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, 1996

                                       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 $7.875 per share (the closing price of such
stock on February 28, 1997 on The Nasdaq Stock Market): $21,018,036 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 26, 1997 was 6,700,129.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders  (the  "Proxy  Statement")(to  be  filed  with the  Securities  and
Exchange  Commission on or before April 30, 1997) are  incorporated by reference
in Part III hereof.

Exhibit Index on sequentially numbered page 50

<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..............................................8
   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.....................17
   Item 9.    Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure.............................46

Part III -

   Item 10. Directors and Executive Officers of the Registrant................46
   Item 11. Executive Compensation............................................46
   Item 12. Security Ownership of Certain Beneficial Owners and Management....46
   Item 13. Certain Relationships and Related Transactions....................46

Part IV -

  Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....47

Signatures....................................................................51

Exhibit Index.................................................................52



                                       2
<PAGE>

                                     PART I

Item 1.  Business

         General

         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>

                                       1996                       1995                     1994
                                       ----                       ----                     ----
                                Net         % of          Net          % of          Net         % of
                                Sales        Total       Sales         Total       Sales         Total
                                -----        -----       -----         -----       -----         -----

<S>                          <C>            <C>      <C>               <C>      <C>              <C>
Fibers and Recycling
 Division                    $  69,873      61.1%    $  82,101         70.2%    $ 81,623         79.7%
Carpet Division                 30,871      27.0%       22,262         19.0%      11,398         11.1%
Yarn Division                    8,959       7.8%        8,412          7.2%       4,818          4.7%
Pigments and Additives           4,713       4.1%        4,195          3.6%       4,654          4.5%
                             ---------      -----    ---------         ----     --------         ----
                             $ 114,416      100%     $ 116,970         100%     $102,493         100%
                             =========      ====     =========         ====     ========         ====
</TABLE>

         Fibers and Recycling Division

         During 1996,  the  principal  products of the Company were fibers which
are marketed to a broad spectrum 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 has  historically  produced  polyester  fibers in
deniers  from 2 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.



                                        3

<PAGE>

<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                         1996    1996     1996     1996     1995     1995    1995     1995
                                    ----    ----     ----     ----     ----     ----    ----     ----
<S>                                 <C>     <C>      <C>      <C>      <C>      <C>     <C>      <C>
Automotive Fabrics                   20%     20%      19%      25%      21%      35%     31%      27%
Floor Coverings                       7%      8%       7%       5%       4%       3%      3%       4%
Home Furnishings & Domestic:
   Fiberfill (slick)                 19%     15%      14%      16%      25%      17%     20%      22%
   Fiberfill (high loft)             17%     17%      18%      17%      13%       9%      9%       8%
   Other                             11%     12%       9%       8%      11%      10%      5%       4%
Industrial                           22%     20%      28%      23%      23%      22%     24%      30%
Construction Reinforcement            3%      5%       4%       4%       2%       3%      5%       4%
Apparel                               1%      3%       1%       2%       1%       1%      3%       1%
                                    ---     ---      ---      ---      ---      ---     ---      ---
                                    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 in the process of  evaluating  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 1996  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 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 in the process of evaluating 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 1996 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 in  the  process  of
evaluating  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 1996 related to this area was not material.

                                        4

<PAGE>

         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 6 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  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.

         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 1997,  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 converted  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 1997,  the supply of raw material  returned to normal levels from the
lower levels experienced during a significant portion of 1995.

                                        5
<PAGE>

         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 $.6301 in 1991 to a high of
$.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 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,  1996,  the  Company  employed  approximately  991
persons,  of whom  approximately  188 employees  were in  management,  sales and
administration and the balance of whom were involved in the

                                        6

<PAGE>



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, 1996 are set forth in the table below:
<TABLE>
<CAPTION>

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

<S>                                                             <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

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

Laurens, South Carolina    Yarn Manufacturing and
                              Warehousing                       123,670                 Owned

</TABLE>

                                        7

<PAGE>


         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 alleges, 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 seeks 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 has been
reached with the class plaintiff under which the Company's  settlement liability
is fixed at  $2,000,000.  In  exchange  for a  written  release,  the  Company's
insurance carrier has provided $850,000 of this amount. 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. Final settlement of the matter remains subject to final court
approval.

         At December  31, 1995,  the Company  accrued the  estimated  settlement
amount, which includes legal fees less insurance proceeds,  as a liability.  The
Company's portion of the settlement has been funded by bank debt.

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

         None.

                                     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 26, 1997, the Company had  approximately  1700 stockholders
based on the  number of  holders  of record  and an  estimate  of the  number of
individual participants represented by security position listings.



                                        8

<PAGE>



                                                             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




                                                             1995
                                                    ----------------------
                                                    High              Low
                                                    ----------------------

First Quarter                                       6                 4
Second Quarter                                      7 1/2             4 1/2
Third Quarter                                       9                 5 3/4
Fourth Quarter                                      6 3/8             3 1/2

For the Year                                        9                 3 1/2

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  December 31, 1996 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
provisions  that  would  have been made for each of the two years in the  period
ended December 31, 1993 if the Company's  income had been taxable to the Company
rather than  directly  to its  shareholders  during  such  periods or portion of
periods. The data presented below should be read in conjunction with the audited
financial statements, including the related notes thereto, included elsewhere in
this report.


                                        9

<PAGE>


<TABLE>
<CAPTION>

                                                                                          Year Ended December 31,
                                                                 1996           1995          1994               1993         1992
                                                                 ----           ----          ----               ----         ----
                                                                                   (In thousands, except per share data)

Statements of Income Data:

<S>                                                            <C>           <C>           <C>                 <C>          <C>
Net sales .................................................    $ 114,416     $ 116,970     $ 102,493           $ 73,971     $69,838
   Cost of sales ..........................................       91,453        95,265        89,229             63,051      59,326
                                                               ---------     ---------     ---------           --------     -------
Gross profit ..............................................       22,963        21,705        13,264             10,920      10,512
   Selling, general and administrative
      expenses ............................................       12,026        12,611         9,624              5,153       4,799
                                                               ---------     ---------     ---------           --------     -------
Operating income ..........................................       10,937         9,094         3,640              5,767       5,713
   Interest expense, net ..................................       (4,335)       (4,658)       (3,366)            (2,055)     (2,286)
   Other income ...........................................          234           244           141                121          92
                                                               ---------     ---------     ---------           --------     -------
Income before income taxes ................................        6,836         4,680           415              3,833       3,519
Provision for income taxes ................................        2,402         1,724           204              2,183        --
                                                               ---------     ---------     ---------           --------     -------
Income before extraordinary item ..........................        4,434         2,956           211              1,650       3,519
Extraordinary item:  Extinguishment of debt
   (less applicable income tax benefit of $68)  ...........            -             -          (117)                 -           -
                                                               ---------     ---------     ---------           --------     -------
Net income ................................................    $   4,434     $   2,956     $      94           $  1,650     $ 3,519
                                                               ---------     ---------     ---------           ========     =======
Income before extraordinary item
   per share ..............................................    $    0.67     $    0.44     $    0.03           $   0.28           -
                                                               =========     =========     =========           ========     =======
Net income per share ......................................    $    0.67     $    0.44     $    0.01           $   0.28           -
                                                               =========     =========     =========           ========     =======
Pro forma net income data:
Net income before income taxes and
   extraordinary item, as reported ........................    $   6,836     $   4,680     $     415           $  3,833     $ 3,519
Pro forma income tax provision (1) ........................        2,402         1,724           204              1,403       1,354
                                                               ---------     ---------     ---------           --------     -------

