UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549
                                ----------------

                                    FORM 10-Q

   (Mark One)

       X     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
             THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 1996
            --------------------------------------------------------

                                       OR

                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to ___________________.

Commission File Number                               0-2127

                             GARMENT GRAPHICS, INC.
                  --------------------------------------------
             (Exact name of registrant as specified in its charter)

                      Minnesota                         41-1270170
----------------------------------------     -----------------------------------
(State or other jurisdiction of               (IRS Employer Identification No.)
  incorporation or organization)

2260 Woodale Drive, Mounds View, MN                      55112-4978
-----------------------------------------    -----------------------------------
(Address of principal executive offices)                 (Zip Code)

                                 (612) 786-6220
          ------------------------------------------------------------
              (Registrant's telephone number, including area code)

         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  the  number  of  shares  outstanding  of each of the  issuers
classes of common stock, as of the latest practicable date:  3,247,188 shares of
common stock, $.001 par value, outstanding as of November 8, 1996.

<PAGE>
                             GARMENT GRAPHICS, INC.

                                Table of Contents

                                                                       Page
                                                                      Number

PART I.  FINANCIAL INFORMATION

        Item 1 - Consolidated Financial Statements

                 Consolidated Balance Sheets                              3
                 Consolidated Statement of Operations                     5
                 Consolidated Statement of Shareholders' Equity           6
                 Consolidated Condensed Statements of Cash Flows          7
                 Notes to Consolidated Financial Statements               8

        Item 2 - Management's Discussion and Analysis of Financial
                  Condition and Results of Operations

                 Results of Operations                                   11
                 Liquidity and Capital Resources                         12

PART II.  OTHER INFORMATION

        Item 1 - Legal Proceedings                                       15
        Item 2 - Changes in Securities                                   15
        Item 3 - Defaults Upon Senior Securities                         15
        Item 4 - Submission of Matters to a Vote of Security Holders     15
        Item 5 - Other Information                                       15
        Item 6 - Exhibits and Reports on Form 8-K                        16

SIGNATURE PAGE
<PAGE>
<TABLE>
<CAPTION>

GARMENT GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS

                                                         September 30, 1996    March 31, 1996
                                                            (Unaudited)
                                                         ------------------   ---------------
<S>                                                       <C>                 <C>         
ASSETS
Current Assets
    Cash                                                  $     46,428        $     20,301
    Receivables:
        Trade, less allowances, September 30, 1996 -
           $280,552 and March 31, 1996 - $365,024            1,641,628           4,682,398
    Income tax                                                       -             507,052
    Inventories                                              5,809,766           6,097,402
    Prepaid expenses                                           299,522             338,374
    Deferred tax assets                                        515,000             515,000
                                                          ------------        ------------
                  Total current assets                       8,312,344          12,160,527
                                                          ------------        ------------

Property and Equipment, at cost
    Equipment and furniture                                  1,865,642           1,813,171
    Leasehold improvements                                     143,451             143,451
                                                          ------------        -------------
                                                             2,009,093           1,956,622

    Accumulated depreciation                                (1,304,663)         (1,159,079)
                                                          ------------        ------------ 
                  Net property and equipment                   704,430             797,543
                                                          ------------        ------------

NonCurrent Assets
    Intangibles, net of amortization, September 30,
        1996 - $45,437 and March 31, 1996 - $25,313            357,063             377,187
    Other                                                       20,807              20,426
                                                          ------------        ------------
                  Total noncurrent assets                      377,870             397,613
                                                          ------------        ------------
                  Total assets                            $  9,394,644        $ 13,355,683
                                                          ============        ============


See Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
GARMENT GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS

                                                         September 30, 1996    March 31, 1996
                                                            (Unaudited)
                                                         ------------------   ---------------
<S>                                                       <C>                 <C>         
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
    Notes payable -- bank (Note 2)                        $  2,726,888        $  5,637,020
    Current portion -- long term debt                           48,135             188,580
    Accounts payable                                         3,289,721           3,449,472
    Accrued expenses
        Compensation                                           210,924             169,577
        Royalties                                              285,781             679,754
        Other                                                  485,929             400,550
                                                          ------------        ------------
                   Total current liabilities                 7,047,378          10,524,953
                                                          ------------        ------------
Long Term Debt, less current maturities                         45,094              62,267
                                                          ------------        ------------

