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UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D. C. 20549

FORM 10-K

 [X] ANNUAL REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30,2004

or

[    ] TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

For the transition period from                     to                    

Commission file number 1-9169

BERNARD CHAUS,INC.

(Exact name of registrant asspecified in its charter)

|                                                              |  |                                     |  |  |  |  |
|--------------------------------------------------------------|--|-------------------------------------|--|--|--|--|
| NewYork                                                      |  | 13-2807386                          |
| (State or other jurisdictionofincorporation or organization) |  | (I.R.S. EmployerIdentification No.) |
| 530Seventh Avenue, New York, New York                        |  | 10018                               |
| (Address of principalexecutive offices)                      |  | (ZipCode)                           |
|                                                              |

Registrant's telephonenumber, including area code (212) 354-1280

Securitiesregistered pursuant to Section 12(b) of the Act:

|                              |  |                                                               |  |  |  |  |
|------------------------------|--|---------------------------------------------------------------|--|--|--|--|
| Titleof each class           |  | Name of each exchange on whichregistered                      |
| Common Stock, $0.01 parvalue |  | None; securities quoted on the Over the Counter BulletinBoard |
|                              |

Securities registered pursuant toSection 12(g) of the Act: None

Indicate by checkmark whether the registrant (1) has filed all reports required to befiled by Section  13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90days.    Yes      X           No             

Indicate by check mark if disclosure of delinquent filerspursuant to Item 405 of Regulation S-K (Section  229.405 of thischapter) is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form10-K.    [          ]

Indicate bycheck mark whether the registrant is an accelerated filer (as definedin Exchange Act Rule  12b-2)    Yes                      No      X   

The aggregate market value of the voting stock held bynon-affiliates of the registrant on December  31, 2003 was$9,068,000

Indicate the number of shares outstanding ofeach of the registrant's classes of common stock, as of thelatest practicable date.

|                |  |                               |  |                   |  |  |  |  |  |  |
|----------------|--|-------------------------------|--|-------------------|--|--|--|--|--|--|
| Date           |  | Class                         |  | SharesOutstanding |
| August 26,2004 |  | Common Stock, $0.01 par value |  | 27,917,089        |
|                |

|                                                                                                             |  |                                             |  |  |  |  |
|-------------------------------------------------------------------------------------------------------------|--|---------------------------------------------|--|--|--|--|
| Documents Incorporated by Reference                                                                         |  | Location in Form 10-K in which incorporated |
| Portions ofregistrant's Proxy Statement for the Annual Meeting ofStockholders to be held November 10, 2004. |  | PartIII                                     |
|                                                                                                             |

    

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PART I

Item1.    Business.

General

Bernard Chaus, Inc.(the "Company" or"Chaus") designs, arranges for themanufacture of and markets an extensive range of women's careerand casual sportswear principally under the JOSEPHINECHAUS® COLLECTION, JOSEPHINE CHAUS® SPORT,CHAUS®, CYNTHIA STEFFE®, CYNTHIA CYNTHIASTEFFE®, and FRANCES & RITA®trademarks and under private label brand names. The Company'sproducts are sold nationwide through department store chains, specialtyretailers and other retail outlets. The Company has positioned itsJOSEPHINE CHAUS product line into the opening price points of the"better" category. In November 2002, theCompany acquired certain assets of S.L. Danielle, Inc.("SL Danielle"). SL Danielle designs,arranges for the manufacture of and markets women's moderatelypriced clothing primarily under private labels. In January 2004, theCompany acquired certain assets of the Cynthia Steffe division of LFBrands Marketing, Inc., ("CS Acquisition")including inventory and showroom fixtures. In connection with suchacquisition, the Company also acquired the Cynthia Steffe trademarksfrom Cynthia Steffe. The Cynthia Steffe business designs, arranges forthe manufacture of, markets and sells an upscale modern women'sapparel line, under the Cynthia Steffe trademarks. As used herein,fiscal 2004 refers to the fiscal year ended June 30, 2004, fiscal 2003refers to the fiscal year ended June 30, 2003 and fiscal 2002 refers tothe fiscal year ended June 30, 2002.

Products

TheCompany markets its products as coordinated groups of jackets, skirts,pants, blouses, sweaters and related accessories principally under thefollowing brand names that also include products for women and petitesizes:

**Josephine Chaus** – a collection ofbetter tailored career clothing that includes tailored suits, dresses,jackets, sweaters, skirts and pants.

**Chaus**–a line of separate items that includes skirts, pants, sweaters and knittops.

**Cynthia Steffe and Cynthia Cynthia Steffe**– a collection of upscale modern clothing that includes tailoredsuits, dresses, jackets, skirts and pants.

**PrivateLabel** – the Company also sells private label apparelmanufactured according to customers' specifications.

Theabove products, while sold as separates, are coordinated by styles,color schemes and fabrics and are designed to be merchandised and worntogether. The Company believes that the target consumers for itsproducts are women aged 25 to 65.

During fiscal 2004, thesuggested retail prices of the Company's Chaus products rangedbetween $18.00 and $180.00. The Company's jackets ranged in pricebetween $98.00 and $180.00, its blouses and sweaters ranged in pricebetween $30.00 and $120.00, its skirts and pants ranged in pricebetween $38.00 and $110.00, and its knit tops and bottoms ranged inprice between $18.00 and $68.00.

During fiscal 2004, thesuggested retail prices of the Company's Cynthia Steffe productsranged between $120.00 and $525.00. The Company's Cynthia Steffejackets ranged in price between $300.00 and $525.00, its blouses andsweaters ranged in price between $150.00 and $285.00, its skirts andpants ranged in price between $120.00 and $330.00, and its knit topsand bottoms ranged in price between $150.00 and $200.00.

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The following table sets forth a breakdownby percentage of the Company's net revenue by class for fiscal2002 through fiscal2004:

|                                         |  |                          |     |         |  |        |         |         |  |        |         |         |  |  |
|-----------------------------------------|--|--------------------------|-----|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                    |  | FiscalYear Ended June30, |
|                                    |  | 2004                     |     | 2003    |  | 2002   |
| JosephineChaus and Chaus                |  |                     | 67  | %  |  |   | 83      | %  |  |   | 97      | %  |
| PrivateLabels                           |  |                     | 28  |    |  |   | 17      |    |  |   | 3       |    |
| CynthiaSteffe and Cynthia CynthiaSteffe |  |                     | 5   |    |  |   | — |    |  |   | — |    |
| Total                                   |  |                     | 100 | %  |  |   | 100     | %  |  |   | 100     | %  |
|                                         |

BusinessSegments

The Company operates in one segment, women'scareer and casual sportswear. In addition, less than 1% of totalrevenue is derived from customers outside the United States. Themajority of the Company's long-lived assets are located in theUnited States.

Customers

The Company's productsare sold nationwide in an estimated 5,000 stores operated byapproximately 650 department store chains, specialty retailers andother retail outlets. The Company does not have any long-termcommitments or contracts with any of its customers.

ThroughMarch 31, 2004, the Company extended credit to the majority of itscustomers through a factoring agreement with The CIT Group/CommercialServices, Inc. ("CIT"). Under the factoringarrangement, the Company receives payment from CIT only after CIT hasbeen paid by the Company's customers. CIT assumes only the riskof the Company's customers' insolvency. All otherreceivable risks are retained by the Company, including, but notlimited to, allowable customer markdowns, operational chargebacks,disputes, discounts, and returns. Effective March 31, 2004, theCompany, the Company's SL Danielle subsidiary and CIT agreed toterminate the Factoring Agreements between them. In connection with thetermination of those Factoring Agreements, the Company's CSAcquisition subsidiary and CIT entered into an amendment of theirFactoring Agreement revising only the factoring commission. Receivablesrelated to sales of Cynthia Steffe product lines continue to befactored. At March 31, 2004, approximately 98% of theCompany's accounts receivable were being serviced by CIT underthe factoring arrangement. Effective April 1, 2004 the Company extendscredit to its customers, other than customers of CS Acquisition, basedupon an evaluation of the customer's financial condition andcredit history.

At June 30, 2004, approximately 95% ofthe Company's accounts receivable was non factored. At June 30,2004 and 2003, approximately 77% and 72% respectively, ofthe Company's accounts receivable were due from customers ownedby three single corporate entities. During fiscal 2004, approximately70% of the Company's net revenue was from three corporateentities – Dillard's Department Stores 35%, TJXCompanies 22%, and Sam's Club 13%. During fiscal2003 approximately 73% of the Company's net revenue wasfrom three corporate entities – Dillard's Department Stores40%, TJX Companies 23% and May Department Stores10%. During fiscal 2002 approximately 70% of theCompany's net revenue was from three corporate entities –Dillards Department Stores 34%, TJX Companies 18% and MayDepartment Stores 18%. As a result of the Company'sdependence on its major customers, such customers may have the abilityto influence the Company's business decisions. The loss of orsignificant decrease in business from any of its major customers couldhave a material adverse effect on the Company's financialposition and results of operations. In addition, the Company'sability to achieve growth in revenues is dependent, in part, on itsability to identify new distribution channels.

Sales andMarketing

The Company's selling operation is highlycentralized. Sales to the Company's department and specialtystore customers are made primarily through the Company's New YorkCity showrooms. As of June 30, 2004, the Company had an in-house salesforce of 13, all of whom are located in the New York City showrooms.The Company's Cynthia Steffe division also employs independentsales representatives to market its products to specialty storesthroughout the country.

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Products are marketed to department andspecialty store customers during "marketweeks," generally four to five months in advance of eachof the Company's selling seasons. The Company assists itscustomers in allocating their purchasing budgets among the items in thevarious product lines to enable consumers to view the full range of theCompany's offerings in each collection. During the course of theretail selling seasons, the Company monitors its product sell-throughat retail in order to directly assess consumer response to itsproducts.

The Company emphasizes the development of long-termcustomer relationships by consulting with its customers concerning thestyle and coordination of clothing purchased by the store, optimaldelivery schedules, floor presentation, pricing and other merchandisingconsiderations. Frequent communications between the Company'ssenior management and other sales personnel and their counterparts atvarious levels in the buying organizations of the Company'scustomers is an essential element of the Company's marketing andsales efforts. These contacts allow the Company to closely monitorretail sales volume to maximize sales at acceptable profit margins forboth the Company and its customers. The Company's marketingefforts attempt to build upon the success of prior selling seasons toencourage existing customers to devote greater selling space to theCompany's product lines and to penetrate additional individualstores within the Company's existing customers. TheCompany's largest customers discuss with the Company retailtrends and their plans regarding their anticipated levels of totalpurchases of Company products for future seasons. These discussions areintended to assist the Company in planning the production and timelydelivery of its products.

Design

The Company'sproducts and certain of the fabrics from which they are made aredesigned by an in-house staff of 23 fashion designers. The Companybelieves that its design staff is well regarded for its distinctivestyling and its ability to contemporize fashion classics. Emphasis isplaced on the coordination of outfits and quality of fabrics toencourage the purchase of more than one garment.

Manufacturingand Distribution

The Company does not own any manufacturingfacilities; all of its products are manufactured in accordance with itsdesign specifications and production schedules through arrangementswith independent manufacturers. The Company believes that outsourcingits manufacturing maximizes its flexibility while avoiding significantcapital expenditures, work-in-process buildup and the costs of a largeworkforce. Approximately 90% of its product is manufactured byindependent suppliers located primarily in South Korea, Hong Kong,Taiwan, China, Indonesia and elsewhere in the Far East. Less than5% of the Company's products are manufactured in theUnited States. No contractual obligations exist between the Company andits manufacturers except on an order-by-order basis. During fiscal2004, the Company purchased approximately 77% of its finishedgoods from its ten largest manufacturers, including approximately16% of its purchases from its largest manufacturer. Contractingwith foreign manufacturers enables the Company to take advantage ofprevailing lower labor rates and to use a skilled labor force toproduce high quality products.

Generally, each manufactureragrees to produce finished garments on the basis of purchase ordersfrom the Company, specifying the price and quantity of items to beproduced and supported by a letter of credit naming the manufacturer asbeneficiary to secure payment for the finished garments.

TheCompany's technical production support staff, located in New YorkCity, coordinates the production of patterns and the production ofsamples from the patterns by its production staff and by overseasmanufacturers. The production staff also coordinates the marking andthe grading of the patterns in anticipation of production by overseasmanufacturers. The overseas manufacturers produce finished garments inaccordance with the production samples and obtain necessary quotaallocations and other requisite customs clearances. Branch offices ofthe Company's subsidiaries in Korea and Hong Kong monitorproduction at each manufacturing facility to control quality,compliance with the Company's specifications and timely deliveryof finished garments, and arrange for the shipment of finished productsto the Company's New Jersey distribution center. Approximately80% of the Company's finished goods is shipped to theCompany's New Jersey distribution center for final inspection,assembly into collections, allocation and shipment to customers. Thirdparty distributors ship the remaining finished goods.