Pro forma income before
   extraordinary item .....................................        4,434         2,956           211              2,430       2,165
Pro forma extraordinary item, net of
   income tax benefit .....................................            -             -          (117)                 -           -
                                                               ---------     ---------     ---------           --------     -------
Pro forma net income (1) ..................................    $   4,434     $   2,956     $      94           $  2,430     $ 2,165
                                                               =========     =========     =========           ========     =======
Pro forma income before extraordinary
   item per share .........................................    $    0.67     $    0.44     $    0.03           $   0.41     $  0.43
                                                               =========     =========     =========           ========     =======

Pro forma net income per share (1)(2) .....................    $    0.67     $    0.44     $    0.01           $   0.41     $  0.43
                                                               =========     =========     =========           ========     =======
Weighted average shares outstanding (4)....................        6,660         6,657         6,590              5,985       5,000
                                                               =========     =========     =========           ========     =======
</TABLE>

                                        10

<PAGE>


<TABLE>
<CAPTION>

                                                                                               December 31,
                                                                                               ------------
                                                                  1996            1995           1994           1993            1992
                                                                  ----            ----           ----           ----            ----
                                                                                            (In thousands)
Balance Sheet Data:

<S>                                                             <C>             <C>            <C>            <C>            <C>
Working capital ........................................        $ 30,479        $27,969        $10,910        $11,126        $ 7,493
Property, plant and equipment, net .....................          42,873         40,214         39,294         27,055         17,840
Total assets ...........................................         102,616         94,966         93,678         71,491         52,648
Total short-term debt(3) ...............................           6,725          4,472         24,577         24,604         20,104
Total long-term debt(3) ................................          44,429         45,168         30,315         16,624         16,995
Shareholders' equity ...................................          30,173         25,632         22,656         21,008          8,701
</TABLE>

(1)  For the 1992  period  and  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  offering  was
     consummated on January 1, 1993, would be $0.41 per share.

(3)  Includes  notes  payable to  shareholders  for periods  ending 1992 through
     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.

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

         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, 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  to  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 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

                                       12

<PAGE>



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.

         Financial Condition

         Current  assets  increased  to $53.3  million at December 31, 1996 from
$48.0  million at December 31, 1995.  The increase was  primarily  related to an
increase in accounts  receivable by $2.2 million,  an increase in inventories by
$1.8  million and an increase in other  assets by $856  thousand.  The change in
accounts  receivable  resulted directly from higher fourth quarter sales in 1996
of $27.7  million  versus  $23.1  million  in the fourth  quarter  of 1995.  The
increase in  inventories  was  primarily  related to an increase in raw material
inventories  at the Carpet  Division  due directly to the growth in sales volume
during the year which required a larger raw material inventory.

         The  increase  in other  assets  is due  directly  to an  amount  to be
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.

         The increase in property,  plant and equipment by $2.7 million resulted
primarily  from  purchases  of  $6.7  million,  primarily  related  to  the  new
production  line  discussed  herein,  offset  by  depreciation  expense  of $3.8
million.

         Current  liabilities  increased  by $2.8  million  primarily  due to an
increase in the current portion of debt by $2.3 million.

                                       13

<PAGE>

         Outlook

         During the third quarter of 1995,  the market  conditions for polyester
fiber  changed  rapidly as a result of a  significant  reduction  in demand from
China and a  corresponding  redirection of production from other Asian countries
from China to European and U.S. markets. The Company believes this change caused
its  international  customers to delay  purchases,  relying  instead on existing
inventories  that they had  built up  during  the  second  quarter  due to their
perception  of  a  shortage  of  polyester  fiber.  Also,  the  availability  of
low-priced  Asian  imports  caused a reduction  in  shipments  of the  Company's
commodity product lines.

         The above  market  conditions  resulted  in a  weakened  demand for the
Company's polyester fibers.  Demand remained at a lower level during 1996 and is
expected to remain at this level into the first part of 1997.  The  weakening of
the  polyester  market has resulted in  decreasing  recycled raw material  costs
resulting in a downward pressure on polyester fiber selling prices.  The Company
anticipates  its polyester fiber selling prices will follow these general market
trends.

         The Company  installed a new production  line during the latter part of
the third  quarter of 1996 for the  manufacture  of fine  denier,  solution-dyed
fiber.  The  Company  began  test  production  during the third  quarter  and is
expected to begin  shipping  products  during the first quarter of 1997. The new
line  will  enhance  the  Company's  diversity  of  product  mix in  fibers  for
automotive and industrial fabrics,  nonwovens, home furnishings and apparel. The
fine  denier  line is  expected to enable the Company to produce in excess of 20
million pounds of 2 denier fiber each year.

         Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

         Net  Sales.  Net sales  increased  14.1% to $117.0  million in the year
ended  December 31,  1995,  from $102.5  million in the year ended  December 31,
1994.  This net sales growth was  primarily  related to the  inclusion of a full
year's  net  sales  in 1995 for the  Palmetto  Spinning  Corporation  subsidiary
acquired  effective June 1, 1994 ($8.4  million),  and net sales of the Buchanan
Industries, Inc. subsidiary acquired effective May 29, 1994 ($22.3 million).

         Net sales in the Fibers Division increased slightly to $82.1 million in
1995 from  $81.6  million  in 1994.  Net sales  from PET fiber  increased  $11.9
million  due  primarily  to an increase in the average PET fiber sales price per
pound to $0.826 in 1995 from $0.6941 in 1994 and a slight  increase in shipments
to 90.9  million  pounds in 1995  from  90.8  million  in 1994.  Net sales  from
shipments of nylon fiber, pellets, trading materials, PET plastics, and chemical
polymer sales decreased to $8.7 million in 1995 from $20.1 million in 1994 which
was  directly  related to a decrease in  shipments  for all of the areas  except
pellet sales. The decrease in shipments was a result of management's decision to
temporarily exit these markets due to market conditions.