Commitments and Contingencies  (Notes 2, 3, 4 and 6)

Shareholders' Equity
    Preferred stock, par value $.01 per share;
        authorized 1,000,000 shares; no shares issued                -                  -
    Common stock, par value $.001 per share;
        authorized 50,000,000 shares; issued 3,242,128
        and 3,075,186 shares                                     3,242               3,075
    Additional paid - in capital                             1,704,071           1,700,155
    Retained earnings                                          594,859           1,065,233
                                                          ------------        ------------
                   Total shareholders' equity                2,302,172           2,768,463
                                                          ------------        ------------

                   Total liabilities and shareholders' 
                       equity                             $  9,394,644        $ 13,355,683
                                                          ============        ============


See Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
GARMENT GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

                                               Second Quarter Ended                  Six Months Ended
                                                   September 30,                      September 30,
                                          -----------------------------    --------------------------------
                                              1996            1995               1996             1995
                                              ----            ----               ----             ----
<S>                                       <C>             <C>               <C>              <C>         
Net Sales                                 $ 9,755,898     $ 5,726,167       $ 17,859,369     $ 13,047,507

Cost of Sales                               8,460,357       5,033,906         14,403,505       10,755,919
                                          -----------     -----------       ------------     ------------

     Gross profit                           1,295,541         692,261          3,455,864        2,291,588

Selling and Administrative Expenses         1,884,411       1,294,842          3,661,787        2,856,322
                                          -----------     -----------       ------------     ------------

     Loss from operations                    (588,870)       (602,581)          (205,923)        (564,734)

Miscellaneous Expense                               0             490                  0            9,501
Interest Expense                              134,408         192,053            264,451          356,968
                                          -----------     -----------       ------------     ------------

     Loss before income taxes                (723,278)       (795,124)          (470,374)        (931,203)
                                          -----------     -----------       ------------     ------------ 

Income Tax (Benefit)                          (87,237)       (318,049)                 0         (372,481)
                                          -----------     -----------       ------------     ------------ 

     Net loss                             $  (636,041)    $  (477,075)      $   (470,374)    $   (558,722)
                                          ===========     ===========       ============     ============ 

Loss Per Common Share                     $     (0.21)    $     (0.16)      $      (0.15)    $      (0.18)
                                          ===========     ===========       ============     ============ 

Weighted Average Common and Common
     Equivalent Shares Outstanding          3,081,128       3,071,654          3,080,901        3,069,045
                                          ===========       =========       ============        =========


See Notes to Consolidated Financial Statements.
</TABLE>


<PAGE>

<TABLE>
<CAPTION>
GARMENT GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


March 31, 1996 to September 30, 1996

                                               Common Stock           Additional
                                        ---------------------------   Paid - In       Retained
                                            Shares       Amount        Capital        Earnings        Total
                                            ------       ------        -------        --------        -----

<S>                                        <C>         <C>           <C>             <C>           <C>        
Balance, March 31, 1996                    3,075,186   $   3,075     $ 1,700,155     $1,065,233    $ 2,768,463

    Issuance of common stock for
        employee stock purchase plan           5,942           6           3,916              -          3,922

    Issuance of common stock held
        in escrow                            161,000         161               -              -            161

    Net loss for the six months
        ended September 30, 1996                   -           -               -       (470,374)      (470,374)
                                           ----------  ---------     -----------    -----------    ----------- 

Balance, September 30, 1996                3,242,128   $   3,242     $ 1,704,071    $   594,859    $ 2,302,172
                                           =========   =========     ===========    ===========    ===========


See Notes to Consolidated Financial Statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
GARMENT GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)


Six Months Ended September 30,                                     1996               1995
------------------------------                                     ----               ----
<S>                                                           <C>                <C>         
Cash Flows From Operating Activities                          $ (2,180,056)      $   (762,182)

Cash Flows From Investing Activities                               (52,471)           (58,180)

Cash Flows from Financing Activities Increase (Decrease)
     Issuance of stock                                                   -              7,524
     Principal payments on long-term borrowings                    (50,618)           (96,999)
     Net borrowings on bank/financing notes                      2,309,272            771,000
                                                              ------------       ------------