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The Company believes that the number andgeographical diversity of its manufacturing sources minimize the riskof adverse consequences that would result from termination of itsrelationship with any of its larger manufacturers. The Company alsobelieves that it would have the ability to develop, over a reasonableperiod of time, adequate alternate manufacturing sources should any ofits existing arrangements terminate. However, should any substantialnumber of such manufacturers become unable or unwilling to continue toproduce apparel for the Company or to meet their delivery schedules, orif the Company's present relationships with such manufacturerswere otherwise materially adversely affected, there can be no assurancethat the Company would find alternate manufacturers of finished goodson satisfactory terms to permit the Company to meet its commitments toits customers on a timely basis. In such event, the Company'soperations could be materially disrupted, especially over theshort-term. The Company believes that relationships with its majormanufacturers are satisfactory.

The Company uses a broad rangeof fabrics in the production of its clothing, consisting of syntheticfibers (including polyester and acrylic), natural fibers (includingcotton and wool), and blends of natural and synthetic fibers. TheCompany does not have any formal, long-term arrangements with anyfabric or other raw material supplier. During fiscal 2004, virtuallyall of the fabrics used in the Company's products manufactured inthe Far East were ordered from the Company's five largestsuppliers in the Far East, which are located in Japan, Taiwan, HongKong and Korea. The Company selects the fabrics to be purchased forproduction in accordance with the Company's specifications. Todate, the Company has not experienced any significant difficulty inobtaining fabrics or other raw materials and considers its sources ofsupply to be adequate.

The Company operates under substantialtime constraints in producing each of its collections. Orders from theCompany's customers generally precede the related shipping periodby up to four months. In order to make timely delivery of merchandisewhich reflects current style trends and tastes, the Company attempts toschedule a substantial portion of its fabric and manufacturingcommitments relatively late in a production cycle. However, in order tosecure adequate amounts of quality raw materials, especially greige(i.e., "undyed") goods, the Company must makesome advance commitments to suppliers of such goods. Many of theseearly commitments are made subject to changes in colors, assortmentsand/or delivery dates.

Imports and Import Restrictions

The Company's arrangements with its manufacturers andsuppliers are subject to the risks attendant to doing business abroad,including the availability of quota and other requisite customsclearances, the imposition of export duties, political and socialinstability, currency revaluations, and restrictions on the transfer offunds. Bilateral agreements between exporting countries, includingthose from which the Company imports substantially all of its products,and the United States' imposition of quotas, limits the amount ofcertain categories of merchandise, including substantially allcategories of merchandise manufactured for the Company, that may beimported into the United States. Furthermore, the majority of suchagreements contain "consultation clauses"which allow the United States to impose at any time restraints on theimportation of categories of merchandise which, under the terms of theagreements, are not subject to specified limits. The bilateralagreements through which quotas are imposed have been negotiated underthe framework established by the Arrangement Regarding InternationalTrade in Textiles, known as the Multifiber Arrangement("MFA") which has been in effect since 1974.The United States has concluded international negotiations known as the"Uruguay Round" in which a variety of tradematters were reviewed and modified. Quotas established under the MFAwill be phased out as of December 2004, after which the textile andclothing trade will be fully integrated into the General Agreement onTrade and Tariffs ("GATT") and will besubject to the same disciplines as other sections. The GATT agreementprovides for expanded trade, improved market access, lower tariffs andimproved safeguard mechanisms.

The United States and thecountries in which the Company's products are manufactured may,from time to time, impose new quotas, duties, tariffs or otherrestrictions, or adversely adjust presently prevailing quotas, duty ortariff levels, with the result that the Company's operations andits ability to continue to import products at current or increasedlevels could be adversely affected. The Company cannot predict thelikelihood or frequency of any such events occurring. The Companymonitors duty, 

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tariff and quota-related developments, andseeks continually to minimize its potential exposure to quota-relatedrisks through, among other measures, geographical diversification ofits manufacturing sources, allocation of production of merchandisecategories where more quota is available and shifts of production amongcountries and manufacturers. The expansion in the past few years of theCompany's varied manufacturing sources and the variety ofcountries in which it has potential manufacturing arrangements,although not the result of specific import restrictions, have had theresult of reducing the potential adverse effect of any increase in suchrestrictions. In addition, substantially all of the Company'sproducts are subject to United States customs duties. Due to the largeportion of the Company's products, which are produced abroad, anysubstantial disruption of its foreign suppliers could have a materialadverse effect on the Company's operations and financialcondition.

Backlog

As of August 26, 2004 and 2003, theCompany's order book reflected unfilled customer orders forapproximately $48.3 million and $59.2 million of merchandise,respectively. Order book data at any date are materially affected bythe timing of the initial showing of collections to the trade, as wellas by the timing of recording of orders and of shipments. The orderbook represents customer orders prior to discounts. Accordingly, acomparison of unfilled orders from period to period is not necessarilymeaningful and may not be indicative of eventual actual shipments.Although a portion of the decline in backlog at August 26, 2004 isattributable to a decline in orders from department stores, the declineis primarily attributable to the timing of recording of orders and ofshipping of orders.

Trademarks

CHAUS, CHAUS & CO.,CHAUS SPORT, CHAUS WOMAN, MS. CHAUS, JOSEPHINE, JOSEPHINE CHAUS,CYNTHIA STEFFE, CYNTHIA CYNTHIA STEFFE and FRANCES & RITA areregistered trademarks of the Company for use on ladies' garments.The Company considers its trademarks to be strong and highlyrecognized, and to have significant value in the marketing of itsproducts.

The Company has also registered its CHAUS, CHAUSSPORT, CHAUS WOMAN, JOSEPHINE CHAUS and JOSEPHINE trademarks forwomen's apparel in certain foreign countries. JOSEPHINE CHAUS forclothing, accessories and cosmetics is a registered trademark in theEuropean Economic Community.

Competition

Thewomen's apparel industry is highly competitive, both within theUnited States and abroad. The Company competes with many apparelcompanies, some of which are larger, and have better established brandnames and greater resources than the Company. In some cases the Companyalso competes with private-label brands of its department storecustomers.

The Company believes that an ability to effectivelyanticipate, gauge and respond to changing consumer demand and tasterelatively far in advance, as well as an ability to operate withinsubstantial production and delivery constraints (including obtainingnecessary quota allocations), is necessary to compete successfully inthe women's apparel industry. Consumer and customer acceptanceand support, which depend primarily upon styling, pricing, quality(both in material and production), and product identity, are alsoimportant aspects of competition in this industry. The Company believesthat its success will depend upon its ability to remain competitive inthese areas.

Furthermore, the Company's traditionaldepartment store customers, which account for a substantial portion ofthe Company's business, encounter intense competition fromoff-price and discount retailers, mass merchandisers and specialtystores. The Company believes that its ability to increase its presentlevels of sales will depend on such customers' ability tomaintain their competitive position and the Company's ability toincrease its market share of sales to department stores and otherretailers.

Employees

At June 30, 2004, the Companyemployed 282 employees as compared with 260 employees at June  30,2003. This total includes 58 in managerial and administrativepositions, approximately 83 in design, 

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production and production administration, 23in marketing, merchandising and sales and 67 in distribution. Of theCompany's total employees, 51 were located in the Far East. TheCompany is a party to a collective bargaining agreement with theAmalgamated Workers Union, Local 88, covering 70 full-time employees.This agreement expires August 31, 2005.

The Company considersits relations with its employees to be satisfactory and has notexperienced any business interruptions as a result of labordisagreements with its employees.

Executive Officers

The executive officers of the Company are:

|                 |  |     |  |                                                       |  |  |  |  |  |  |
|-----------------|--|-----|--|-------------------------------------------------------|--|--|--|--|--|--|
| Name            |  | Age |  | Position                                              |
| JosephineChaus  |  | 53  |  | Chairwomanof the Board and Chief Executive Officer    |
| NicholasDiPaolo |  | 63  |  | Vice Chairman of the Board and ChiefOperating Officer |
| BartonHeminover |  | 50  |  | Chief FinancialOfficer                                |
|                 |

Executive officers serve at thediscretion of the Board of Directors.

Josephine Chaus isa co founder of the Company and has held various positions with theCompany since its inception. She has been a director of the Companysince 1977, President from 1980 through February 1993, Chief ExecutiveOfficer from July 1991 through September 1994 and again since December1998, Chairwoman of the Board since 1991 and member of the Office ofthe Chairman since September 1994.

Nicholas DiPaolo wasappointed Vice Chairman of the Board and Chief Operating Officer inNovember 2000 and has been a director of the Company since February1999. Prior to joining the Company, Mr. DiPaolo served as a consultantto the apparel industry and as a private investor. From 1991 throughMay 1997, Mr. DiPaolo served as Chairman, President and Chief ExecutiveOfficer of Salant Corporation, a diversified apparel company which hejoined in 1988 as President and Chief Operating Officer. Prior to 1988,he held executive positions with a number of apparel and relatedcompanies, including Manhattan Industries, a menswear company, and TheVillager, a women's sportswear company. Mr. DiPaolo currentlyserves as a director of JPS Industries Inc., a publicly tradedmanufacturer of specialty extruded and woven materials, and FootLocker, Inc., a publicly traded athletic footwear and apparelretailer.

Barton Heminover was appointed Chief FinancialOfficer in August 2002 and served as Vice President of Finance fromJanuary 2000 through August 2002 and as Vice President –Corporate Controller from July 1996 to January 2000. From January 1983to July 1996 he was employed by Petrie Retail, Inc. (formerly PetrieStores Corporation), a woman's retail apparel chain, serving asVice President/Treasurer from 1986 to 1994 and as VicePresident/Financial Controller from 1994 to 1996.

ForwardLooking Statements

Certain statements contained herein areforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Actof 1934 that have been made pursuant to the safe harbor provisions ofthe Private Securities Litigation Reform Act of 1995. Such statementsare indicated by words or phrases such as"anticipate,""estimate,""project,""expect," "believe"and similar words or phrases. Such statements are based on currentexpectations and are subject to certain risks, uncertainties andassumptions, including, but not limited to, the overall level ofconsumer spending on apparel; the financial strength of the retailindustry, generally and the Company's customers in particular;changes in trends in the market segments in which the Company competesand the Company's ability to gauge and respond to changingconsumer demands and fashion trends; the level of demand for theCompany's products; the Company's dependence on its majordepartment store customers; the highly competitive nature of thefashion industry; the Company's ability to satisfy its cash flowneeds by meeting its business plan and satisfying the financialcovenants in its credit facility; and changes in economic or politicalconditions in the markets where the Company sells or sources itsproducts, as well as other risks and uncertainties set forth in theCompany's publicly-filed documents, 

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including this Annual Report on Form 10-K.Should one or more of these risks or uncertainties materialize, orshould underlying assumptions prove incorrect, actual results may varymaterially from those anticipated, estimated or projected. The Companydisclaims any intention or obligation to update or revise anyforward-looking statements, whether as a result of new information,future events or otherwise.

Item2.    Properties.

The Company's principalexecutive office is located at 530 Seventh Avenue in New York Citywhere the Company leases approximately 28,000 square feet. This leaseexpires in May 2009. This facility also houses the Company'sChaus and SL Danielle showrooms and its sales, design, production andmerchandising staffs. Net base rental expense for the executive officesaggregated approximately $0.9 million in each of fiscal 2004, fiscal2003 and fiscal 2002.

The Company's Cynthia Steffesubsidiary is located at 550 Seventh Avenue in New York City where theCompany leases approximately 12,000 square feet. This lease expires inOctober 2013 and the net base rental expense is approximately $0.3million per year.

The Company's technical productionsupport facility (including its sample and patternmakers) is located at519 Eighth Avenue in New York City where the Company leasesapproximately 15,000 square feet. This lease expires in August 2009.Net base rental expense for the technical production support facilitiesaggregated approximately $0.3 million in each of fiscal 2004, fiscal2003, and fiscal 2002.

The Company's distribution centeris located in Secaucus, New Jersey where the Company leasesapproximately 276,000 square feet. This facility also houses theCompany's administrative and finance personnel, its computeroperations, and its one retail outlet store. This space is occupiedunder a lease expiring December 31, 2005. Base rental expense for theSecaucus facility aggregated approximately $1.2 million in each offiscal 2004, fiscal 2003, and fiscal 2002.