                                       14

<PAGE>

         Gross Profit.  Gross profit increased 63.6% to $21.7 million in 1995 as
compared to $13.3 million in 1994.  As a percentage  of net sales,  gross profit
increased to 18.6% in 1995  compared to 12.9% in 1994.  Special  charges of $2.0
million were incurred in 1994. These charges consisted of special adjustments of
$400  thousand to the carrying  value of certain  inventory,  the recording of a
$1.6 million reserve for excess  quantities of low-grade raw materials,  as well
as the bulk sale of inventory located at the unprofitable  warehouse facility in
Decatur,  Alabama, which management decided to close. Excluding the $2.0 million
special charges in 1994, the gross profit  percentage was 14.9%. The increase in
the normal gross profit  percentage to 18.6% from 14.9% relates  directly to the
increase in the average  PET fiber sales price per pound  discussed  above which
offset  gross profit  percentage  decreases  in the  Pigment,  Yarn,  and Carpet
Divisions.

         Selling,    General   and   Administrative.    Selling,   general   and
administrative  expenses  were  $12.6  million,  or 10.8%  of net  sales in 1995
compared to $9.6 million or 9.4% of net sales in 1994. The increase in SG&A is a
result of the acquisitions  discussed above and an accrual of $1.2 million which
is the amount  estimated to be paid for the  settlement of a lawsuit.  Excluding
the settlement  accrual,  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 was due to the fact that Buchanan Industries,  which was included in the
Company's results of operations for a full year for the first time in 1995, 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.

         Interest  Expense.  Interest expense  increased to $4.7 million in 1995
from $3.4 million in 1994.  This increase was due to a  significant  increase in
the average outstanding debt balance during 1995 compared to 1994, interest rate
increases  coinciding  with  general  market  interest  rate  increases,  and an
interest rate  increase due to  amendments to bank loan  agreements in the first
quarter  of 1995.  The  additional  borrowings  were  incurred  to  finance  the
acquisitions discussed above and increases in property, plant and equipment.

         Income Tax  Provision.  Income tax expense for 1995  increased  to $1.7
million  compared to $204  thousand for 1994.  The increase was primarily due to
the increase in pretax income.

         Net  Income and Net Income  Per  Share.  Net income  increased  to $3.0
million or $0.44 per share in 1995  compared to a net income of $94  thousand or
$0.01 per share in 1994. The increase  related directly to the increase in gross
profit and gross profit  percentage  which was partially  offset by increases in
SG&A and interest expense.

                                       15

<PAGE>

         Liquidity and Capital Resources

         The Company  generated  cash from  operations  of $5.7  million in 1996
compared to $11.1  million in 1995.  The  decrease in cash from  operations  was
primarily a result of an increase in net operating assets and  liabilities.  The
increase was primarily a result of increases in  receivables,  accounts  payable
and  accrued  expenses  offset by a decrease  in the net change of  inventories.
Also, the decrease in cash from operations was partially  offset by increases in
net income, depreciation, amortization and deferred taxes.

         Net cash used in investing  activities amounted to $7.1 million in 1996
compared to $6.2 million in 1995. The Company increased its investing activities
during 1996 by $900  thousand due  primarily to increased  capital  additions in
1996  over  1995.  The  Company  funded  the 1996  capital  additions  under the
revolving line of credit and the term loan agreement.

         Net cash provided by financing  activities amounted to $1.6 million for
1996 compared to net cash used in financing activities of $5.3 million for 1995.
The  significant  change  occurred due to an increase in the  revolving  line of
credit as a result of borrowings to fund a portion of the capital  additions for
1996 which were not funded by the term loan.

         The Company's loan  agreements  with financial  institutions  contain a
number of restrictive covenants. See Note 6 of Notes to Financial Statements.

         On December 16, 1996, the Company extended the existing  revolving line
of credit  agreement  with a bank to June 2, 1998.  The  agreement  provides for
borrowings not to exceed the lesser of $25 million, or an agreed-upon  borrowing
base.

         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.

         As  previously  discussed,  the  Company has funded the  settlement  of
litigation with bank debt.

         The Company believes that the financial resources available to it under
its revolving line of credit, the 1997 Term Loan and other internally  generated
funds  will  adequately  meet  its  foreseeable   working  capital  and  capital
expenditures requirements.


                                       16

<PAGE>

Item 8.  Financial Statements and Supplementary Data


                                               Martin Color-Fi, Inc.

                                         Consolidated Financial Statements






List of Financial Statements

Report of Independent Auditors...............................................18

Audited Consolidated Financial Statements

    Consolidated Balance Sheets..............................................19
    Consolidated Statements of Income........................................21
    Consolidated Statements of Shareholders' Equity..........................22
    Consolidated Statements of Cash Flows....................................24
    Notes to Consolidated Financial Statements...............................27


                                       17

<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, 1996 and 1995, and the related  consolidated  statements
of income,  shareholders'  equity and cash flows for each of the three  years in
the period  ended  December  31, 1996.  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, 1996 and 1995, and the  consolidated  results of
its  operations,  and its cash  flows for each of the three  years in the period
ended  December 31, 1996,  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, 1997,
except for Note 13, as to which the date is
March 24, 1997


                                       18

<PAGE>

<TABLE>
<CAPTION>

                                               Martin Color-Fi, Inc.

                                            Consolidated Balance Sheets

                                     (In Thousands, except Share Related Data)



                                                                                      December 31,
                                                                                   1996          1995
                                                                                   ----          ----

<S>                                                                            <C>              <C>
Assets
Current assets:
  Cash ...............................................................         $    272         $    12
  Accounts receivable, less allowance of $150
    in 1996 and 1995 .................................................           12,622          10,403
Inventories (Note 4)                                                             38,678          36,922
  Prepaid expenses ...................................................              881             652
  Income tax receivable ..............................................                -              51
  Other assets .......................................................              856               -
                                                                               --------         -------


Total current assets .................................................           53,309          48,040

Property, plant and equipment, net (Note 5) ..........................           42,873          40,214

Goodwill (net of accumulated amortization of $500
  and $291 for 1996 and 1995, respectively) ..........................            5,091           4,852

Other assets .........................................................            1,343           1,860
                                                                               --------         -------


Total assets .........................................................         $102,616         $94,966
                                                                               ========         =======
</TABLE>


                                       19

<PAGE>

<TABLE>
<CAPTION>

                                               Martin Color-Fi, Inc.

                                      Consolidated Balance Sheets (continued)

                                     (In Thousands, except Share Related Data)



                                                                                        December 31,
                                                                                   1996             1995
                                                                                   ----             ----

<S>                                                                             <C>               <C>
Liabilities and shareholders' equity
Current liabilities:
  Accounts payable and accrued expenses ..............................          $ 16,105          $15,599
 Current portion of debt (Note 6) ....................................             6,725            4,472
                                                                                --------          -------


Total current liabilities ............................................            22,830           20,071

Deferred income taxes (Note 9) .......................................             5,184            4,061

Long-term portion of debt (Note 6) ...................................            44,429           45,168

Other non-current liabilities ........................................                 -               34

Shareholders' equity:
  Common stock, no par value:
    Authorized shares - 50,000,000 in 1996 and 1995
    Issued and outstanding shares - 6,681,479 and
      6,657,483 in 1996 and 1995, respectively .......................               832              832
  Additional paid-in capital .........................................            19,861           19,754
Retained earnings.....................................................             9,480            5,046
                                                                                --------          -------


Total shareholders' equity ...........................................            30,173           25,632
                                                                                --------          -------


Total liabilities and shareholders' equity ...........................          $102,616          $94,966
                                                                                ========          =======
</TABLE>




See accompanying notes.