            Net cash provided by financing activities            2,258,654            681,525
                                                              ------------       ------------


            Decrease in cash                                        26,127           (138,837)

Cash
     Beginning                                                      20,301            171,124
                                                              ------------       ------------

     Ending                                                   $     46,428       $     32,287
                                                              ============       ============


Supplemental disclosures of cash flow information
     Cash paid (refunded) during the period for:
        Interest                                              $    292,509       $    351,098
        Income Taxes (net)                                        (525,318)           (39,270)
Supplemental schedule of noncash investing and financing 
        activities
     Common stock issued for employee stock purchase plan     $      3,922       $          -
     Debt retired with proceeds from factoring agreement         6,214,127                  -
     Common stock issued and held in escrow                            161                  -


See Notes to Consolidated Financial Statements.
</TABLE>

<PAGE>

GARMENT GRAPHICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 - BASIS OF PRESENTATION

     The  accompanying  unaudited  consolidated  financial  statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly,  they do not include all of the information and footnotes  required
by generally accepted accounting  principles for complete financial  statements.
In the opinion of management,  all adjustments  (consisting of normal  recurring
accruals)  considered  necessary  for a fair  presentation  have been  included.
Operating  results for the second  quarter and six months  ended  September  30,
1996, are not necessarily indicative of the results that may be expected for the
fiscal  year  ended  March  31,  1997.  For  further  information,  refer to the
financial   statements  and  footnotes  included  in  the  Company's   financial
statements for the year ended March 31, 1996.

     The consolidated  financial  statements include the accounts of the Company
and  its  wholly-owned   subsidiary,   Signet,  Inc.   ("Signet").   Significant
intercompany transactions are eliminated in consolidation.

NOTE 2 - NOTE PAYABLE-BANK

     Effective  April 12, 1996,  the Company  entered into a two-year  agreement
with Heller Financial,  Inc. ("Heller") for the purpose of refinancing  existing
bank debt and to  provide  additional  working  capital  and  credit  protection
against  customer  bankruptcies  in the  retail  industry  through a credit  and
receivable factoring program.

     Under the terms of the  agreement,  Heller will provide the Company with up
to  $9,000,000  via a Credit  Facility.  The  facility  provides for advances on
receivables  of up to 85%, loans against  eligible  inventory of up to 55% and a
letter of credit facility of up to $1,000,000.  Within the Credit Facility,  the
loans against inventory will have a limit of up to $4,000,000. The interest rate
on the Credit  Facility  will be at the National Bank  Reference  Rate or "Prime
Rate" plus one  percent  per annum.  The prime rate at April 12,  1996,  through
September 30, 1996, was 8.25%. The Company must meet certain financial covenants
relating to current ratio,  working capital, net worth and debt to equity ratio.
In  addition,  the  Company  is  restricted  on paying  dividends,  and would be
required to pay a  termination  fee if the Company were to cancel the  agreement
prior to the  expiration  of the  agreement.  The Company has  received a waiver
regarding  certain  financial  covenant  violations  as of  September  30, 1996,
relating to working capital and interest  coverage.  Net borrowing  availability
through this credit facility was $150,822 at September 30, 1996.

     As  part of the  Credit  Facility,  Heller  will  provide  its  credit  and
collection administration services for a fee and agree to purchase substantially
all of the Company's trade accounts receivable.  At September 30, 1996, accounts
receivable  carried at the Company's  risk was $952,469,  relating  primarily to
accounts  receivable balances assigned to Heller on the date the Credit Facility
was entered into.  Heller will provide credit and collection  administration  on
these  balances,  and the Company  anticipates  no  additional  reserves will be
required.  As of April 12, 1996,  Heller assumed the bad debt credit risk on all
approved accounts.

NOTE 3 - COMMITMENTS

     The Company has entered into various  licensing  agreements which permit it
to manufacture and market apparel with copyrighted  characters and logos.  Under
the terms of these agreements, the Company is required to pay minimum guaranteed
fees to  some  licensors.  Remaining  minimum  annual  obligations  under  these
agreements  are  approximately:  fiscal  1997 ---  $270,000  and fiscal 1998 ---
$17,000.