Office locations arealso leased in Hong Kong and Korea, with annual aggregate rentalexpense of approximately $0.1 million for each of fiscal 2004, fiscal2003, and fiscal 2002.

Item 3.    LegalProceedings.

The Company is involved in legal proceedingsfrom time to time arising out of the ordinary conduct of its business.The Company believes that the outcome of these proceedings will nothave a material adverse effect on the Company's financialcondition or results of operations.

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

None.

PART II

Item 5.    Market for the Registrant'sEquity and Related Stockholder Matters.

TheCompany's common stock, par value $0.01 per share (the"Common Stock"), is currently traded in theover the counter market and quotations are available on the Over theCounter Bulletin Board (OTC BB: CHBD).

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The following table sets forth foreach of the Company's fiscal periods indicated the high and lowbid prices for the Common Stock as reported on the OTC BB. These pricesreflect inter-dealer prices, without retail mark-up, mark-down orcommission and may not necessarily represent actual transactions.

|                 |  |                         |  |        |      |        |  |        |      |        |  |  |  |  |
|-----------------|--|-------------------------|--|--------|------|--------|--|--------|------|--------|--|--|--|--|
|            |  |                    |  | High   |      | Low    |
| **Fiscal 2003** |  |
|            |  | FirstQuarter            |  | $      | 0.77 |   |  | $      | 0.45 |   |
|            |  | SecondQuarter           |  |   | 0.85 |   |  |   | 0.52 |   |
|            |  | ThirdQuarter            |  |   | 0.92 |   |  |   | 0.55 |   |
|            |  | FourthQuarter           |  |   | 0.93 |   |  |   | 0.77 |   |
| **Fiscal2004**  |  |
|            |  | FirstQuarter            |  | $      | 1.65 |   |  | $      | 0.92 |   |
|            |  | SecondQuarter           |  |   | 1.42 |   |  |   | 0.85 |   |
|            |  | ThirdQuarter            |  |   | 1.26 |   |  |   | 0.85 |   |
|            |  | FourthQuarter           |  |   | 0.97 |   |  |   | 0.84 |   |
| **Fiscal2005**  |  |
|            |  | July 01- August 26,2004 |  | $      | 1.05 |   |  | $      | 0.86 |   |
|                 |

As ofAugust 26, 2004, the Company had approximately 442 stockholders ofrecord.

The Company has not declared or paid cash dividends ormade other distributions on the Common Stock since prior to its 1986initial public offering. The payment of dividends, if any, in thefuture is within the discretion of the Board of Directors and willdepend on the Company's earnings, capital requirements andfinancial condition. It is the present intention of the Board ofDirectors to retain all earnings, if any, for use in theCompany's business operations and, accordingly, the Board ofDirectors does not expect to declare or pay any dividends in theforeseeable future. In addition, the Company's FinancingAgreement prohibits the Company from declaring dividends or makingother distributions on its capital stock, without the consent of thelender. See "Management's Discussion and Analysis ofFinancial Condition and Results of Operations — FinancialCondition, Liquidity and Capital Resources."

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Item 6.    Selected FinancialData.

The following financial information is qualified byreference to, and should be read in conjunction with, the ConsolidatedFinancial Statements of the Company and the notes thereto, as well asManagement's Discussion and Analysis of Financial Condition andResults of Operations contained elsewhere herein.

Statement ofOperationsData:

|                                                                                         |  |                                        |         |        |  |        |         |        |  |        |         |         |  |        |         |         |  |        |         |        |  |  |
|-----------------------------------------------------------------------------------------|--|----------------------------------------|---------|--------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|--------|--|--|
|                                                                                    |  | FiscalYear Ended June30,               |
|                                                                                    |  | 2004                                   |         | 2003   |  | 2002   |         | 2001   |  | 2000   |
|                                                                                    |  | (Inthousands, except per shareamounts) |
|                                                                                    |  |
| Netrevenue                                                                              |  | $                                      | 157,107 |   |  | $      | 140,225 |   |  | $      | 145,769 |    |  | $      | 149.499 |    |  | $      | 181,538 |   |
| Costof goodssold                                                                        |  |                                   | 117,451 |   |  |   | 104,398 |   |  |   | 116,951 |    |  |   | 122,324 |    |  |   | 142,909 |   |
| Grossprofit                                                                             |  |                                   | 39,656  |   |  |   | 35,827  |   |  |   | 28,818  |    |  |   | 27,175  |    |  |   | 38,629  |   |
| Selling,general and administrativeexpenses                                              |  |                                   | 34,894  |   |  |   | 29,634  |   |  |   | 30,130  |    |  |   | 32,666  |    |  |   | 36,075  |   |
| Otherincome                                                                             |  |                                   | — |   |  |   | — |   |  |   | (193    | )  |  |   | — |    |  |   | — |   |
| Interestexpense,net                                                                     |  |                                   | 1,355   |   |  |   | 1,091   |   |  |   | 2,049   |    |  |   | 2,121   |    |  |   | 2,358   |   |
| Income(loss) before income tax provision(benefit)                                       |  |                                   | 3,407   |   |  |   | 5,102   |   |  |   | (3,168  | )  |  |   | (7,612  | )  |  |   | 196     |   |
| Incometax provision(benefit)                                                            |  |                                   | 303     |   |  |   | 425     |   |  |   | (944    | )  |  |   | 11      |    |  |   | 4       |   |
| Netincome(loss)                                                                         |  | $                                      | 3,104   |   |  | $      | 4,677   |   |  | $      | (2,224  | )  |  | $      | (7,623  | )  |  | $      | 192     |   |
|                                                                                    |  |
| Basicearnings (loss) per share(1)                                                       |  | $                                      | 0.11    |   |  | $      | 0.17    |   |  | $      | (0.08   | )  |  | $      | (0.28   | )  |  | $      | 0.01    |   |
|                                                                                    |  |
| Dilutedearnings (loss) per share(2)                                                     |  | $                                      | 0.10    |   |  | $      | 0.16    |   |  | $      | (0.08   | )  |  | $      | (0.28   | )  |  | $      | 0.01    |   |
|                                                                                    |  |
| Weightedaverage number of common shares outstanding –basic                        |  |                                   | 27,504  |   |  |   | 27,384  |   |  |   | 27,216  |    |  |   | 27,216  |    |  |   | 27,174  |   |
| Weightedaverage number of common and common equivalent shares outstanding–diluted |  |                                   | 30,490  |   |  |   | 29,912  |   |  |   | 27,216  |    |  |   | 27,216  |    |  |   | 27,183  |   |
| **BalanceSheetData**                                                                    |  |
|                                                                                    |  | **Asof June30,**                       |
|                                                                                    |  | 2004                                   |         | 2003   |  | 2002   |         | 2001   |  | 2000   |
| Workingcapital                                                                          |  | $                                      | 17,191  |   |  | $      | 15,653  |   |  | $      | 12,404  |    |  | $      | 15,185  |    |  | $      | 23,891  |   |
| Totalassets                                                                             |  |                                   | 46,376  |   |  |   | 39,847  |   |  |   | 35,691  |    |  |   | 44,795  |    |  |   | 49,045  |   |
| Short-termdebt, including current portion of long-termdebt                              |  |                                   | 10,263  |   |  |   | 1,500   |   |  |   | 4,716   |    |  |   | 6,024   |    |  |   | 1,000   |   |
| Long-termdebt                                                                           |  |                                   | 7,325   |   |  |   | 7,875   |   |  |   | 9,375   |    |  |   | 10,500  |    |  |   | 11,500  |   |
| Stockholders'equity                                                                     |  |                                   | 16,699  |   |  |   | 13,109  |   |  |   | 8,213   |    |  |   | 10,679  |    |  |   | 18,302  |   |
|                                                                                         |

|     |                                                                                                                                           |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Computedby dividing the applicable net income (loss) by the weighted averagenumber of shares of Common Stock outstanding during the year. |

|     |                                                                                                                                                                          |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Computed by dividing theapplicable net income (loss) by the weighted average number of commonshares outstanding and common stock equivalents outstanding during theyear. |

9

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Item7.    Management's Discussion and Analysis of FinancialCondition and Results of Operations.

Overview

TheCompany has expanded its product mix over the last two years mainlythrough its acquisition of S.L. Danielle and Cynthia Steffe. InNovember 2002, the Company acquired certain assets of S.L. DanielleInc. S.L. Danielle designs, arranges for the manufacture of , marketsand sells a women's apparel line, principally under private andexclusive labels. In January 2004 the Company purchased certain assetsof the Cynthia Steffe, a division of LF Brands Marketing, Inc.,including inventory and intellectual property. In connection with theacquisition, the Company also acquired Cynthia Steffe trademarks fromCynthia Steffe. The Cynthia Steffe business designs, arranges for themanufacture of, markets and sells an upscale modern women apparel line,under the Cynthia Steffe trademarks. The results of CynthiaSteffe's operations are included in the consolidated financialstatements commencing January 2, 2004.

Results ofOperations

The following table sets forth, for the yearsindicated, certain items expressed as a percentage of netrevenue.

|                                            |  |                          |        |         |  |        |        |         |  |        |        |         |  |  |
|--------------------------------------------|--|--------------------------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                       |  | FiscalYear Ended June30, |
|                                       |  | 2004                     |        | 2003    |  | 2002   |
| Netrevenue                                 |  |                     | 100.0  | %  |  |   | 100.0  | %  |  |   | 100.0  | %  |
| Grossprofit                                |  |                     | 25.2   |    |  |   | 25.5   |    |  |   | 19.8   |    |
| Selling,general and administrativeexpenses |  |                     | 22.2   |    |  |   | 21.1   |    |  |   | 20.7   |    |
|                                       |  |                     |   |    |  |   |   |    |  |   |   |    |
| Interestexpense                            |  |                     | 0.9    |    |  |   | 0.8    |    |  |   | 1.4    |    |
| Netincome(loss)                            |  |                     | 1.9    |    |  |   | 3.3    |    |  |   | (1.5   | )  |
|                                            |

Fiscal2004 Compared to Fiscal 2003

Net revenues for fiscal 2004increased 12.1% or $16.9 million to $157.1 million as comparedto $140.2 million for fiscal 2003. Units sold increased by 11.7%and the overall price per unit remained relatively the same. Theincrease in net revenue was primarily due to the inclusion of a fulltwelve months of sales for the Company's S.L. Danielle divisionacquired in November 2002 and the sales of the Company's CynthiaSteffe product lines acquired in January 2004. These acquisitionscontributed $31.0 million to the increase in fiscal 2004 revenues. Thisincrease was partially offset by a decrease of $14.0 million in salesof other product lines to department stores and discount stores. Seetable of percentage of net revenue by class on page 2 for additionalinformation.

Gross profit for fiscal 2004 increased $3.9 millionto $39.7 million as compared to $35.8 million for fiscal 2003. As apercentage of sales, gross profit decreased to 25.2% for fiscal2004 from 25.5% for fiscal 2003. The increase in gross profitdollars was attributable to the gross profit of the Company'sS.L. Danielle and Cynthia Steffe divisions. The increase in grossprofit dollars from these divisions more than offset a decrease ingross profit dollars associated with the Company's Chaus productlines sold to department stores. The decrease in gross profitpercentage was primarily due to the lower gross profit percentageassociated with the Company's Chaus product lines.

Selling, general and administrative("SG&A") expenses increased by $5.2million to $34.9 million for fiscal 2004 as compared to $29.6 millionin fiscal 2003. As a percentage of net revenue, SG&A expensesincreased to 22.2% in fiscal 2004 as compared to 21.1% infiscal 2003. These increases were primarily attributable to the CynthiaSteffe product lines acquired in January 2004 and the inclusion of afull twelve months of expenses of the S.L. Danielle product linesacquired in November 2002. The increase in SG&A expenses wasprimarily due to SG&A expenses related to payroll and payrollrelated costs ($1.9 million), design related costs ($0.8 million), andmarketing and advertising costs ($0.7 million). The increase inSG&A expense as a percentage of net revenue was due to the decreasein sales volume of the Company's Chaus product lines sold todepartment stores which reduced the Company's leverage onSG&A expenses in addition to the higher SG&A expenses as apercentage of net revenue associated with the Cynthia Steffe productlines.

10

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Interest expense increased byapproximately $0.3 million to $1.4 million for fiscal 2004 as comparedto $1.1 million for fiscal 2003. The increase was due to higher bankborrowings partially offset by lower interest rates.