                                       20

<PAGE>

<TABLE>
<CAPTION>
                                               Martin Color-Fi, Inc.

                                         Consolidated Statements of Income

                                     (In Thousands, except Share Related Data)


                                                                                                Year Ended December 31,
                                                                         1996                            1995                 1994
                                                                         ----                            ----                 ----


<S>                                                                 <C>                               <C>               <C>
Net sales ..................................................        $   114,416                       $  116,970        $   102,193
Cost of sales ..............................................             91,453                           95,265             89,229
                                                                    -----------                       ----------        -----------


Gross profit ...............................................             22,963                           21,705             13,264
Selling, general and administrative expenses ...............             12,026                           12,611              9,624
                                                                    -----------                       ----------        -----------


Operating income ...........................................             10,937                            9,094              3,640
Interest expense ...........................................             (4,335)                          (4,658)            (3,366)
Other income ...............................................                234                              244                141
                                                                    -----------                       ----------        -----------

Income before income taxes and extraordinary
  item .....................................................              6,836                            4,680                415

Provision for income taxes (Notes 2 and 9) .................              2,402                            1,724                204
                                                                    -----------                       ----------        -----------


Income before extraordinary item ...........................              4,434                            2,956                211

Extraordinary item - extinguishment of debt
  (less applicable income tax benefit of $68) ..............                  -                                -               (117)
                                                                    -----------                       ----------        -----------


Net income .................................................        $     4,434                       $    2,956        $        94
                                                                    ===========                       ==========        ===========


Income before extraordinary item per share .................        $      0.67                       $     0.44        $      0.03
                                                                    ===========                       ==========        ===========


Net income per share .......................................        $      0.67                       $     0.44        $      0.01
                                                                    ===========                       ==========        ===========


Weighted average shares outstanding (Note 2) ...............          6,660,356                        6,657,483          6,589,903
                                                                      =========                        =========          =========
</TABLE>

See accompanying notes.

                                                        21
<PAGE>
<TABLE>
<CAPTION>

                                                       Martin Color-Fi, Inc.

                                          Consolidated Statements of Shareholders' Equity

                                             (In Thousands, except Share Related Data)


                                                                                                                 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, 1993 .........................       6,490,817       $832     $18,254       $1,996        ($74)      $21,008

  Net reduction in notes receivable from
    shareholders .....................................               -          -           -            -          54            54
  Common shares issued for business
    acquisition ......................................         166,666          -       1,500            -           -         1,500
  1994 net income ....................................               -          -           -           94           -            94
                                                             ---------       ----     -------       ------         ---       -------


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
                                                             =========       ====     =======       ======         ===       =======
</TABLE>



See accompanying notes.


                                       22

<PAGE>
<TABLE>
<CAPTION>

                                                       Martin Color-Fi, Inc.

                                               Consolidated Statements of Cash Flows

                                                           (In Thousands)



                                                                                                Year Ended December 31,
                                                                          1996                        1995                     1994
                                                                          ----                        ----                     ----

<S>                                                                     <C>                         <C>                      <C>
Operating activities
Net income ....................................................         $ 4,434                     $ 2,956                  $   94
Adjustments to reconcile net income to net cash
  provided by operating activities:
    Extraordinary item ........................................               -                           -                     185
    Depreciation and amortization .............................           4,222                       3,951                   3,097
    Inventory write-down ......................................               -                           -                   1,624
    Provision for doubtful accounts ...........................              71                          38                     423
    Deferred income taxes .....................................           1,123                         929                      53
    Loss on sale of equipment .................................              27                          85                     150
    Changes in operating assets and liabilities:
      Accounts receivable .....................................          (2,290)                      3,633                  (3,541)
      Income tax receivable ...................................              51                         913                    (964)
      Inventories .............................................          (1,756)                     (4,489)                  4,096
      Other assets ............................................            (417)                        461                    (294)
      Prepaid expenses ........................................            (229)                       (178)                   (215)
      Accounts payable and accrued expenses ...................             506                       2,830                    (358)
                                                                        -------                     -------                    ----


Net cash provided by operating activities .....................           5,742                      11,129                   4,350

Investing activities
Purchases of property, plant and equipment ....................          (6,653)                     (4,809)                 (5,748)
Acquisition of Buchanan Industries, Inc. and
  Palmetto Spinning Corporation, net of cash
  acquired ....................................................               -                           -                  (3,018)
Purchase of assets from Dye Pigments and
  Custom Colorants, Inc. and Custom Polymer
  Additives and Colors, Inc. ..................................            (575)                       (600)                      -
Deposits on purchase of equipment .............................            (139)                       (678)                   (519)
Net proceeds from sale of equipment ...........................             206                         210                     148
Other .........................................................              94                        (281)                    (50)
                                                                        -------                    --------                     ---


Net cash used in investing activities .........................          (7,067)                     (6,158)                 (9,187)
</TABLE>




                                       23

<PAGE>

<TABLE>
<CAPTION>

                                                       Martin Color Fi, Inc.

                                         Consolidated Statements of Cash Flows (continued)

                                                           (In Thousands)



                                                                                               Year Ended December 31,
                                                                          1996                          1995                 1994
                                                                          ----                          ----                 ----

<S>                                                                    <C>                            <C>                  <C>
Financing activities
Borrowings under line of credit ................................       $ 40,407                       $ 42,409             $ 55,485
Payments on line of credit .....................................        (37,734)                       (46,085)             (54,420)
Additional loan costs ..........................................            (36)                           (38)                (230)
Proceeds from issuance of long-term debt .......................          3,000                          3,000               35,503
Principal payments on long-term debt ...........................         (4,159)                        (4,576)             (29,619)
Proceeds from net shareholder debt .............................              -                             20                   54
Payments on net shareholder debt ...............................              -                              -               (1,637)
Proceeds from issuance of common stock .........................            107                              -                    -
                                                                       --------                       --------             --------


Net cash provided by (used in) financing activities ............          1,585                         (5,270)               5,136
                                                                       --------                       --------             --------


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

Cash and cash equivalents at beginning of year .................             12                            311                   12
                                                                       --------                       --------             --------


Cash and cash equivalents at end of year .......................       $    272                       $     12             $    311
                                                                       ========                       ========             ========


Supplemental disclosures of cash flow
information
Cash paid during the year for interest (net of
  amounts capitalized) .........................................       $  4,347                       $  4,697             $  3,222
Income taxes paid ..............................................          1,203                            874                  721
</TABLE>


                                       24

<PAGE>




                              Martin Color Fi, Inc.