NOTE 4 - RELATED PARTY TRANSACTIONS

     The  Company  recently  entered  into a new  facilities  lease with R. Neil
Hamlin,  Chairman of the Board and Chief Executive Officer of the Company, on an
arms' length  basis.  The decision to effect a lease with Mr. Hamlin was made by
the non-interested directors. The lease will be classified as an operating lease
and is for a term of 8.5 years  commencing  December 1, 1996.  Rent is $3.41 per
square  foot and  taxes  currently  are $1.50 per  square  foot,  for a total of
$39,633  per month,  net of a monthly  credit of $4,350  relating  to a sublease
which terminates in one year.  Annual rents will be $368,400 for lease years one
through five and annual rents of $384,188 for the balance of the lease term. The
new lease rates are lower than other  comparable  current  lease rates,  and the
Board believes that the new lease rate is  competitive.  The Company  expects to
receive  operational  efficiencies  and additional  cost savings from having the
warehouse and production  operations at one facility.  The Company plans to move
during  December  and  January.  After the costs of the move are  absorbed,  the
Company expects to obtain annual expense  reductions of approximately  $250,000.
The Company  anticipates costs associated with the move will total approximately
$200,000.

NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS

     In October 1995, the Financial  Accounting Standards Board issued Statement
of  Financial   Accounting   Standards  No.  123,   Accounting  for  Stock-Based
Compensation,   which   establishes  new  standards  for  stock-based   employee
compensation  plans.  The  statement  establishes a  fair-value-based  method of
accounting  for  stock-based  compensation  plans and  encourages,  but does not
require,  entities  to  adopt  that  method  in  place of APB  Opinion  No.  25,
Accounting for Stock Issued to Employees.  Entities that elect to continue under
Opinion No. 25 must disclose pro forma net income and earnings per share for all
years presented as if Statement No. 123 had been adopted.

     The  Company  does not  intend  to adopt  Statement  No.  123 in  measuring
expense;  however it will present the proforma  disclosures  beginning in fiscal
1997,  and those pro forma  amounts  will  likely  reflect  higher  compensation
expense than the amounts shown in future statements of operations.

NOTE 6 - ESCROW AGREEMENT

     On September 17, 1996,  the Company  issued  161,000 shares of common stock
under  the terms of an  Escrow  Agreement  pursuant  to an  operating  agreement
entered into in November 1995 for the manufacture and sale of licensed  apparel.
The shares will be released upon fulfillment of the Company's  obligations under
the agreement.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Results of Operations

     Net Sales.  Net sales for the second quarter of fiscal 1997 ended September
30, 1996,  increased  70.4% to $9,755,898  from  $5,726,167  for the  comparable
period in fiscal 1996.  The increase in net sales is mainly  attributed  to more
favorable  market  conditions  created by an  improvement  in the retail apparel
market compared to a very soft retail apparel market in fiscal 1996 and the sale
of National Football League (NFL) licensed product under the operating agreement
with  Cliff  Engle.  Net sales for the six  months  ended  September  30,  1996,
increased  36.9%  to  $17,859,369  from  $13,047,507  in the  six  months  ended
September  30, 1995.  The increase in sales for the six month period  relates to
the  factors  discussed  previously  and also to a shift in sales  mix to higher
priced  garments.  Actual unit sales  increased 57.6% for the second quarter and
22.0% for the six month period ended September 30, 1996, respectively,  compared
with the same periods in fiscal 1996.

     Gross Profit.  Gross profit increased 87.2% to $1,295,541,  or 13.2% of net
sales,  for the second quarter of fiscal 1997 compared to $692,261,  or 12.1% of
net sales for the comparable period in fiscal 1996. Gross profit increased 50.8%
to  $3,455,864,  or 19.4% of Net Sales for the six months  ended  September  30,
1996, compared to $2,291,588, or 17.6% of Net Sales for the comparable period in
fiscal  1996.  The dollar and  percentage  increase  is related to higher  sales
volume as described in net sales above.  Also,  while labor costs increased 1.1%
as a  percentage  of net  sales for the first  six  months of fiscal  1997,  raw
material  costs  decreased  2.3% as a percentage of net sales  compared with the
same period in fiscal 1996.  Labor costs  increased and product costs  decreased
due to higher cost value  processes  added to the garment.  This  includes  more
sophisticated  graphic  prints,  multi-location  prints  and other  mixed  media
applications.   In  addition,  shorter  production  runs  resulted  in  overtime
requirements and higher per unit costs.