Theprovision for income taxes for fiscal 2004 reflects a provision forcertain federal, state and local taxes. For fiscal 2004, theCompany's income tax provision includes federal alternativeminimum taxes (AMT) that are not offset by the Company's netoperating loss (NOL) carryforward from prior years. New Jersey enactednew tax legislation in fiscal 2003 temporarily suspending the use ofnet operating loss (NOL) carryforwards against income. Accordingly, forfiscal 2004, the Company has made provisions for state income taxes,including New Jersey.

The Company periodically reviews itshistorical and projected taxable income and considers availableinformation and evidence to determine if it is more likely than notthat a portion of the deferred tax assets will be realized. A valuationallowance is established to reduce the deferred tax assets to theamount that is more likely than not to be realized. As of June 30, 2004and 2003, based upon its evaluation of taxable income and the currentbusiness environment, the Company recorded a full valuation allowanceon its deferred tax assets including NOL's. In fiscal 2004, thevaluation allowance was reduced by $2.5 million to $42.8 million atJune 30, 2004 from $45.3 million at June 30, 2003 to reflect theutilization of NOL's to offset taxes otherwise payable on currenttaxable income. If the Company determines that a portion of thedeferred tax assets will be realized in the future, a portion of thevaluation allowance will be reduced and the Company will provide forincome tax expense (benefit) in its Statement of Operations at itsestimated effective tax rate. See discussion below under CriticalAccounting Policies and Estimates regarding income taxes and theCompany's federal net operating loss carryforward.

Fiscal 2003 Compared to Fiscal 2002

Net revenue forfiscal 2003 decreased 3.8% or $5.6 million to $140.2 million ascompared to $145.8 million for fiscal 2002. The decrease in net revenuewas primarily due to lower net revenue for the Chaus product linespartially offset by private label merchandise sales resulting from S.L.Danielle product lines acquired in December 2002.

Gross profitfor fiscal 2003 increased $7.0 million to $35.8 million as compared to$28.8 million for fiscal 2002. As a percentage of sales, gross profitincreased to 25.5% for fiscal 2003 from 19.8% for fiscal2002. The increase in gross profit dollars and gross profit percentagewas primarily due to an increase in the overall markup, lower salesdiscounts and better inventory management for the Chaus product lines.S.L. Danielle sales also contributed to the increase in gross profitdollars.

Selling, general and administrative("SG&A") expenses decreased by $0.5million to $29.6 million for fiscal 2003 as compared to $30.1 millionfor fiscal 2002. As a percentage of net revenue, SG&A expensesincreased to 21.1% in fiscal 2003 as compared to 20.7% infiscal 2002. The decrease in SG&A expenses was primarily due todecreases in payroll and payroll related expenses ($1.0 million),marketing and advertising expenses ($0.4 million), provision for baddebts ($0.3 million) and professional fees ($0.2  million)associated with the Company's Chaus product lines. Thesedecreases were partially offset by increases in overhead ofapproximately $1.5 million related to the addition of the S.L. Danielleproduct lines in December of 2002. The increase in SG&A expense asa percentage of net revenue was due to a decrease in sales volume,which reduced the Company's leverage on SG&A expenses.

Interest expense decreased by $1.0 million for fiscal 2003 ascompared to fiscal 2002. The decrease was due to lower revolving creditborrowings and interest rates.

The provision for income taxesfor fiscal 2003 reflects a provision for certain federal, state andlocal taxes. For fiscal 2003, the Company's income tax provisionincludes federal alternative minimum taxes (AMT) that are not offset bythe Company's net operating loss (NOL) carryforward from prioryears. New Jersey enacted new tax legislation temporarily suspendingthe use of net operating loss (NOL) carryforwards against income.Accordingly, for fiscal 2003, the Company has made provisions foradditional state income taxes, including New Jersey. The income taxbenefit for fiscal 2002 of $0.9 million includes a benefit of $0.2million for refund claims due to tax law changes and a benefit of $0.7million related to the elimination of tax liabilities that were nolonger required, offset by a provision for state and local taxes of$30,000. See discussion below under Critical Accounting Policies andEstimates regarding income taxes and the Company's federal netoperating loss carryforward.

11

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Financial Condition, Liquidity andCapital Resources

General

Net cash used in operatingactivities was $7.1 million for fiscal 2004 as compared to net cashprovided by operating activities of $12.2 million for fiscal 2003, andnet cash provided by operating activities of $3.2 million for fiscal2002. Net cash used in operating activities for fiscal 2004 resultedprimarily from a decrease in accounts payable ($4.8 million), anincrease in accounts receivable ($9.0 million) partially offset by adecrease in inventory ($2.6 million), and net income ($3.1million). Netcash provided by operating activities for fiscal 2003 resultedprimarily from net income ($4.7 million), an increase in accountspayable ($3.0 million), a decrease in accounts receivable ($1.7million).

Cash used in investing activities was $3.9 million infiscal 2004 compared to $5.0 million in fiscal 2003 and $0.8 million infiscal 2002. The investing activities in fiscal 2004 consisted of $3.0million primarily for the acquisition of Cynthia Steffe product linesand $1.0 million for the purchase of fixed assets. In fiscal 2003investing activities consisted of $4.7 million for the acquisition ofthe S.L. Danielle product lines and $0.3 million for the purchase offixed assets. In fiscal 2002 investing activities consisted of $0.4million for the purchase of fixed assets and $0.4 million for thepurchase of in-store shops. The purchases of fixed assets for all yearspresented consisted primarily of purchases of computer hardware andsoftware systems. In fiscal 2005, the Company anticipates capitalexpenditures of approximately $0.8 million consisting primarily ofManagement Information System upgrades.

Cash provided byfinancing activities for fiscal 2004 resulted from net borrowings of$8.6 million for short-term bank borrowings and $0.3 million from netproceeds from the issuance of stock offset by net principal payments of$0.4 million on the term loan. Cash used in financing activities forfiscal 2003 resulted from net repayments of $3.6 million for short-termbank borrowings and net principal payments of $1.1 million on termloans. Cash used in financing activities for fiscal 2002 resulted fromnet repayments of $1.4 million for short-term bank borrowings andprincipal payments of $1.0 million on the term loan.

Contractual Obligations and Commercial Commitments

Thefollowing table summarizes as of June 30, 2004, the Company'scontractual obligations and commercial commitments by futureperiod:

|                                                        |  |                       |        |                 |  |           |         |           |  |              |         |        |  |        |         |        |  |        |         |        |  |  |
|--------------------------------------------------------|--|-----------------------|--------|-----------------|--|-----------|---------|-----------|--|--------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                                   |  | Paymentsdue by Period |
|                                                   |  | (inthousands)         |
| Contractualobligations (inthousands)                   |  | Total                 |        | Less than 1year |  | 2-3 years |         | 4-5 years |  | After 5years |
| Operatingleases                                        |  | $                     | 11,128 |            |  | $         | 3,085   |      |  | $            | 3,789   |   |  | $      | 2,862   |   |  | $      | 1,392   |   |
| Inventorypurchase commitments Letters ofCredits        |  |                  | 7,812  |            |  |      | 7,812   |      |  |         | — |   |  |   | — |   |  |   | — |   |
| Inventorypurchasecommitments                           |  |                  | 10,692 |            |  |      | 10,692  |      |  |         | — |   |  |   | — |   |  |   | — |   |
| Revolvingcreditborrowings                              |  |                  | 8,563  |            |  |      | 8,563   |      |  |         | — |   |  |   | — |   |  |   | — |   |
| Currentportion of termloan                             |  |                  | 1,700  |            |  |      | 1,700   |      |  |         | — |   |  |   | — |   |  |   | — |   |
| Long-termborrowings                                    |  |                  | 7,325  |            |  |      | — |      |  |         | 7,325   |   |  |   | — |   |  |   | — |   |
| Totalcontractual obligations and commercialcommitments |  | $                     | 47,220 |            |  | $         | 31,852  |      |  | $            | 11,114  |   |  | $      | 2,862   |   |  | $      | 1,392   |   |
|                                                        |

FinancingAgreement

On September 27, 2002, the Company and certain of itssubsidiaries entered into a new three-year financing agreement (the"Financing Agreement") with The CITGroup/Commercial Services, Inc. ("CIT"), toreplace the Former Financing Agreement discussed below. The FinancingAgreement provides the Company with a $50.5 million facility comprisedof (i) a $40 million revolving line of credit 

12

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(the "RevolvingFacility") with a $25 million sublimit for letters ofcredit, a $3 million seasonal overadvance and certain otheroveradvances at the discretion of CIT, and (ii) a $10.5 million termloan (the "Term Loan").

At the optionof the Company, the Revolving Facility and the Term Loan each may bearinterest either at the JP Morgan Chase Bank Rate ("PrimeRate") or the London Interbank Offered Rate("LIBOR"). If the Company chooses the PrimeRate, the interest (i) on the Revolving Facility accrues at a rate of1⁄2 of 1% above the Prime Rate (ii) on the Term Loanaccrues at a rate of 1% above the Prime Rate. If the Companychooses LIBOR, the interest (i) on the Revolving Facility accrues at arate of 31⁄4% above LIBOR (ii) on the Term Loan accrues ata rate of 33⁄4% above Libor. From the inception of thefinancing agreement through June 30, 2004, the Company has elected thePrime Rate option. The interest rate as of June 30, 2004 on theRevolving Facility was 4.50% and on the Term Loan was5.00%.

On September 27, 2002, the Company borrowed $18.3million under the Revolving Facility and $10.5 million under the TermLoan. These borrowings were used to pay off the balances under theFormer Financing Agreement of $18.3 million and the Former Term Loan of$10.5 million and for working capital purposes. Commencing October 1,2002, amortization payments in the amount of $375,000 (increased to$425,000 by the January 2004 amendment to the Financing Agreementdescribed below) are payable quarterly in arrears in connection withthe Term Loan. A balloon payment of $6.9 million is due on September27, 2005 under the Term Loan. The Company's obligations under theFinancing Agreement are secured by a first priority lien onsubstantially all of the Company's assets, including theCompany's accounts receivable, inventory, intangibles, equipment,and trademarks, and a pledge of the Company's equity interest inits subsidiaries.

The Financing Agreement contains numerousfinancial and operational covenants, including limitations onadditional indebtedness, liens, dividends, stock repurchases andcapital expenditures. In addition, the Company is required to maintain(i) specified levels of tangible net worth, (ii) certain fixed chargecoverage ratios, (iii) certain leverage ratios, and (iv) specifiedlevels of minimum borrowing availability under the Revolving Facility.At June 30, 2004, the Company was in compliance with all of itscovenants. In the event of the early termination by the Company of theFinancing Agreement, the Financing Agreement provides that the Companywill be liable for termination fees of (i) $350,000 if terminationoccurs between the thirteenth and the twenty-fourth month from theclosing date or, (ii) $150,000 if termination occurs after thetwenty-fourth month from the closing date. The Company may prepay atany time, in whole or in part, the Term Loan without penalty. TheFinancing Agreement expires on September 27, 2005. A fee of $125,000was paid in connection with the new Financing Agreement.

OnNovember 27, 2002, the Company and CIT agreed to an amendment to theFinancing Agreement in order to facilitate the S.L. Danielleacquisition discussed below. The Company and CIT agreed to add theCompany's newly formed wholly-owned subsidiary, S.L. DanielleAcquisition, LLC (the "Additional Borrower"),as a co-borrower under the Financing Agreement and related FactoringAgreement. Accordingly, the Company and CIT (i) amended the FinancingAgreement pursuant to a joinder agreement, which also constitutesAmendment No. 1 to the Financing Agreement (the "AmendedFinancing Agreement") and (ii) entered into a newfactoring agreement with the Additional Borrower, to add the AdditionalBorrower as a co-borrower. The Company's and the AdditionalBorrower's obligations under the Amended Financing Agreement aresecured by a first priority lien on substantially all of theCompany's and the Additional Borrower's assets, includingthe Company's and the Additional Borrower's accountsreceivable, inventory, intangibles, equipment, and trademarks and apledge of the Company's stock interest and membership interest inthe Company's subsidiaries, including the AdditionalBorrower.