                Consolidated Statements of Cash Flows (continued)

                                 (In Thousands)



Supplemental Schedule of Noncash Investing and Financing Activities

During 1994,  the Company  recorded  "other assets" and  liabilities  related to
three non-compete agreements with employees of the Company. At December 31, 1996
and 1995, other assets and liabilities  included  approximately  $34 and $79 for
the unpaid portion of these agreements, respectively.

Acquisition of Palmetto Spinning Corporation in 1994:

                                                                  (In thousands)

    Fair value of assets acquired and acquisition costs                 $ 8,991
    Liabilities assumed                                                  (4,098)
    Note issued                                                          (3,150)
                                                                        -------


    Total cash paid for net assets acquired and acquisition costs       $ 1,743
                                                                        =======



Acquisition of Buchanan Industries, Inc. in 1994:

                                                                  (In thousands)

     Fair value of assets acquired and acquisition costs                $10,686
     Liabilities assumed                                                 (6,453)
     Notes issued                                                        (1,420)
     Common stock issued (166,666 shares)                                (1,500)
                                                                        -------


     Total cash paid for net assets acquired and acquisition costs      $ 1,313
                                                                        =======



                                       25

<PAGE>



                              Martin Color Fi, Inc.

                Consolidated Statements of Cash Flows (continued)

                                 (In Thousands)



Supplemental Schedule of Noncash Investing and Financing Activities (continued)

In 1996, 1995, and 1994, the Company recorded additional goodwill, other assets,
and liabilities  totaling  approximately  $575 in 1996 and $600 in 1995 and 1994
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 Note 3).





See accompanying notes.

                                       26

<PAGE>



                              Martin Color Fi, Inc.

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

                                December 31, 1996



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.

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.

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.

Maintenance and repairs are expensed as incurred.  Interest expense incurred for
the  construction  of assets and  direct  costs of  self-constructed  assets are
capitalized.  Expenditures which  significantly  increase asset values or extend
useful lives are capitalized.  Upon retirement or other disposition, the cost of
the item and the related  accumulated  depreciation is removed from the accounts
and any gain or loss is included in income.

                                       27

<PAGE>



                              Martin Color Fi, Inc.

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



2. Summary of Significant Accounting Policies (continued)

Income Taxes

The  Company  accounts  for  its  income  taxes  under  Statement  of  Financial
Accounting  Standards No. 109,  "Accounting  for Income Taxes".  Deferred income
taxes are  recognized for the tax  consequences  of "temporary  differences"  by
applying  enacted  statutory tax rates applicable to future years to differences
between the financial  statement  carrying amounts and the tax basis of existing
assets and liabilities.

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 cash flows.

Loan costs are  amortized  over the life of the related  loan.  Amortization  of
these costs,  including a write-off of  approximately  $185  accounted for as an
extraordinary  item in 1994, was approximately  $60, $46, and $290 for the years
ended December 31, 1996, 1995, and 1994, 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
$271, $281, and $135 for 1996, 1995, and 1994, respectively.


                                       28

<PAGE>



                             Martin Color Fi, Inc.

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



2. Summary of Significant Accounting Policies (continued)

New Accounting Standards

On January 1, 1996, the Company  adopted the provisions of Financial  Accounting
Standards  Board Statement No. 123,  "Accounting  for Stock-Based  Compensation"
("SFAS No. 123").  This standard  applies to all transactions in which an entity
acquires  goods  and  services  by  issuing  equity  instruments,  such as stock
options, to employees or others. Under SFAS No. 123, the Company has a choice in
the method of accounting  used for stock-based  compensation.  The method chosen
can be either the  intrinsic  value based method  currently  used by the Company
within the scope of  Accounting  Principles  Board (APB) Opinion 25, or the fair
value method  introduced by SFAS No. 123 that might involve the  recognition  of
compensation expense. The Company has elected to account for the Company's stock
option  plan  under APB  Opinion  25, and to  provide  the pro forma  disclosure
required by SFAS No. 123.  Therefore,  the  implementation of SFAS No. 123 as of
January 1, 1996 had no effect on the Company's financial condition or results of
operations.

Also during 1996,  the Company  adopted the  provisions of Financial  Accounting
Standards  Board ("FASB")  Statement No. 121,  "Accounting for the Impairment of
Long-Lived  Assets and for  Long-Lived  Assets to be Disposed  Of" ("FAS  121"),
which  requires  impairment  losses to be recorded on long-lived  assets used in
operations when indicators are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying  amount.  The
effect of adoption did not have a material  impact on the  Company's  results of
operations as the provisions of the statement were consistent with the Company's
previously implemented policy.

Earnings Per Share

Earnings per common share are computed  based on the weighted  average number of
shares outstanding during each period. The effect of common stock equivalents on
earnings per share is not material.


3. Business Combinations

Palmetto Spinning Corporation

On June 13, 1994, the Company  purchased all of the outstanding  common stock of
Palmetto Spinning  Corporation  ("PSC") for $4,650.  PSC manufactures  synthetic
yarn used principally for the carpet industry.

The  acquisition,  which was  effective  as of the close of  business on May 31,
1994,  has been recorded using the purchase  method of accounting.  Accordingly,
the purchase price has been allocated to assets and  liabilities  based on their
estimated  fair values as of the  effective  date of  acquisition.  The purchase
price and expenses  associated with the  acquisition  exceeded the fair value of
PSC's net assets by approximately  $751, which has been assigned to goodwill and
is being amortized by the straight-line method over 25 years.



                                       29

<PAGE>



                              Martin Color Fi, Inc.

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



3. Business Combinations (continued)

Results of Palmetto Spinning Corporation since the date of acquisition have been
included in the consolidated financial statements of Martin Color-Fi, Inc.

The  acquisition  was  financed  by a note to the  sellers  of  $3,150  and bank
borrowings of $1,500.  The note to the sellers is  subordinated to all bank debt
and is convertible into Company  unregistered common stock at a conversion price
of $11.00 per share.

Buchanan Industries, Inc. (Georgia)

On June 1, 1994,  Buchanan  Industries,  Inc.  (South  Carolina) was formed as a
wholly  owned  subsidiary  of  Martin  Color-Fi,  Inc.  On July  14,  1994,  the
subsidiary  acquired all the assets and assumed certain  liabilities of Buchanan
Industries,  Inc.  (Georgia)  ("BI") for $3,980.  BI is a manufacturer of tufted
textile products  (carpet) and conducts business under the trade names of Condor
Carpets, Forum Carpets, Graphic Concepts, and Lakeview Distributing.