     Margin  was  negatively  impacted  by  the  Company's  efforts  to  cleanse
inventory of slower moving  product.  During the second  quarter of fiscal 1997,
the  Company  sold  close-outs  and slow  moving  goods at a nominal  loss.  The
September 30, 1996  inventory  balance is the lowest it has been since May 1994.
It is management's intention to continue to reduce inventory balances throughout
the balance of the fiscal year.  This reduction may result in margin  reductions
in the future. Margins were also impacted by the Company's tight cash situation,
which  increased the challenge of obtaining the materials  needed at a cost that
allows the Company to remain  competitive.  Pricing continues to be tight due to
the competitive market.  Effective November 1, 1996, both production and support
staff was cut back to meet competitive margin pressures.

     Selling and Administrative  Expenses.  Selling and administrative  expenses
increased  45.5% to  $1,884,411  for the  second  quarter  of  fiscal  1997 from
$1,294,842 in the same period in fiscal 1996,  but decreased as a percent of Net
Sales  to  19.3%  in  fiscal  1997  from  22.6%  in  fiscal  1996.  Selling  and
administrative  expenses  increased  $805,465 to  $3,661,787  for the six months
ended  September  30,  1996,  compared to  $2,856,322  for the six months  ended
September  30, 1995,  but decreased as a percent of net sales to 20.5% in fiscal
1997 from 21.9% in fiscal  1996 . The dollar  increase  relates  primarily  to a
88.0% and 51.0% increase in royalty and commission expense for the three and six
month periods ended  September  30, 1996,  respectively,  compared with the same
periods in fiscal 1996,  due to increased  sales levels.  As a percent of sales,
total Selling and administrative  expenses decreased 3.3% for the second quarter
of 1997 and 1.4% for the six months ended September 30, 1996,  compared with the
same  periods  in  fiscal  1996.  Royalty  expense,   included  in  selling  and
administrative expenses, actually increased 1.9% and 1.6% as a percentage of net
sales for the three and six month  periods ended  September  30, 1996,  compared
with the same  periods in fiscal  1996,  relating  to changes in product mix and
related royalty rates. Therefore,  selling and administrative expenses excluding
royalties  actually decreased 5.2% and 3.0% as a percentage of net sales for the
three and six months ended September 30, 1996, compared with the same periods in
fiscal 1996.  Consistent with the Company's  production staff cut back,  general
and administrative staffing levels were also reduced.

     Interest  Expense.  Interest  expense  decreased  30.0% to $134,408 for the
second quarter of fiscal 1997, from $192,053 for the same period in fiscal 1996,
due primarily to lower  interest  rates (average 7.37% for the second quarter of
fiscal 1997 compared to 9.72% for the second  quarter of fiscal 1996).  Interest
expense for the six month period ending  September 30, 1996,  decreased 25.9% to
$264,451 from $356,968 for the same period in fiscal 1996.  The decrease for the
six  month  period  was due to:  i) lower  outstanding  loan  balances  (average
outstanding  borrowings of $6,523,370  during the six months ended September 30,
1996  compared to  $6,728,857  for the same period of fiscal  1996),  which were
related to lower asset levels during the period;  and ii) lower  interest  rates
(average  rate of 7.71% for the six months of fiscal 1997  compared to 9.63% for
the same period of fiscal 1996).

     Net Loss. Net loss decreased  $88,348 to a net loss of $470,374 for the six
months ended  September 30, 1996, from a net loss of $558,722 for the six months
ended September 30, 1995. Net loss increased  $158,966 to a net loss of $636,041
for the second  quarter of fiscal 1997 from a net loss of $477,075  for the same
period in fiscal 1996. The changes in net loss are directly  attributable to the
challenges discussed above with respect to gross profit.

Liquidity and Capital Resources

     Current assets decreased 31.6% to $8,312,344 as of September 30, 1996, from
$12,160,527  as of March 31,  1996.  The  change  relates  primarily  to a 64.9%
decrease in Accounts  Receivable to  $1,641,628  as of September 30, 1996,  from
$4,682,398 as of March 31, 1996.  This decrease is due to advances loaned to the
Company against receivables  pursuant to the factoring agreement entered into on
April 12,  1996,  with  Heller  Financial,  Inc.  At  September  30,  1996,  the
outstanding balance of advances loaned was $4,620,958.  In addition,  income tax
receivable  was  eliminated  as of September  30, 1996,  due to the receipt of a
refund  carried  at  $507,052  at March 31,  1996.  Inventories  also  decreased
$287,636 or 4.7% due to higher  sales levels and the sell-off of excess and slow
moving inventory.