On January 30, 2004, the Company and CIT agreed to anamendment to the Financing Agreement in order to facilitate the CynthiaSteffe acquisition discussed below. The Company and CIT agreed to addthe Company's wholly-owned subsidiary, Cynthia SteffeAcquisition, LLC ("CS Acquisition") as aco-borrower under the Financing Agreement and related FactoringAgreement. Accordingly, the Company and CIT (i) amended the FinancingAgreement pursuant to a joinder agreement, which also constitutesAmendment No. 2 to the Financing Agreement (the "SecondAmended Financing Agreement") and (ii) entered into a newfactoring agreement with CS Acquisition, to add CS Acquisition as a

13

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co-borrower. The obligations of the Company,S.L. Danielle and CS Acquisition under the Second Amended FinancingAgreement are secured by a first priority lien on substantially all ofthe assets of the Company, S.L. Danielle and CS Acquisition, includingtheir respective accounts receivables, inventory, intangibles,equipment, and trademarks and a pledge of the Company's stockinterest and membership interest in the Company's subsidiaries.The Second Amended Financing Agreement also provided, among otherthings for (i) an increase in the amount of the Term Loan by $1.2million to cover a portion of the purchase price of the Cynthia Steffeassets which had initially been paid for through revolving creditborrowings under the Revolving Facility; (ii) an increase in thequarterly amortization payments on the Term Loan from $375,000 to$425,000; and (iii) the amendment of certain financial covenants forfiscal 2004 (including the fixed charge coverage ratio and the minimumborrowing availability covenants) to provide for the Cynthia Steffeoperations and to be consistent with the Company's latestbusiness plan for fiscal 2004.

On September 15, 2004 the Companyand CIT agreed to further amend the Financing Agreement to modify thefinancial covenants to be consistent with the Company's latestbusiness plan for fiscal 2005.

On June 30, 2004, the Company had$8.0 million of outstanding letters of credit under the RevolvingFacility, total availability of approximately $11.6 million under theAmended Financing Agreement, a balance of $9.0 million on the Term Loanand $8.6 million in revolving credit borrowings. At June 30, 2003, theCompany had $11.6 million of outstanding letters of credit, totalavailability of approximately $10.7 million, a balance of $9.4 millionon the Term Loan and no revolving credit borrowings.

FactoringAgreement

On September 27, 2002 the Company also entered into afactoring agreement with CIT (the "FactoringAgreement"). The Factoring Agreement provided for afactoring commission equal to 4/10 of 1% of the gross faceamount of all accounts factored by CIT, plus certain customary charges.The minimum factoring commission fee per year was $500,000. TheFactoring Agreement provided that it would be terminated after eighteenmonths if there were no events of default under the Factoring Agreementat such time. Once terminated, the Company is required to pay to CIT acollateral management fee equal to $5,000 a month.

EffectiveMarch 31, 2004, the Company, S.L. Danielle and CIT agreed to terminatethe Factoring Agreements between them. Pursuant to the terms of theoriginal agreement, the Company is now obligated to pay to CIT acollateral management fee of $5,000 a month. Receivables related tosales of Cynthia Steffe product lines continue to be factored. Inconnection with the termination of those Factoring Agreements, CSAcquisition and CIT entered into an amendment of their FactoringAgreement which provides for a factoring commission equal to 6/10 of1% of the gross face amount of all accounts factored by CIT upto $10 million ratably declining to a commission between .55%and .45% of the gross amount of the receivables in excess of $10million. The amended Factoring agreement between CS Acquisition and CIThas a term of twelve months.

Prior Financing Agreement

Until September 27, 2002, the Company had a financing agreement withBNY Financial Corporation, a wholly owned subsidiary of General MotorsAcceptance Corp. ("GMAC") (the"Former Financing Agreement"). The FormerFinancing Agreement consisted of two facilities: (i) the FormerRevolving Facility which was a $45.5 million five-year revolving creditline (subject to an asset based borrowing formula) with a $34.0 millionsublimit for letters of credit, and (ii) the Former Term Loan which wasa $14.5 million term loan facility. Each facility had been amended toextend the maturity date until April  1, 2003.

Interest onthe Former Revolving Facility accrued at the greater of (i) 6%or (ii) 1⁄2 of 1% above the Prime Rate (6.0% at June30, 2002) and was payable on a monthly basis, in arrears. Interest onthe Former Term Loan accrued at an interest rate equal to the greaterof (i) 6.0% or (ii) a rate ranging from 1⁄2 of 1%above the Prime Rate to 11⁄2% above the Prime Rate, whichinterest rate was determined, from time to time, based upon theCompany's availability under the Revolving Facility. The interestrate on the Former Term Loan was 6.0% at June 30, 2002.

14

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Future Financing Requirements

AtJune 30, 2004, the Company had working capital of $17.2 million ascompared with working capital of $15.7 million at June 30, 2003. TheCompany's business plan requires the availability of sufficientcash flow and borrowing capacity to finance its product lines. TheCompany expects to satisfy such requirements through cash flow fromoperations and borrowings under its financing agreements. The Companybelieves that it has adequate resources to meet its needs for theforeseeable future assuming that it meets its business plan andsatisfies the covenants set forth in the Financing Agreement.

The foregoing discussion contains forward-looking statements whichare based upon current expectations and involve a number ofuncertainties, including the Company's ability to maintain itsborrowing capabilities under the Financing Agreement, retail marketconditions, and consumer acceptance of the Company'sproducts.

Acquisitions

S.L. Danielle Acquisition

On November 27, 2002, S.L. Danielle Acquisition, LLC("S.L. Danielle"), a newly formed subsidiaryof the Company acquired certain assets of S.L. Danielle Inc. Theresults of S.L. Danielle's operations have been included in theconsolidated financial statements since that date. S.L. Danielledesigns, arranges for the manufacture of, markets and sells awomen's apparel line, principally under private labels.

The aggregate purchase price was approximately $5.1 million,including cash of $4.4 million, 100,000 shares of common stock of theCompany ("Common Stock") valued at $84,000,and stock options to purchase 500,000 shares of Common Stock valued at$384,000 and transaction costs of approximately $250,000. Theacquisition was funded by CIT through revolving credit borrowings of$4.6 million. The value of the 100,000 shares of Common Stock wasdetermined based on the average market price of the Common Stock overthe 3-day period before and after the date of the acquisition. The500,000 stock options were granted at the fair market value on the dateof the acquisition and were valued using the Black Scholes optionpricing model. The following table summarizes the fair values of theassets acquired and liabilities assumed at the date of acquisition.

|                               |  |                     |       |        |  |  |
|-------------------------------|--|---------------------|-------|--------|--|--|
|                          |  | AtNovember 27, 2002 |
|                          |  | (Inthousands)       |
| Currentassets                 |  | $                   | 3,609 |   |
| Property, plant, andequipment |  |                | 36    |   |
| Intangibleassets              |  |                | 90    |   |
| Goodwill                      |  |                | 1,437 |   |
| Totalassets acquired          |  | $                   | 5,172 |   |
|                               |

CynthiaSteffe Acquisition

On January 2, 2004, Cynthia SteffeAcquisition, LLC ("CS Acquisition"), a newlyformed subsidiary of the Company acquired certain assets of the CynthiaSteffe division of LF Brands Marketing, Inc., including inventory andshowroom fixtures. The Company also acquired the Cynthia Steffetrademarks from Cynthia Steffe for consideration equal to $1.0 millionunder a separate agreement. The Cynthia Steffe business designs,arranges for the manufacture of, markets and sells a women'sapparel line, under the Cynthia Steffe trademarks. As a result of theacquisition, the Company expects to increase its sales volume throughthe sale of Cynthia Steffe product lines. The results of CynthiaSteffe's operations have been included in the consolidatedfinancial statements commencing January 2, 2004. The aggregate purchaseprice was approximately $2.2 million, plus the payment of $0.5 millionin satisfaction of certain liabilities, plus transaction fees andrelated acquisition costs of $0.2 million. The acquisition wasinitially funded out of borrowings under the Revolving Facility ofwhich $1.2 million was subsequently rolled into the Term Loan.

15

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The following table summarizes the fairvalues of the assets acquired at the date of acquisition. 

|                               |  |                   |       |         |  |  |
|-------------------------------|--|-------------------|-------|---------|--|--|
|                          |  | AtJanuary 2, 2004 |
|                          |  | (inthousands)     |
| Inventory                     |  | $                 | 578   |    |
| Property,plant, and equipment |  |              | 458   |    |
| Intangibleassets              |  |              | 1,062 |    |
| Goodwill                      |  |              | 820   |    |
| Totalassets acquired          |  | $                 | 2,918 |    |
| Currentliabilities            |  |              | (457  | )  |
| Netassetsacquired             |  | $                 | 2,461 |    |
|                               |

Intangibleassets include i) $1.0 million related to the Cynthia Steffe trademark,which was determined to be an indefinite lived intangible asset andthus not subject to amortization, and ii) $62,000 related to the salesorder backlog which was amortized over the sales period of fourmonths. 

The following unaudited pro formainformation presents financial information of the Company as though theacquisitions had been completed as of the beginning of the periods setforthbelow.

|                         |  |                                        |         |             |  |        |         |        |  |  |
|-------------------------|--|----------------------------------------|---------|-------------|--|--------|---------|--------|--|--|
|                    |  | Forthe Year Ended                      |
|                    |  | June30,2004                            |         | June30,2003 |
|                    |  | (Unaudited)                            |
|                    |  | (Inthousands except per share amounts) |
| Netrevenue              |  | $                                      | 162,796 |        |  | $      | 158,344 |   |
| Netincome               |  |                                   | 3,232   |        |  |   | 4,350   |   |
| Basic income pershare   |  | $                                      | 0.12    |        |  | $      | 0.16    |   |
| Diluted income pershare |  | $                                      | 0.11    |        |  | $      | 0.15    |   |
|                         |

Off–BalanceSheet Arrangements

The Company does not have any off-balancesheet arrangements except for inventory purchase orders and letters ofcredit under the Financing Agreement. See"—Financing Agreement".

Inflation

The Company does not believe that the relativelymoderate rates of inflation which recently have been experienced in theUnited States, where it competes, have had a significant effect on itsnet revenue or profitability.

Seasonality of Business andFashion Risk

The Company's principal products areorganized into seasonal lines for resale at the retail level during theSpring, Summer, Fall and Holiday Seasons. Typically, theCompany's products are designed as much as one year in advanceand manufactured approximately one season in advance of the relatedretail selling season. Accordingly, the success of the Company'sproducts is often dependent on the ability to successfully anticipatethe needs of retail customers and the tastes of the ultimate consumerup to a year prior to the relevant selling season.

Historically,the Company's sales and operating results fluctuate by quarter,with the greatest sales occurring in the Company's first andthird fiscal quarters. It is in these quarters that the Company'sFall and Spring product lines, which traditionally have had the highestvolume of net sales, are shipped to customers, with revenues recognizedat the time of shipment. As a result, the Company experiencessignificant variability in its quarterly results and working capitalrequirements. Moreover, delays in shipping can cause revenues to berecognized in a later quarter, resulting in further variability in suchquarterly results.

Foreign Operations

TheCompany's foreign sourcing operations are subject to variousrisks of doing business abroad and any substantial disruption of itsrelationships with its foreign suppliers could adversely affect the

16

----

Company's operations. Any materialincrease in duty levels, material decrease in quota levels or materialdecrease in available quota allocation could adversely affect theCompany's operations. Approximately 90% of the productssold by the Company in fiscal 2004 were manufactured in Asia.

Critical Accounting Policies and Estimates

TheCompany's significant accounting policies are more fullydescribed in Note 2 to the consolidated financial statements. Certainof the Company's accounting policies require the application ofsignificant judgment by management in selecting the appropriateassumptions for calculating financial estimates. By their nature, thesejudgments are subject to an inherent degree of uncertainty. Thesejudgments are based on historical experience, observation of trends inthe industry, information provided by customers and informationavailable from other outside sources, as appropriate. Significantaccounting policies include: 

Revenue Recognition –The Company recognizes sales upon shipment of products to customerssince title and risk of loss passes upon shipment. Provisions forestimated uncollectible accounts, discounts and returns and allowancesare provided when sales are recorded based upon historical experienceand current trends. While such amounts have been within expectationsand the provisions established, the Company cannot guarantee that itwill continue to experience the same rates as in the past.

Accounts Receivable – Accounts Receivable are net ofallowances and anticipated discounts. An allowance for doubtfulaccounts is determined through analysis of the aging of accountsreceivable at the date of the financial statements, assessments ofcollectibility based on historic trends and an evaluation of the impactof economic conditions. This amount is not significant primarily due tothe Company's history of minimal bad debts and the factoringagreement. An allowance for discounts is based on those discountsrelating to open invoices where trade discounts have been extended tocustomers. Costs associated with potential returns of products as wellas allowable customer markdowns and operational charge backs, net ofexpected recoveries, are included as a reduction to net revenue and arepart of the provision for allowances included in Accounts Receivable.These provisions result from seasonal negotiations as well as historicdeduction trends, net expected recoveries and the evaluation of currentmarket conditions. Account Receivable reserves were $1.2 million and$0.9 million at June 30, 2004 and 2003, respectively.