The  acquisition,  which was  effective  as of the close of  business on May 28,
1994,  has been recorded using the purchase  method of accounting.  Accordingly,
the purchase price has been allocated to assets and  liabilities  based on their
estimated  fair values as of the  effective  date of  acquisition.  The purchase
price and expenses  associated with the  acquisition  exceeded the fair value of
BI's net assets by approximately $2,936, which has been assigned to goodwill and
is being amortized by the straight-line method over 25 years.

Results  of  Buchanan  Industries,  Inc.  (South  Carolina)  since  the  date of
acquisition  have been  included in the  consolidated  financial  statements  of
Martin Color-Fi, Inc.

The purchase price consisted of notes to the seller of $1,420, 166,666 shares of
common stock of Martin Color- Fi Inc., valued at $1,500,  and bank borrowings of
$1,060.


                                       30

<PAGE>



                              Martin Color Fi, Inc.

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



3. Business Combinations (continued)

Pro Forma Information

The  following  unaudited pro forma results  assume the  transactions  described
above  occurred  as of the  beginning  of the  respective  year-to-date  periods
presented after giving effect to certain adjustments,  including amortization of
goodwill,   increased   interest  expense  on  acquisition  debt  and  increased
depreciation on property,  plant and equipment to reflect  increased fair market
values.  These  adjustments  were  applied  to the pro  forma  net  income  data
presented on the  consolidated  statements  of operations  for the  year-to-date
period presented.

                                                                   Year Ended
                                                                   December 31,
                                                                      1994
                                                                      ----


   Net sales                                                       $114,223
   Net income before extraordinary item                                  67
   Net (loss) income after extraordinary item                           (50)
   Net (loss) income per share                                         (.01)
   Weighted average shares outstanding (in thousands)                 6,659


The pro forma  financial  information  does not purport to be  indicative of the
results of operations that would have occurred had the transactions  taken place
at the beginning of the periods presented or of future results of operations.


4. Inventories

Inventories consist of the following:


                                                            December 31,
                                                     1996              1995
                                                     ----              ----


    Raw materials                                 $ 25,963          $ 22,811
    Finished goods                                  12,715            14,111
                                                  --------          --------


                                                  $ 38,678          $ 36,922
                                                  ========          ========


                                       31

<PAGE>



                              Martin Color Fi, Inc.

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



5. Property, Plant and Equipment

Property, plant and equipment consist of the following:

                                                               December 31,
                                                            1996          1995
                                                            ----          ----


    Land and buildings                                    $13,794       $13,690
    Machinery and equipment                                38,714        37,190
    Furniture and fixtures                                  3,523         3,132
    Machinery and equipment under construction              5,359         1,092
                                                          -------       -------


                                                           61,390        55,104
    Accumulated depreciation                              (18,517)      (14,890)
                                                          -------       -------


    Net property, plant and equipment                     $42,873       $40,214
                                                          =======       =======



Depreciation  expense of approximately  $3,761,  $3,594, and $2,858 was recorded
for the years ended December 31, 1996, 1995, and 1994, respectively.

Interest of  approximately  $234,  $55, and $198 was  capitalized  on qualifying
assets for the years ended December 31, 1996, 1995, and 1994, respectively.

At December 31, 1996, the Company had commitments to spend approximately $521 to
purchase other machinery and equipment.

                                       32

<PAGE>



                              Martin Color Fi, Inc.

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



6. Debt

At  December  31,  1996,  the  Company had two loan  agreements.  The  Company's
revolving  line of credit  agreement  with a bank provides for borrowings not to
exceed the lesser of $25,000 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, 1996, the interest rate was LIBOR
plus 240 basis points, or 7.84%.  This agreement was amended effective  December
16, 1996, which resulted in a long-term  classification  for this obligation.  A
single principal payment is due on June 2, 1998 with interest on the outstanding
principal  payable  monthly  beginning on August 12, 1995  continuing each month
with  final  payment of all  accrued  but unpaid  interest  on June 2, 1998.  At
December 31, 1996, the balance outstanding was $19,943 of which $943 is current.
The  unused  line of credit  available  is  $2,071  under  the  amended  formula
discussed below.

The Company also has a term loan agreement, amended effective December 16, 1996,
with a bank which  provides for  borrowings  up to $36,300.  The term loan bears
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  agreement,
adjusted  monthly.  At December 31, 1996,  the interest  rate was LIBOR plus 265
basis points, or 8.09%. The terms of the loan include monthly principal payments
of approximately  $300 plus interest with the principal  payments being adjusted
upward  based on  additional  drawings for capital  expenditures.  The loan also
requires 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 loan
matures on June 2, 1999.

On February 18, 1997, the debt agreements discussed above were amended effective
December 16, 1996.  The  amendments  provided for changes in the borrowing  base
formula until April 30, 1997.

The weighted  average  interest rate for  short-term  borrowings at December 31,
1996 was 8.4%,  which was the rate on the Company's line of credit as it was the
only short-term borrowing outstanding during 1996.

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.

At December 31, 1996, under the revolving line of credit agreement,  the Company
has available letters of credit in the aggregate principal amount up to $750.


                                       33

<PAGE>
<TABLE>
<CAPTION>



                                                       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:


                                                                                                                   December 31,
                                                                                                               1996           1995
                                                                                                               ----           ----


<S>                                                                                                          <C>             <C>
Term loan with a bank ..............................................................................         $27,868         $28,991

Revolving line of credit with a bank ...............................................................          19,943          17,270

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 (see Note 3) ......................................................           3,150           3,150

Note payable to former shareholder in monthly installments of $3, which includes
  principal plus interest at 8%, due
  June 2003 ........................................................................................             193             229
                                                                                                             -------        --------


                                                                                                              51,154          49,640

Less current portion ...............................................................................           6,725           4,472
                                                                                                             -------        --------


                                                                                                             $44,429         $45,168
                                                                                                             =======         =======
</TABLE>


                                       34

<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, 1996 are as follows:


         1997                              $ 6,725
         1998                               23,676
         1999                               20,637
         2000                                   30
         2001                                   32
         Thereafter                             54
                                           -------


                                           $51,154
                                           =======



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 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, $75,
and $50 for the years ended December 31, 1996, 1995, and 1994, respectively. For
the years ended  December  31,  1996,  1995,  and 1994,  the Company  made total
contributions to the plan of $295, $350, and $233, respectively.

In  addition,  PSC,  which was  acquired  on June 13,  1994 (see Note 3), had an
employee savings plan which permitted  employees to make contributions by salary
reduction  pursuant  to  section  401(k)  of  the  Internal  Revenue  Code.  The
Corporation  contributed  a 30%  match on  deferrals  up to a  maximum  of 6% of
compensation and could, at its discretion,  make additional contributions to the
plan. In connection with the required match, the  Corporation's  contribution to
the plan since the  acquisition  became  effective  was  approximately  $22.  No
discretionary  contribution was made.  Effective  January 1, 1995, this plan was
consolidated with the defined contribution profit-sharing plan discussed above.