     Current liabilities decreased 49.3% to $7,047,378 as of September 30, 1996,
from $10,524,953 at March 31, 1996. The decrease relates primarily to a decrease
in Notes Payable-Bank to $2,726,888 as of September 30, 1996, from $5,637,020 as
of March 31, 1996. This decrease is due to the classification of advances loaned
to the Company against accounts receivable by Heller Financial, Inc. pursuant to
the  factoring  agreement  entered  into on April 12,  1996,  as a reduction  to
accounts receivable.  At September 30, 1996, the outstanding balance of advances
loaned was $4,620,958.

     Net cash used by operating  activities  for the six months ended  September
30, 1996, was $2,180,056 due to a combination of the reported losses incurred by
the  Company  and  changes  in  current  assets.   The  Company's  business  has
historically been somewhat seasonal,  with the bulk of sales generally occurring
in the second  fiscal  quarter  as a result of  back-to-school  sales.  The next
highest level generally occurs in the third fiscal quarter due to sales reorders
for  back-to-school   merchandise  and  the  holiday  season.   Working  capital
requirements  reflect this seasonality as receivable balances have increased due
to higher sales levels in relation to the prior year.

     The  Company  recently  entered  into a new  facilities  lease with R. Neil
Hamlin,  Chairman of the Board and Chief Executive Officer of the Company, on an
arms' length  basis.  The decision to effect a lease with Mr. Hamlin was made by
the  non-interested  directors.  The lease is for a term of 8.5 years commencing
December 1, 1996.  Rent is $3.41 per square foot and taxes  currently  are $1.50
per square foot,  for a total of $39,633 per month,  net of a monthly  credit of
$4,350 relating to a sublease which terminates in one year. Annual rents will be
$368,400  for lease years one through  five and annual rents of $384,188 for the
balance of the lease term.  The new lease rates are lower than other  comparable
current  lease  rates,  and  the  Board  believes  that  the new  lease  rate is
competitive.  The  Company  expects  to  receive  operational  efficiencies  and
additional  cost savings from having the warehouse and production  operations at
one facility. The Company plans to move during December.  After the costs of the
move are absorbed,  the Company  expects to obtain annual expense  reductions of
approximately $250,000.

     In October  1996,  the Company  entered  into a 12-month  agreement  with a
supplier whereby the supplier will warehouse goods at the Company's location and
the Company will purchase goods from this inventory supply as needed.  Any goods
remaining in the Company's warehouse at the expiration of this agreement must be
purchased by the Company. The Company anticipates that it will fully utilize the
quantity  of goods  available  under the terms of this  agreement  in the normal
course of business.

     On August 2, 1994,  the Company  issued  60,000  shares of common  stock in
exchange for all the outstanding  common stock of Signet. The Company has agreed
to pay the  difference in cash between the market price of the Company's  common
stock and $3.375 if the market  price should be less than $3.375 on December 31,
1996.  Under the agreement,  market price is defined as the average  between the
bid and ask prices of the Company's common stock.  Assuming the market price, as
defined,  is $0.75 per share on December 31, 1996, the Company would be required
to make a payment of  $157,500  by January 15,  1997.  The Company is  currently
exploring alternatives to fund this payment or negotiate a payment plan.

     The Company has obtained a waiver from its lender (Heller Financial,  Inc.)
to waive compliance with working capital and interest coverage covenants. Heller
has agreed to suspend  measuring  all  financial  covenants for the period ended
October 31, 1996 only. The Company believes that it will need to seek additional
waivers for November  1996.  Additionally,  the amount of the Company's past due
accounts  payable  with its  vendors is  approximately  $1,700,000.  Many of the
Company's  vendors are now requesting cash in advance of orders.  The Company is
currently  making partial  payments to its vendors,  and, in return, a number of
them  have  continued  to  cooperate  with the  Company.  The  Company  is in an
extremely tight cash situation which is, in some situations, making it difficult
to purchase the materials needed to deliver finished product.  Efforts are being
made to  obtain  additional  equity  or  debt  financing  which  have  not  been
successful to date,  and the Company  currently has no assurance that it will be
able to obtain the needed  financing.  The Company is currently at its borrowing
limits  with Heller  Financial,  Inc. As a result,  without  additional  working
capital,  the ability of the Company to continue its  operations  is limited and
the  board  of  directors  has  directed  management  to  explore  all  feasible
alternatives,  including a sale of the business.  There is no assurance that the
Company's business can be sold.