Inventories – Inventory is stated at the lower ofcost or market, cost being determined on the first-in, first-outmethod. Reserves for slow moving and aged merchandise are providedbased on historical experience and current product demand. Inventoryreserves were $0.8 million and $0.7 million at June 30, 2004 and 2003,respectively. The increase in inventory reserves was due to an increasein slow moving and aged merchandise as compared to last year. Inventoryreserves are based upon the level of excess and aged inventory and theCompany's estimated recoveries on the sale of the inventory.While markdowns have been within expectations and the provisionsestablished, the Company cannot guarantee that it will continue toexperience the same level of markdowns as in the past.

Valuationof Long-Lived Assets and Goodwill – The Companyperiodically reviews the carrying value of its long-lived assets forcontinued appropriateness. This review is based upon projections ofanticipated future undiscounted cash flows. While the Company believesthat its estimates of future cash flows are reasonable, differentassumptions regarding such cash flows could materially affectevaluations. The Company evaluates goodwill whenever events and changesin circumstances suggest that the carrying amount may not berecoverable from its estimated future cash flows. To the extent thesefuture projections or the Company's strategies change, theconclusion regarding impairment may differ from the currentestimates.

Income Taxes – The Company'sresults of operations have generated a federal tax net operating loss("NOL") carryforward of approximately $93million as of June 30, 2004. Generally accepted accounting principlesrequire that the Company record a valuation allowance against thedeferred tax asset associated with this NOL if it is "morelikely than not" that the Company will not be able toutilize it to offset future taxes. As of June 30, 2004, based upon itsevaluation of the Company's historical and projected results ofoperations, the current business environment and the magnitude of theNOL, the Company recorded a full valuation allowance on its deferredtax assets including NOL's. The provision for income taxesprimarily relates to federal alternative minimum taxes (AMT) and stateand local taxes. It is possible, however, that the Company could beprofitable in the future at levels which cause management to

17

----

conclude that it is more likely than not thatthe Company will realize all or a portion of the NOL carryforward. Uponreaching such a conclusion, the Company would record the estimated netrealizable value of the deferred tax asset at that time and would thenprovide for income taxes at a rate equal to its combined federal andstate effective rates. Subsequent revisions to the estimated netrealizable value of the deferred tax asset could cause theCompany's provision for income taxes to vary from period toperiod, although its cash tax payments would remain unaffected untilthe benefit of the NOL is utilized.

Item7A.    Quantitative and Qualitative Disclosures About MarketRisk.

Interest Rate Risk – The Company issubject to market risk from exposure to changes in interest rates basedprimarily on its financing activities. The market risk inherent in thefinancial instruments represents the potential loss in earnings or cashflows arising from adverse changes in interest rates. These debtobligations with interest rates tied to the prime rate are described in"Liquidity and Capital Resources", as well asNote 6 of the Notes to the Consolidated Financial Statements. TheCompany manages these exposures through regular operating and financingactivities. The Company has not entered into any derivative financialinstruments for hedging or other purposes. The following quantitativedisclosures are based on the prevailing prime rate. These quantitativedisclosures do not represent the maximum possible loss or any expectedloss that may occur, since actual results may differ from theseestimates.

At June 30, 2004 and 2003, the carrying amounts ofthe Company's revolving credit borrowings and term loanapproximated fair value. As of June 30, 2004, the Company'srevolving credit borrowings bore interest at 4.5% and the termloan bore interest at 5.0%. As of June 30, 2004, a hypotheticalimmediate 10% adverse change in prime interest rates relating tothe Company's revolving credit borrowings and term loan wouldhave a $0.1 million unfavorable impact on its earnings and cash flowsover a one-year period.

Item 8.    Financial Statementsand Supplementary Data.

The Company's consolidatedfinancial statements are included herein commencing on page F-1.

Item 9.    Changes in and Disagreements with Accountants onAccounting and Financial Disclosure.

None.

Item9A.    Controls and Procedures.

The Companymaintains disclosure controls and procedures that are designed toensure that information required to be disclosed by the Company in thereports filed or submitted by it under the Securities Exchange Act of1934, as amended (the "Exchange Act"), isrecorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission's rules andforms, and include controls and procedures designed to ensure thatinformation required to be disclosed by the Company in such reports isaccumulated and communicated to the Company's management,including the Company's Chairwoman and Chief Executive Officerand the Company's Chief Financial Officer, as appropriate toallow timely decisions regarding required disclosure.

Eachfiscal quarter the Company carries out an evaluation, under thesupervision and with the participation of the Company'smanagement, including Company's Chairwoman and Chief ExecutiveOfficer along with the Company's Chief Financial Officer, of theeffectiveness of the design and operation of the Company'sdisclosure controls and procedures pursuant to Exchange Act Rule13a-15. Based upon the foregoing, the Company's Chairwoman andChief Executive Officer along with the Company's Chief FinancialOfficer, concluded that, as of June 30, 2004, the Company'sdisclosure controls and procedures are effective in timely alertingthem to material information relating to the Company (including itsconsolidated subsidiaries) required to be included in theCompany's Exchange Act reports.

During the fiscal yearended June 30, 2004, there has been no change in the Company'sinternal control over financial reporting that has materially affected,or is reasonably likely to materially affect, the Company'sinternal control over financial reporting.

18

----

Item 9B.    OtherInformation

None

PART III

Item10.    Directors and Executive Officers of theRegistrant.

Information with respect to the executiveofficers of the Company is set forth in Part I of this Annual Report onForm 10-K.

Information with respect to the directors of theCompany is incorporated by reference to the information to be set forthunder the heading "Election of Directors" inthe Company's definitive proxy statement relating to its 2004Annual Meeting of Shareholders to be filed pursuant to Regulation 14A(the "2004 Proxy Statement").

Item11.    Executive Compensation.

Information calledfor by Item 11 is incorporated by reference to the information to beset forth under the heading "ExecutiveCompensation" in the Company's 2004 ProxyStatement.

Item 12.    Security Ownership of CertainBeneficial Owners and Management.

Information called forby Item 12 is incorporated by reference to the information to be setforth under the heading "Security Ownership of CertainBeneficial Owners and Management" in the Company's2004 Proxy Statement.

Information with respect to securitiesauthorized for issuance under equity compensation plans is incorporatedby reference to the information to be set forth under the heading"Compensation Program Components" in theCompany's 2004 Proxy Statement.

Item 13.    CertainRelationships and Related Transactions.

Information calledfor by Item 13 is incorporated by reference to the information to beset forth under the headings "ExecutiveCompensation" and "CertainTransactions" in the Company's 2004 ProxyStatement.

Item 14.    Principal Accounting Fees andServices.

Information called for by Item 14 isincorporated by reference to the information to be set forth under theheadings "Report of the Audit Committee" and"Auditors" in the Company's 2004 ProxyStatement.

PART IV

Item 15.    Exhibits,Financial Statement Schedules, and Reports on Form 8-K.

|            |                                                                                                                                     |
|------------|-------------------------------------------------------------------------------------------------------------------------------------|
| (a)   | Financial Statements and FinancialStatement Schedule: See List of Financial Statements and FinancialStatement Schedule on page F-1. |

|           |                                                                                                                 |
|-----------|-----------------------------------------------------------------------------------------------------------------|
| (b)  | TheCompany did not file any reports on form 8-K during the last quarter ofits fiscal year ended June  30, 2004. |

|           |          |
|-----------|----------|
| (c)  | Exhibits |

|           |                                                                                                                                                                                                                                            |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1  | RestatedCertificate of Incorporation (the "RestatedCertificate") of the Company (incorporated by reference toExhibit 3.1 of the Company's Registration Statement on Form S-1,Registration No. 33-5954 (the "1986 RegistrationStatement")). |

|           |                                                                                                                                                                                                                           |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  | Amendmentdated November 18, 1987 to the Restated Certificate (incorporated byreference to Exhibit 3.11 of the Company's Registration Statementon Form S-2, Registration No. 33-63317 (the "1995Registration Statement")). |

19

----

|           |                                                                                                                                                               |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.3  | Amendmentdated November 15, 1995 to the Restated Certificate (incorporated byreference to Exhibit 3.12 of Amendment No. 1 to the 1995 RegistrationStatement). |

|           |                                                                                                                                                                                          |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.4  | Amendment datedDecember 9, 1998 to the Restated Certificate (incorporated by referenceto Exhibit 3.13 of the Company's Form 10-K for the year endedJune 30, 1998 (the "1998 Form10-K")). |

|           |                                                                                                                                                |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.5  | By-Laws ofthe Company, as amended (incorporated by reference to exhibit 3.1 ofthe Company's Form 10-Q for the quarter ended December 31,1987). |

|           |                                                                                                                                                                   |
|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.6  | Amendment dated September13, 1994 to the By-Laws (incorporated by reference to Exhibit 10.105 ofthe Company's Form 10-Q for the quarter ended September 30,1994). |

|                     |                                                                                                                                                                                                                                                 |
|---------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †10.77  | 1998 StockOption Plan, as amended by Amendment No.1 thereto including form ofrelated stock option agreement (incorporated by reference to Exhibit Aand Exhibit B of the Company's Proxy Statement filed with theCommission on October 17,2000). |

|             |                                                                                                                                                                                                                                                           |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.81  | Collective BargainingAgreement between the Company and Amalgamated Workers Union, Local 8effective as of September 24, 1999 (incorporated by reference toExhibit 10.81 of the Company's Form 10-K for the year ended June30, 1999 (the "1999 Form10-K")). |

|             |                                                                                                                                                                                                                                          |
|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.82  | Leasebetween the Company and Adler Realty Company, dated June 1, 1999 withrespect to the Company's executive offices and showroom at 530Seventh Avenue, New York City (incorporated by reference to Exhibit10.82 of the 1999 Form 10-K). |

|             |                                                                                                                                                                                                                                                                                                                     |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.84  | Lease between the Company andKaufman Eighth Avenue Associates, dated September 11, 1999 with respectto the Company's technical support facilities at 519 EighthAvenue, New York City (incorporated by reference to Exhibit 10.84 ofthe Company's Form 10-K for the year ended June 30, 2000 (the"2000 Form 10-K")). |

|             |                                                                                                                                                                                                    |
|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.87  | Employment Agreement dated January 10, 2001between the Company and Nicholas DiPaolo (incorporated by reference toExhibit 10.87 of the Company's Form 10-Q for the quarter endedDecember 31, 2000). |

|              |                                                                                                                                                                                                                                                                                                                          |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.90   | Leasemodification agreement between the Company and Hartz MountainIndustries, Inc., dated August 30, 1999 with respect to theCompany's distribution and office facilities in Secaucus, NJ.(incorporated by reference to Exhibit 10.90 of the Company's Form10-K for the year ended June 30, 2001 (the "2001 Form10-K")). |

|             |                                                                                                                                                   |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.91  | Employment Agreement dated June 1,2001 between the Company and Gregory Mongno. (incorporated by referenceto Exhibit 10.91 of the 2001 Form 10-K). |

|              |                                                                                                                                                                                  |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.100  | Financing Agreement between theCompany and CIT/Commercial Services, Inc., as Agent, dated September27, 2002. (incorporated by reference to Exhibit 10.100 of the 2002 Form10-K). |

|              |                                                                                                                                                                        |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.101  | Factoring Agreementbetween the Company and CIT/Commercial Services, Inc., dated September27, 2002. (incorporated by reference to Exhibit 10.101 of the 2002 Form10-K). |

|              |                                                                                                                                                                                                                                                                                          |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.102  | Joinder and AmendmentNo. 1 to Financing Agreement by and among the Company, S.L. Danielleand The CIT Group/Commercial Services, Inc., as agent, dated November27, 2002. (incorporated by reference to Exhibit 10.102 of theCompany's Form 10-Q for the quarter ended December 31, 2002). |

|              |                                                                                                                                                                                                                                                |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.103  | Amendment No. 1 to FactoringAgreement between the Company and The CIT Group/Commercial Services,Inc., dated November 27, 2002. (incorporated by reference to Exhibit10.103 of the Company's Form 10-Q for the quarter ended December31, 2002). |

|              |                                                                                                                                                                                                                               |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.104  | FactoringAgreement between S.L. Danielle and The CIT Group/Commercial Services,Inc., dated November 27, 2002. (incorporated by reference to Exhibit10.104 of the Company's Form 10-Q for the quarter ended December31, 2002). |

