries, Inc. (South Carolina),
                  dated December 14, 1995 (incorporated by reference to Exhibit 10.30
                  to the Company's Annual Report on Form 10-K for the year ended
                  December 31, 1995 (the "1995 10-K")).                                                   *

       10.31      Letter  Agreement,  dated October 25, 1996,  Modifying Amended
                  and  Restated  Loan and  Security  Agreement,  dated August 9,
                  1995, with  NationsBank,  N.A.  (incorporated  by reference to
                  Exhibit 10 to the Company's Report on Form 10-Q for the period
                  ended September 29, 1996).                                                              *

       10.32      Second Amended and Restated Loan and Security  Agreement dated
                  December  16, 1996 between the Company and  NationsBank,  N.A.
                  (incorporated  by reference to Exhibit  10.32 to the Company's
                  annual  Report on Form 10-K for the year  ended  December  31,
                  1996 (the "1996 10-K")).                                                                *

       10.33      Second Amended and Restated Revolving Credit Promissory Note
                  dated December 16, 1996 between the Company and NationsBank, N.A.
                  (incorporated by reference to Exhibit 10.33 of the Company's 1996 10-K).                *

       10.34      Second  Amended and Restated Term Loan  Promissory  Note dated
                  December 16, 1996 between the Company and NationsBank, N.A.
                  (incorporated by reference to Exhibit 10.34 of the Company's 1996 10-K).                *

       10.35      Letter Agreement, dated February 18, 1997, Modifying Second Amended
                  and Restated Loan and Security Agreement, dated December 16, 1996,
                  with NationsBank, N.A.(incorporated by reference to Exhibit 10.35
                  of the Company's 1996 10-K).                                                            *

       10.36      Third Amended and Restated Loan and Security Agreement, dated
                  March 27, 1997 between the Company and NationsBank, N.A.(incorporated
                  by reference to Exhibit 10.36 of the Company's 1996 10-K).                              *

       10.37      1997 Term Loan Promissory Note, dated March 27, 1997 between the
                  Company and NationsBank, N.A.(incorporated by reference to Exhibit 10.37
                  of the Company's 1996 10-K).                                                            *

       10.38      Letter Agreement,  dated May 2, 1997,  Modifying Third Amended
                  and  Restated  Loan and  Security  Agreement,  dated March 27,
                  1997, with  NationsBank,  N.A.  (incorporated  by reference to
                  Exhibit 10.38 to the Company's  Report  on  Form  10-Q for the
                  period ended March 30, 1997)                                                            *

       10.39      Letter Agreement, dated June 2, 1997, Modifying Third Amended and

                                       52

<PAGE>




                  Restated Loan and Security Agreement, dated March 27, 1997, with
                  NationsBank, N.A. (incorporated by reference to Exhibit 10.39 to
                  the Company's Report on Form 10-Q for the period ended June 29, 1997
                  (the "1997 second quarter 10-Q")).                                                      *

       10.40      Letter Agreement, dated August 6, 1997, Modifying Third Amended and
                  Restated Loan and Security Agreement, dated March 27, 1997, with
                  NationsBank, N.A. (incorporated by reference to Exhibit 10.40 to
                  the 1997 second quarter 10-Q).                                                          *

       10.41      Fourth Amended and Restated Loan and Security Agreement, dated September
                  30, 1997, between the Company and NationsBank, N.A.(incorporated by reference
                  to Exhibit 10.41 to the Company's Report on form 10-Q for the period ended
                  September 28, 1997 (the "1997 third quarter 10-Q")).                                    *

       10.42      Third Amended and Restated Revolving Credit Promissory Note dated
                  September 30, 1997, between the Company and NationsBank, N.A.(incorporated
                  by reference to  Exhibit 10.42 to the 1997 third quarter 10-Q).                         *

       10.43      Letter Agreement, dated October 1, 1997, Modifying Fourth Amended and
                  Restated Loan and Security Agreement, dated September 30, 1997, with
                  NationsBank, N.A.(incorporated by reference to Exhibit 10.43 to the 1997
                  third quarter 10-Q).                                                                    *

       10.44      Letter Agreement, dated January 20, 1998, Modifying Fourth Amended and
                  Restated Loan and Security Agreement, dated September 30, 1997, with
                  NationsBank, N.A.                                                                       Attached

       10.45      1998  Amendment  to  the  Fourth  Amended  and  Restated  Loan
                  Agreement and Other  Documents dated March 4, 1998 between the
                  Company and NationsBank, N.A.                                                           Attached

       10.46      1998 Overline Promissory Note, dated March 4, 1998 between the Company and
                  NationsBank, N.A.                                                                       Attached

       21.1       Subsidiaries of Registrant (incorporated by reference to Exhibit 21.1
                  to the Company's Annual Report on Form 10-K for the year ended
                  December 31, 1994).                                                                     *

       23.1       Consent of Ernst & Young LLP                                                            Attached


       27         Financial Data Schedule                                                                 Attached


(b)               Reports on Form 8-K

                  None.
</TABLE>

*        Incorporated by reference


                                       53