Cautionary Statement Regarding Forward Looking  Information

     The foregoing  contains "forward looking  statements" within the meaning of
federal  securities  laws which represent  management's  expectations or beliefs
concerning future events. These and other forward looking statements made by the
Company  must be evaluated in the context of a number of factors that may affect
the Company's financial condition and results of operations,  such as the recent
losses experienced by the Company,  uncertain sales,  dependency on new licenses
and others,  including  those set forth in the  Company's  annual and  quarterly
reports filed with the Securities and Exchange Commission.

PART II.  OTHER INFORMATION

         Item 1- Legal Proceedings

                  None.

         Item 2 - Changes in Securities

                  None.

         Item 3 - Defaults upon Senior Securities

                  None.

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

          (a)  The Annual Meeting of the  Registrant's  shareholders was held on
               Thursday, July 25, 1996.

          (b)  Proxies  for  the  Annual  Meeting  were  solicited  pursuant  to
               Regulation  14A under the  Securities  Exchange Act of 1934.  The
               following   persons  were  elected  Class  II  Directors  of  the
               Registrant to serve until the 1999 annual meeting of shareholders
               and until  their  successors  shall  have been duly  elected  and
               qualified:

                                           Number of           Number of
                       Nominee             Votes For         Votes Withheld
                ----------------------- ----------------- ---------------------

                John M. Gunnarson          2,799,910             11,160
                William H. Spell           2,787,910             23,160

          (c)  The  names of each  other  director  whose  term of  office  as a
               director continued after the Annual Meeting are as follows:

                           Terms expiring at 1997 Annual Meeting:
                                    R. Neil Hamlin
                                    Richard W. Perkins
                                    Donald M. Roux

                           Terms expiring at 1998 Annual Meeting:
                                    Barbara S. Remley
                                    Edwin N. Peterson

          (d)  At the Annual Meeting, the shareholders  approved a 150,000 share
               increase in the number of shares  reserved for issuance under the
               Registrant's 1992 Stock Option Plan by a vote of 2,732,093 shares
               in favor, with 48,777 shares against, 9,020 shares abstaining and
               21,180 shares represented no votes.

         Item 5 - Other Information

               None.

         Item 6 - Exhibits and Reports on Form 8-K

               (a)      Exhibits

                    10.1 Amendment of Factoring and Revolving Inventory Loan and
                         Security   Agreement   with  Heller   Financial,   Inc.
                         effective July 1, 1996

                    10.2 Stock Escrow Agreement among Cliff Engle, Ltd., Garment
                         Garment  Graphics,  Inc.  and St.  John &  Wayne  dated
                         September 27, 1996. 27 Financial Data Schedule

               (b)      Reports on Form 8-K

                        None.



<PAGE>


                                   SIGNATURES

     Pursuant to the  requirements  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.


                                   GARMENT GRAPHICS, INC.
                                       (Registrant)


Date:  November 13, 1996           By:  /s/ R. Neil Hamlin
                                        R. Neil Hamlin
                                        Chairman and Chief Executive Officer


                                   By:  /s/ Barbara S. Remley
                                        Barbara S. Remley
                                        President, Chief Operating and Financial
                                        Officer (Principal Financial Officer and
                                        Chief Accounting Officer)




<PAGE>

                                  EXHIBIT INDEX



Exhibit
Number

10.1              Amendment of Factoring and Revolving Inventory
                  Loan and Security Agreement with Heller Financial, Inc.
                  effective July 1, 1996.

10.2              Stock Escrow Agreement among Cliff Engle, Ltd.,
                  Garment Graphics, Inc. and St. John & Wayne dated
                  September 27, 1996.

27                Financial Data Schedule