20

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|              |                                                                                                                                                                                                                 |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.105  | AssetPurchase Agreement between S.L. Danielle and S.L. Danielle, Inc., datedNovember  27, 2002. (incorporated by reference to Exhibit 10.105of the Company's Form 10-Q for the quarter ended December 31,2002). |

|               |                                                                                                                                                                                                                                                                                                                         |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.106   | Joinder and AmendmentNo. 2 to Financing Agreement by and among the Company, S.L. Danielle,Cynthia Steffe Acquisition, LLC and The CIT Group/Commercial Services,Inc., as agent, dated January 30, 2004. (incorporated by reference toExhibit 10.106 of the Company's Form 10-Q for the quarter endedDecember 31, 2003). |

|              |                                                                                                                                                                                                                                                |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.107  | Amendment No. 2 to Factoring Agreement betweenthe Company and The CIT Group/Commercial Services, Inc., dated January30, 2004. (incorporated by reference to Exhibit 10.107 of theCompany's Form 10-Q for the quarter ended December 31, 2003). |

|               |                                                                                                                                                                                                                                                 |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.108   | Amendment No. 1 to FactoringAgreement between S.L. Danielle and The CIT Group/Commercial Services,Inc., dated January 30, 2004. (incorporated by reference to Exhibit10.108 of the Company's Form 10-Q for the quarter ended December31, 2003). |

|               |                                                                                                                                                                                                                                                |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.109   | FactoringAgreement between Cynthia Steffe Acquisition, LLC and The CITGroup/Commercial Services, Inc., dated January 15, 2004. (incorporatedby reference to Exhibit 10.109 of the Company's Form 10-Q for thequarter ended December 31, 2003). |

|              |                                                                                                                                                                                                                 |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.110  | Amendment to Employment Agreement between theCompany and Gregory Mongo, dated October 15, 2003. (incorporated byreference to Exhibit 10.110 of the Company's Form 10-Q for thequarter ended December 31, 2003). |

|              |                                                                                                                                                                                                                                   |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.111  | Amendment to Employment Agreement betweenNicholas DiPaolo and Bernard Chaus, Inc., effective as ofDecember  1, 2003. (incorporated by reference to Exhibit 10.111of the Company's Form 10-Q for the quarter ended March 31,2004). |

|               |                                                                                                                                                                                                                                                                |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.112   | Notice of Defactoringamong Bernard Chaus, Inc., S.L. Danielle Acquisition, LLC and the CITGroup/Commercial Services, Inc., dated March  31, 2004.(incorporated by reference to Exhibit 10.112 of the Company'sForm 10-Q for the quarter ended March 31, 2004). |

|              |                                                                                                                                                                                                                                                            |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.113  | Amendment No.  1 to Factoring Agreementbetween Cynthia Steffe Acquisition LLC and the CIT Group/CommercialServices, Inc., dated April1, 2004. (incorporated by reference toExhibit 10.113 of the Company's Form 10-Q for the quarter endedMarch 31, 2004). |

|                |                                                                                                                                                                                       |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.114   | AmendmentNo. 3 to Financing Agreement among the Company, S.L. Danielle, CynthiaSteffe Acquisition, LLC and the CIT Group/Commercial Services, Inc. asagent, dated September 15, 2004. |

|           |                                     |
|-----------|-------------------------------------|
| *21  | List of Subsidiaries of theCompany. |

|            |                                      |
|------------|--------------------------------------|
| *23   | Consent of Deloitte& Touche LLP. |

|             |                                                                                             |
|-------------|---------------------------------------------------------------------------------------------|
| *31.1  | Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002 for Josephine Chaus. |

|             |                                                                                              |
|-------------|----------------------------------------------------------------------------------------------|
| *31.2  | Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002 for Barton Heminover. |

|             |                                                                                                                                           |
|-------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| *32.1  | Certification Pursuant to 18 U.S.C. Section 1350,as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002for Josephine Chaus. |

|             |                                                                                                                                            |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| *32.2  | Certification Pursuant to 18 U.S.C. Section 1350,as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002for Barton Heminover. |

|  |
|--|
|  |  |
|  |

|                |                                                                                            |
|----------------|--------------------------------------------------------------------------------------------|
| †  | Managementagreement or compensatory plan or arrangement required to be filed asan exhibit. |

|         |                |
|---------|----------------|
| *  | Filedherewith. |

21

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused thisReport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

|  | BERNARD CHAUS, INC. |
|--|---------------------|

|  | By:/s/ Josephine Chaus         |
|--|------------------------------------------------------------------------|

|  | Josephine Chaus Chairwoman of the Boardand Chief Executive Officer |
|--|--------------------------------------------------------------------|

|  | Date: September27, 2004 |
|--|-------------------------|

Pursuant to the requirements of the Securities ExchangeAct of 1934, this Report has been signed below by the following personson behalf of the registrant and in the capacities and on the datesindicated.

|                      |  |                                                       |  |                    |
|----------------------|--|-------------------------------------------------------|--|--------------------|
| SIGNATURE            |  | TITLE                                                 |  | DATE               |
|                      |
| /s/Josephine Chaus   |  | Chairwoman of the Board and Chief ExecutiveOfficer    |  | September 23, 2004 |
|                      |
| Josephine Chaus      |
|                      |
| /s/ NicholasDiPaolo  |  | Vice Chairmanof the Board and Chief Operating Officer |  | September 23,2004  |
|                      |
| Nicholas DiPaolo     |
|                      |
| /s/ BartonHeminover  |  | ChiefFinancial Officer                                |  | September 23, 2004 |
|                      |
| Barton Heminover     |
|                      |
| /s/ Philip G.Barach  |  | Director                                              |  | September 23,2004  |
|                      |
| Philip G.Barach      |
|                      |
| /s/ S. LeeKling      |  | Director                                              |  | September 23,2004  |
|                      |
| S. LeeKling          |
|                      |
| /s/ Harvey M.Krueger |  | Director                                              |  | September 23,2004  |
|                      |
| Harvey M.Krueger     |
|                      |

22

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BERNARDCHAUS, INC. AND SUBSIDIARIES

INDEX TO FINANCIALSTATEMENTS AND FINANCIAL STATEMENT SCHEDULE

The followingconsolidated financial statements of Bernard Chaus, Inc. andsubsidiaries are included in Item 8:

|                                                                                                                                |  |        |     |        |  |  |
|--------------------------------------------------------------------------------------------------------------------------------|--|--------|-----|--------|--|--|
| Reportof Independent Registered Public Accounting Firm                                                                         |  |   | F-2 |   |
| Consolidated Balance Sheets — June 30, 2004 and 2003                                                                     |  |   | F-3 |   |
| Consolidated Statements of Operations— Years Ended June 30, 2004, 2003 and 2002                                          |  |   | F-4 |   |
| Consolidated Statements of Stockholders' Equity andComprehensive Income (Loss) — Years Ended June 30, 2004, 2003 and2002 |  |   | F-5 |   |
| Consolidated Statements of CashFlows — Years Ended June 30, 2004, 2003 and2002                                           |  |   | F-6 |   |
| Notes to Consolidated FinancialStatements                                                                                      |  |   | F-7 |   |
| Thefollowing consolidated financial statement schedule of Bernard Chaus,Inc. and subsidiaries is included in Item15:           |
| Schedule II —Valuation and QualifyingAccounts                                                                            |  |   | S-1 |   |
|                                                                                                                                |

The other schedulesfor which provision is made in the applicable accounting regulation ofthe Securities and Exchange Commission are not required under therelated instructions or are inapplicable and, therefore, have beenomitted.

F-1

----

REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

To the Board of Directors andStockholders of Bernard Chaus, Inc.New York, New York

We have audited the accompanying consolidated balancesheets of Bernard Chaus, Inc. and subsidiaries as of June 30, 2004 andJune 30, 2003 and the related consolidated statements of operations,stockholders' equity and cash flows for each of the three yearsin the period ended June 30, 2004. Our audits also included thefinancial statement schedule listed in the Index at item 15. Thesefinancial statements and financial statement schedule are theresponsibility of the Company's management. Our responsibility isto express an opinion on these financial statements and financialstatement schedule based on our audits.

We conducted ouraudits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion, suchconsolidated financial statements present fairly, in all materialrespects, the financial position of Bernard Chaus, Inc. andsubsidiaries at June 30, 2004 and June 30, 2003, and the results oftheir operations and their cash flows for each of the three years inthe period ended June 30, 2004 in conformity with accounting principlesgenerally accepted in the United States of America. Also, in ouropinion, such financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole,presents fairly in all material respects the information set forththerein.

/S/ Deloitte & Touche LLP

Parsippany, New JerseySeptember 28,2004

F-2

----

BERNARDCHAUS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS(Inthousands, except number of shares and per shareamounts)

|                                                                                                        |  |             |          |             |  |        |          |         |  |  |
|--------------------------------------------------------------------------------------------------------|--|-------------|----------|-------------|--|--------|----------|---------|--|--|
|                                                                                                   |  | June30,2004 |          | June30,2003 |
| **Assets**                                                                                             |  |
| CurrentAssets                                                                                          |  |        |     |        |  |   |     |    |
| Cash and cashequivalents                                                                               |  | $           | 137      |        |  | $      | 2,650    |    |
| Accountsreceivable –net                                                                          |  |        | 28,803   |        |  |   | 19,996   |    |
| Inventories–net                                                                                  |  |        | 8,673    |        |  |   | 10,696   |    |
| Prepaidexpenses and other current assets                                                               |  |        | 952      |        |  |   | 719      |    |
| Totalcurrent assets                                                                                    |  |        | 38,565   |        |  |   | 34,061   |    |
| Fixedassets – net                                                                                |  |        | 4,212    |        |  |   | 3,792    |    |
| Otherassets –net                                                                                 |  |        | 342      |        |  |   | 599      |    |
| Trademarks                                                                                             |  |        | 1,000    |        |  |   | —  |    |
| Goodwill                                                                                               |  |        | 2,257    |        |  |   | 1,395    |    |
| Totalassets                                                                                            |  | $           | 46,376   |        |  | $      | 39,847   |    |
| **Liabilitiesand Stockholders'Equity**                                                                 |  |        |     |        |  |   |     |    |
| CurrentLiabilities                                                                                     |  |        |     |        |  |   |     |    |
| Revolving creditborrowings                                                                             |  | $           | 8,563    |        |  | $      | —  |    |
| Accountspayable                                                                                        |  |        | 7,913    |        |  |   | 12,747   |    |
| Accruedexpenses                                                                                        |  |        | 3,198    |        |  |   | 3,599    |    |
| Term loan–current                                                                                |  |        | 1,700    |        |  |   | 1,500    |    |
| Totalcurrentliabilities                                                                                |  |        | 21,374   |        |  |   | 17,846   |    |
| Termloan                                                                                               |  |        | 7,325    |        |  |   | 7,875    |    |
| Long termliabilities                                                                                   |  |        | 897      |        |  |   | 1,017    |    |
| Deferredincometaxes                                                                                    |  |        | 81       |        |  |   | —  |    |
| Totalliabilities                                                                                       |  |        | 29,677   |        |  |   | 26,738   |    |
| Commitmentsand Contingencies (Notes 6, 9, and12)                                                       |  |
| **Stockholders'Equity**                                                                                |  |
| Preferredstock, $.01 par value, authorized shares – 1,000,000; outstandingshares –none     |  |        | —  |        |  |   | —  |    |
| Commonstock, $.01 par value, authorized shares –50,000,000;                                      |  |        | 280      |        |  |   | 274      |    |
|     issuedshares – 27,979,359 at June 30, 2004 and 27,384,358 atJune30, 2003 |  |        |     |        |  |   |     |    |
| Additional paid-incapital                                                                              |  |        | 126,234  |        |  |   | 125,943  |    |
| Deficit                                                                                                |  |        | (108,030 | )      |  |   | (111,134 | )  |
| Accumulatedother comprehensiveloss                                                                     |  |        | (305     | )      |  |   | (494     | )  |
| Less: Treasurystock at cost – 62,270 shares at June 30, 2004 and2003                             |  |        | (1,480   | )      |  |   | (1,480   | )  |
| Totalstockholders'equity                                                                               |  |        | 16,699   |        |  |   | 13,109   |    |
| Totalliabilities and stockholders'equity                                                               |  | $           | 46,376   |        |  | $      | 39,847   |    |
|                                                                                                        |

Seeaccompanying notes to consolidated financial statements.