                                       35

<PAGE>



                              Martin Color Fi, Inc.

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



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 in 1996 and 1995 for
the Corporate Office was $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.  Total rent expense
for all  operating  leases was  $1,508,  $1,558,  and $1,394 for the years ended
December 31, 1996, 1995, and 1994, respectively.

Future  minimum  rental  payments  under  noncancelable  operating  leases as of
December 31, 1996 are as follows:


         1997                                     $  935
         1998                                        527
         1999                                        144
         2000                                        122
         2001                                         85
         Thereafter                                  299
                                                  ------

                                                  $2,112
                                                  ======




                                       36

<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:



                                                                December 31,
                                                               1996        1995
                                                               ----        ----

Deferred tax liabilities:
  Tax over book depreciation ...........................      $6,984      $6,357
  Other ................................................         531         434
                                                              ------      ------


Total deferred tax liabilities .........................       7,515       6,791


Deferred tax assets:
  Tax inventory value over book ........................         218         187
  Allowance for doubtful accounts and accruals .........         532         579
  Alternative minimum tax credits ......................         941       1,087
  Net operating loss carryforwards .....................         640         877
                                                              ------      ------


Total deferred tax assets ..............................      $2,331      $2,730
                                                              ------      ------


Net deferred tax liabilities over tax assets ...........      $5,184      $4,061
                                                              ======      ======



At December 31, 1996, the Company has federal net operating  loss  carryforwards
of $1,487 and state net operating loss carryforwards of $2,693 which expire from
2001 to 2010.

                                       37

<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,
                                                                   1996                      1995                    1994
                                                                   ----                      ----                    ----

                                                          Amount          Percent        Amount   Percent       Amount    Percent
                                                          ------          -------        ------   -------       ------    -------

<S>                                                        <C>                <C>        <C>          <C>        <C>         <C>
Tax expense at U.S.
  statutory rate .................................         $2,324             34         $1,591       34         $141         34
State income taxes,
  net of Federal benefit .........................             78              1             91        2           10          2
Other ............................................              -              -             42        1           53         13
                                                           ------             --         ------       --         ----         --


                                                           $2,402             35         $1,724       37         $204         49
                                                           ======             ==         ======       ==         ====         ==

</TABLE>

The following  information  reflects the  components of the provision for income
taxes in 1996, 1995, and 1994:

                                               Year Ended December 31,


                                     1996             1995            1994
                                     ----             ----            ----

     Income tax provision:
       Current:
         Federal                    $1,201           $ 753             $ 151
         State                          78              42                 -
       Deferred                      1,123             929                53
                                    ------          ------             -----


                                    $2,402          $1,724             $ 204
                                    ======          ======             =====











                                       38

<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 FASB  Statement 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.

In 1993, the Company adopted two stock option plans for the purpose of providing
incentives  for retaining  qualified  and  competent  employees or for rewarding
employees for past performance.

The 1993  Incentive  Stock  Option  and  Stock  Appreciation  Rights  Plan  (the
"Qualified  Plan"),  permits the grant of options to purchase an aggregate of up
to  300,000  shares of common  stock of the  Company.  The  Qualified  Plan also
provides for the granting of up to 300,000 stock appreciation rights ("SARs") in
tandem with stock options.  Under the Qualified  Plan,  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 Company  also adopted the 1993  Non-Qualified  Stock Option Plan
(the "Non-Qualified Plan"), which 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).

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.

The 1994 Incentive Stock Option and Stock  Appreciation  Rights Plan was adopted
in 1994 and  permits  the grant of options to  purchase  an  aggregate  of up to
300,000  shares of common  stock of the Company.  All material  features of this
plan are  identical  to the 1993 plan  discussed  above.  No stock  appreciation
rights  have been  granted  under  either  plan as of  December  31,  1996.  The
following table summarizes stock option transactions during 1996 and 1995.


                                       39

<PAGE>
<TABLE>
<CAPTION>



                                                       Martin Color Fi, Inc.

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



10. Shareholders' Equity (continued)

                                               As of December 31, 1996         As of December 31, 1995
                                                            Option Price                Option Price
                                               Shares           Range          Shares      Range
                                               ------           -----          ------      -----
<S>                                           <C>          <C>                <C>          <C>
Options outstanding at beginning
  of period                                   244,500      $4.63 - $13.00     235,000      $8.25 - $13.00
Granted                                       163,500           $4.25          84,000           $4.63
Canceled                                      (88,503)     $4.25 - $13.00     (74,500)     $9.00 - $13.00
Exercised                                     (23,996)     $4.25 - $4.65           -              -


Options outstanding at end                    295,501      $4.25 - $13.00     244,500      $4.63 - $13.00
  of period


Options exercisable at end                    184,789      $4.25 - $13.00     159,640      $4.63 - $13.00
  of period


Options available for grant
  at end of period                            296,503                         371,500


Weighted average fair value of
options granted during the year               $2.72                              $2.97

</TABLE>


Pro forma information regarding net income and earnings per share is required by
Statement 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 1996
and 1995,  respectively;  risk-free  interest rates of 5.75% for both years;  no
dividend yield; volatility factors of the expected market price of the Company's
common stock of 0.43 for both years; and a weighted-average expected life of the
option of 7 years.



                                       40

<PAGE>



                              Martin Color Fi, Inc.

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



10. Shareholders' Equity (continued)

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):

                                                   1996              1995
                                                   ----              ----


         Pro forma net income                    $4,280             $2,910
         Pro forma earnings per share            $ 0.64             $ 0.44

The weighted-average remaining contractual life of those options is 6.1 years.

Shareholders' Agreement

The Company  entered into a  shareholders'  agreement upon the effective date of
its initial public offering.  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.


                                       41

<PAGE>



                              Martin Color Fi, Inc.

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



11.  Geographic Sales Information

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


                                            1996               1995
                                            ----               ----


         Domestic                         $105,876          $103,484
         Foreign                             8,540            13,486
                                          --------          --------


                                          $114,416          $116,970
                                          ========          ========



Net  sales  to  customers  outside  of  the  United  States  in  1994  were  not
significant.


12.  Fair Values of Financial Instruments

The fair values of the  Company's  financial  instruments  at December  31, 1996
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 $3,011 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.



                                       42

<PAGE>



                              Martin Color Fi, Inc.

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


13. Contingent Liability

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  has been  reached  with the class
plaintiff under which the Company's settlement liability is fixed at $2,000,000.
In exchange for a written release,  the Company's insurance carrier has provided
$850,000  of this  amount.  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.
Final settlement of the matter remains subject to final court approval.

At December 31, 1995, the Company accrued the estimated settlement amount, which
includes  legal fees less  insurance  proceeds,  as a liability.  The  Company's
portion of the settlement has been funded by bank debt.




                                       43

<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
--------------                                  ---------        --------          --------         ----------       ---------


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

Year ended December 31, 1994
Allowance for doubtful
   accounts ............................           $ 86           $423                 -           ($ 309)(1)          $ 200
                                                   ====           ====           =======           ======              =====
</TABLE>


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

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





                                       44

<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, 1996 and 1995.

<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 ................................              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 .....................            (0.01)            0.14            0.30            0.24             0.67
</TABLE>


<TABLE>
<CAPTION>


                                                                                         Quarter Ended
                                                         ----------------------------------------------------------
                                                         April 2          July 2        October 1       December 31          TOTAL
                                                         -------          ------        ---------       -----------          -----

                                                               (In thousands, except per share data)

1995

<S>                                                      <C>             <C>             <C>             <C>               <C>
Net sales ......................................         $34,746         $31,855         $27,230         $ 23,139          $116,970
Gross profit ...................................           6,108           6,653           4,947            3,997            21,705
Operating profit (loss) ........................           2,970           3,938           2,211              (25)            9,094
Net income (loss) ..............................           1,041           1,791             742             (618)            2,956

Net income (loss) per share ....................            0.16            0.27            0.11            (0.09)             0.44*
</TABLE>


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

                                       45

<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 1997  Annual  Meeting  of  Stockholders  to be filed with the
Securities  and  Exchange  Commission  on or  before  April  30,  1997  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 1997 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 8 through  12) in the
Company's  Proxy  Statement for the 1997 Annual  Meeting of  Stockholders  to be
filed with the Securities and Exchange Commission on or before April 30, 1997 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 1997 Annual  Meeting of  Stockholders  to be filed with the  Securities  and
Exchange  Commission  on or before  April 30,  1997 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 1997
Annual  Meeting of  Stockholders  to be filed with the  Securities  and Exchange
Commission  on or before  April 30,  1997 is hereby  incorporated  by  reference
herein.

                                       46

<PAGE>

                                     PART IV

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

(a)  1.   Financial Statements

          Consolidated  statements  of income for the years ended  December  31,
          1996, 1995 and 1994

          Consolidated balance sheets at December 31, 1996 and 1995

          Consolidated  statements  of  shareholders  equity for the years ended
          December 31, 1996, 1995 and 1994

          Consolidated statements of cash flows for the years ended December 31,
          1996, 1995 and 1994

          Notes to consolidated financial statements

          Consolidated schedules for the years ended December 31, 1996, 1995 and
          1994:

               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.  Supplemental
              schedules  other than the one listed above are omitted  because of
              the absence of conditions under which they are required or because
              the required information is included in the consolidated financial
              statements or in the notes thereto.

       3.     Exhibits

       2.1    Agreement   for  Purchase   and  Sale  of  Assets  from   Buchanan
              Industries, Inc. dated July 14, 1994, effective as of May 28, 1994
              (incorporated  by reference to Exhibit 2.1 to the Company's Report
              on Form 10-Q for the period  ended July 3, 1994 (the "1994  second
              quarter 10-Q")).

       2.2    Stock Purchase Agreement between the Company and Palmetto Spinning
              Corporation,  et al. dated June 13, 1994,  effective as of May 31,
              1994  (incorporated by reference to Exhibit 2.2 to the 1994 second
              quarter 10-Q).

       3.1    Restated Articles of Incorporation of the Company (incorporated by
              reference  to  Exhibit  3.1  of  the  Company's  S-1  Registration

                                       47

<PAGE>
              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")).

       10.15  1993 Incentive Stock  Option and Stock  Appreciation  Rights  Plan
              (incorporated by reference to Exhibit 10.1 of the S-1 Registration
              Statement).

       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).

                                       48

<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  "A" of the S-8  Registration  Statement
              filed November 12, 1993).

       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  the  Proxy  Statement  filed  in
              connection   with   the   Company's   1994   Annual   Meeting   of
              Shareholders).


                                       49

<PAGE>

       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.

       10.33  Second Amended and Restated Revolving Credit Promissory Note dated
              December 16, 1996 between the Company and NationsBank, N.A.

       10.34  Second  Amended  and  Restated  Term Loan  Promissory  Note  dated
              December 16, 1996 between the Company and NationsBank, N.A.

       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.

       10.36  Third  Amended and  Restated  Loan and Security  Agreement,  dated
              March 27, 1997 between the Company and NationsBank, N.A.

       10.37  1997 Term Loan Promissory  Note, dated March 27, 1997  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.


                                       50

<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, 1997.

                                     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, 1997.


Signatures                                          Title


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

s/Henry M. Poston                                   President, Chief Operating
Henry M. Poston                                     Officer & Director

s/Gregory W. Anderson                               Corporate Counsel & Director
Gregory W. Anderson

s/Russell T. Lyon                                   Director
Russell T. Lyon

s/W. Fred Davis, Jr.                                Director
W. Fred Davis, Jr.

s/James C. Hite                                     Director
James C. Hite

s/Jack J. Jackson                                   Director
Jack J. Jackson

s/George L. Rainsford                               Director
George L. Rainsford

s/Bettis C. Rainsford                               Director
Bettis C. Rainsford


* Principal Financial and Accounting Officer

                                       51

<PAGE>



                                  EXHIBIT INDEX




Exhibit Number    Description


       2.1    Agreement   for  Purchase   and  Sale  of  Assets  from   Buchanan
              Industries, Inc. dated July 14, 1994, effective as of May 28, 1994
              (incorporated  by  reference  to  Exhibit  2.1  to  the  Company's
              original  report on Form 10-Q for the  period  ended  July 3, 1994
              (the "1994 second quarter 10-Q")). *

       2.2    Stock Purchase Agreement between the Company and Palmetto Spinning
              Corporation,  et al. dated June 13, 1994,  effective as of May 31,
              1994  (incorporated by reference to Exhibit 2.2 to the 1994 second
              quarter 10-Q). *

       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


                                       52

<PAGE>



              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 10.1 of the S-1 Registration
              Statement). *

       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  "A" of the S-8  Registration  Statement
              filed November 12, 1993). *

       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

                                       53

<PAGE>



              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  the  Proxy  Statement  filed  in
              connection   with   the   Company's   1994   Annual   Meeting   of
              Shareholders.) *

       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.
              Attached

       10.33  Second Amended and Restated Revolving Credit Promissory Note dated
              December  16,  1996  between the  Company  and  NationsBank,  N.A.
              Attached

       10.34  Second  Amended  and  Restated  Term Loan  Promissory  Note  dated
              December  16,  1996  between the  Company  and  NationsBank,  N.A.
              Attached

       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. Attached

       10.36  Third  Amended and  Restated  Loan and Security  Agreement,  dated
              March 27, 1997 between the Company and NationsBank, N.A. Attached

       10.37  1997 Term Loan Promissory  Note, dated March 27, 1997  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 Ernest & Young LLP. Attached

       27     Financial Data Schedule. Attached

       (b)    Reports on Form 8-K

              None.


      * Incorporated by reference

                                       54