F-3

----

BERNARD CHAUS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, exceptnumber of shares and per shareamounts)

|                                                                                         |  |                          |            |        |  |        |            |        |  |        |            |         |  |  |
|-----------------------------------------------------------------------------------------|--|--------------------------|------------|--------|--|--------|------------|--------|--|--------|------------|---------|--|--|
|                                                                                    |  | FiscalYear Ended June30, |
|                                                                                    |  | 2004                     |            | 2003   |  | 2002   |
| Netrevenue                                                                              |  | $                        | 157,107    |   |  | $      | 140,225    |   |  | $      | 145,769    |    |
| Costof goodssold                                                                        |  |                     | 117,451    |   |  |   | 104,398    |   |  |   | 116,951    |    |
| Grossprofit                                                                             |  |                     | 39,656     |   |  |   | 35,827     |   |  |   | 28,818     |    |
| Selling,general and administrativeexpenses                                              |  |                     | 34,894     |   |  |   | 29,634     |   |  |   | 30,130     |    |
| Income(loss) fromoperations                                                             |  |                     | 4,762      |   |  |   | 6,193      |   |  |   | (1,312     | )  |
| Otherincome                                                                             |  |                     | —    |   |  |   | —    |   |  |   | (193       | )  |
| Interestexpense,net                                                                     |  |                     | 1,355      |   |  |   | 1,091      |   |  |   | 2,049      |    |
| Income(loss) before income tax provision(benefit)                                       |  |                     | 3,407      |   |  |   | 5,102      |   |  |   | (3,168     | )  |
| Incometax provision(benefit)                                                            |  |                     | 303        |   |  |   | 425        |   |  |   | (944       | )  |
| Netincome(loss)                                                                         |  | $                        | 3,104      |   |  | $      | 4,677      |   |  | $      | (2,224     | )  |
| Basicearnings (loss) pershare                                                           |  | $                        | 0.11       |   |  | $      | 0.17       |   |  | $      | (0.08      | )  |
| Dilutedearnings (loss) pershare                                                         |  | $                        | 0.10       |   |  | $      | 0.16       |   |  | $      | (0.08      | )  |
| Weightedaverage number of common shares outstanding –basic                        |  |                     | 27,504,000 |   |  |   | 27,384,000 |   |  |   | 27,216,000 |    |
| Weightedaverage number of common and common equivalent shares outstanding–diluted |  |                     | 30,490,000 |   |  |   | 29,912,000 |   |  |   | 27,216,000 |    |
|                                                                                         |

Seeaccompanying notes to consolidated financialstatements.

F-4

----

BERNARDCHAUS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OFSTOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)(In thousands, except number ofshares)

|                                                        |  |                |            |        |  |                          |         |           |  |                |         |        |  |                                   |           |         |  |        |         |        |  |        |         |         |  |        |         |         |  |        |        |         |  |  |
|--------------------------------------------------------|--|----------------|------------|--------|--|--------------------------|---------|-----------|--|----------------|---------|--------|--|-----------------------------------|-----------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--------|--------|---------|--|--|
|                                                   |  | CommonStock    |            |   |  | TreasuryStock            |         |
|                                                   |  | NumberofShares |            | Amount |  | AdditionalPaid-inCapital |         | (Deficit) |  | NumberofShares |         | Amount |  | AccumulatedOtherComprehensiveLoss |           | Total   |
| Balanceat July 1,2001                                  |  |           | 27,278,258 |   |  | $                        | 273     |      |  | $              | 125,473 |   |  |                              | ($113,587 | )  |  |   | 62,270  |   |  |   | ($1,480 | )  |  |   | — |    |  | $      | 10,679 |    |
| Minimumpension liabilityadjustment                     |  |           | —    |   |  |                     | — |      |  |           | — |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | (242    | )  |  |   | (242   | )  |
| Netloss                                                |  |           | —    |   |  |                     | — |      |  |           | — |   |  |                              | (2,224    | )  |  |   | — |   |  |   | — |    |  |   | — |    |  |   | (2,224 | )  |
| Comprehensiveloss                                      |  |           |       |   |  |                     |    |      |  |           |    |   |  |                              |      |    |  |   |    |   |  |   |    |    |  |   |    |    |  |   | (2,466 | )  |
| Balanceat June 30,2002                                 |  |           | 27,278,258 |   |  |                     | 273     |      |  |           | 125,473 |   |  |                              | (115,811  | )  |  |   | 62,270  |   |  |   | (1,480  | )  |  |   | (242    | )  |  |   | 8,213  |    |
| Issuanceof common stock upon exercise of stock options |  |           | 6,100      |   |  |                     | — |      |  |           | 3       |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | — |    |  |   | 3      |    |
| Commonstock and stock options issued foracquisition    |  |           | 100,000    |   |  |                     | 1       |      |  |           | 467     |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | — |    |  |   | 468    |    |
| Minimumpension liabilityadjustment                     |  |           | —    |   |  |                     | — |      |  |           | — |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | (252    | )  |  |   | (252   | )  |
| Netincome                                              |  |           | —    |   |  |                     | — |      |  |           | — |   |  |                              | 4,677     |    |  |   | — |   |  |   | — |    |  |   | — |    |  |   | 4,677  |    |
| Comprehensiveincome                                    |  |           |       |   |  |                     |    |      |  |           |    |   |  |                              |      |    |  |   |    |   |  |   |    |    |  |   |    |    |  |   | 4,425  |    |
| Balanceat June 30,2003                                 |  |           | 27,384,358 |   |  |                     | 274     |      |  |           | 125,943 |   |  |                              | (111,134  | )  |  |   | 62,270  |   |  |   | (1,480  | )  |  |   | (494    | )  |  |   | 13,109 |    |
| Issuanceof common stock upon exercise of stockoptions  |  |           | 595,001    |   |  |                     | 6       |      |  |           | 291     |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | — |    |  |   | 297    |    |
| Minimumpension liabilityadjustment                     |  |           | —    |   |  |                     | — |      |  |           | — |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | 189     |    |  |   | 189    |    |
| Netincome                                              |  |           | —    |   |  |                     | — |      |  |           | — |   |  |                              | 3,104     |    |  |   | — |   |  |   | — |    |  |   | — |    |  |   | 3,104  |    |
| Comprehensiveincome                                    |  |           |       |   |  |                     |    |      |  |           |    |   |  |                              |      |    |  |   |    |   |  |   |    |    |  |   |    |    |  |   | 3,293  |    |
| Balanceat June 30,2004                                 |  |           | 27,979,359 |   |  | $                        | 280     |      |  | $              | 126,234 |   |  |                              | ($108,030 | )  |  |   | 62,270  |   |  |   | ($1,480 | )  |  |   | ($305   | )  |  | $      | 16,699 |    |
|                                                        |

Seeaccompanying notes to consolidated financialstatements

F-5

----

BERNARD CHAUS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Inthousands)

|                                                                                                  |  |                   |         |         |  |        |         |         |  |        |         |         |  |  |
|--------------------------------------------------------------------------------------------------|--|-------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                             |  | YearEnded June30, |
|                                                                                             |  | 2004              |         | 2003    |  | 2002   |
| **OperatingActivities**                                                                          |  |
| Net income(loss)                                                                                 |  | $                 | 3,104   |    |  | $      | 4,677   |    |  | $      | (2,224  | )  |
| Adjustmentsto reconcile net income (loss) to net cash provided by (used in)operating activities: |  |
| Depreciation andamortization                                                                     |  |              | 1,273   |    |  |   | 1,580   |    |  |   | 1,608   |    |
| Losson disposal of otherassets                                                                   |  |              | — |    |  |   | 244     |    |  |   | — |    |
| Provisionfor losses on accountsreceivable                                                        |  |              | 180     |    |  |   | (260    | )  |  |   | 75      |    |
| Changesin operating assets and liabilities:                                                      |  |
| Accountsreceivable                                                                               |  |              | (8,987  | )  |  |   | 2,268   |    |  |   | 3,027   |    |
| Inventories                                                                                      |  |              | 2,601   |    |  |   | (455    | )  |  |   | 5,532   |    |
| Prepaidexpenses and other currentassets                                                          |  |              | (176    | )  |  |   | 405     |    |  |   | (360    | )  |
| Accountspayable                                                                                  |  |              | (4,834  | )  |  |   | 2,998   |    |  |   | (3,767  | )  |
| Accruedexpenses and long termliabilities                                                         |  |              | (251    | )  |  |   | 726     |    |  |   | (680    | )  |
| NetCash (Used In) Provided By OperatingActivities                                                |  |              | (7,090  | )  |  |   | 12,183  |    |  |   | 3,211   |    |
| **InvestingActivities**                                                                          |  |
| Acquisition ofbusiness                                                                           |  |              | (2,960  | )  |  |   | (4,662  | )  |  |   | — |    |
| Purchasesof fixedassets                                                                          |  |              | (973    | )  |  |   | (308    | )  |  |   | (392    | )  |
| Purchasesof otherassets                                                                          |  |              | — |    |  |   | — |    |  |   | (419    | )  |
| NetCash Used In InvestingActivities                                                              |  |              | (3,933  | )  |  |   | (4,970  | )  |  |   | (811    | )  |
| **FinancingActivities**                                                                          |  |
| Net borrowings (repayments) ofshort-term bankborrowings                                          |  |              | 8,563   |    |  |   | (3,591  | )  |  |   | (1,433  | )  |
| Principalpayments on termloans                                                                   |  |              | (1,550  | )  |  |   | (11,625 | )  |  |   | (1,000  | )  |
| Borrowingson termloans                                                                           |  |              | 1,200   |    |  |   | 10,500  |    |  |   | — |    |
| Netproceeds from issuance ofstock                                                                |  |              | 297     |    |  |   | 3       |    |  |   | — |    |
| NetCash Provided By (Used In) FinancingActivities                                                |  |              | 8,510   |    |  |   | (4,713  | )  |  |   | (2,433  | )  |
| (Decrease)Increase in Cash and CashEquivalents                                                   |  |              | (2,513  | )  |  |   | 2,500   |    |  |   | (33     | )  |
| Cash,Beginning ofYear                                                                            |  |              | 2,650   |    |  |   | 150     |    |  |   | 183     |    |
| Cash,End ofYear                                                                                  |  | $                 | 137     |    |  | $      | 2,650   |    |  | $      | 150     |    |
| Cashpaidfor:                                                                                     |  |
| Taxes                                                                                            |  | $                 | 283     |    |  | $      | 313     |    |  | $      | 23      |    |
| Interest                                                                                         |  | $                 | 1,222   |    |  | $      | 964     |    |  | $      | 1,767   |    |
|                                                                                                  |

Seeaccompanying notes to consolidated financialstatements.

F-6

----

BERNARDCHAUS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIALSTATEMENTSYEARS ENDED JUNE 30, 2004, 2003 AND2002

|          |          |
|----------|----------|
| 1.  | Business |

Bernard Chaus, Inc. (the "Company" or"Chaus") designs, arranges for themanufacture of and markets an extensive range of women's careerand casual sportswear principally under the JOSEPHINECHAUS® COLLECTION, JOSEPHINE CHAUS®SPORT, CHAUS®, and CYNTHIA STEFFE®trademarks and under private label brand names. The Company'sproducts are sold nationwide through department store chains, specialtyretailers and other retail outlets. The Company has positioned itsJOSEPHINE CHAUS product line into the opening price points of the"better" category. In December 2002, theCompany acquired certain assets of S.L. Danielle Inc. ("SLDanielle"). SL Danielle designs, arranges for themanufacture of and markets women's moderately priced privatelabel clothing. In January 2004, the Company acquired certain assets ofthe Cynthia Steffe division of LF Brands Marketing, Inc.("Cynthia Steffe"). Cynthia Steffe designs,arranges for the manufacture of, markets and sells an upscale modernwomen's apparel line, under the Cynthia Steffe trademarks.

|          |                                            |
|----------|--------------------------------------------|
| 2.  | Summary of Significant Accounting Policies |

Principles of Consolidation:

The consolidated financialstatements include the accounts of the Company and its subsidiaries.Intercompany accounts and transactions have been eliminated.

Use of Estimates:

The preparation of financial statementsin conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates andassumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from thoseestimates.

Revenue Recognition:

The Company recognizesrevenue upon shipment of products to customers since title and risk ofloss passes upon shipment. Provisions for estimated uncollectibleaccounts, discounts and returns and allowances are provided when salesare recorded based upon historical experience and current trends. Whilesuch amounts have been within expectations and the provisionsestablished, the Company cannot guarantee that it will continue toexperience the same rates as in the past. Design revenue is recognizedwhen designs are manufactured and shipped.

Credit Terms:

Through March 31, 2004, the Company extended credit to the majorityof its customers through a factoring agreement with The CITGroup/Commercial Services, Inc. ("CIT").Under the factoring arrangement, the Company receives payment from CITonly after CIT has been paid by the Company's customers. CITassumes only the risk of the Company's customers'insolvency. All other receivable risks are retained by the Company,including, but not limited to, allowable customer markdowns,operational chargebacks, disputes, discounts, and returns. EffectiveMarch 31, 2004, the Company, the Company's SL Danielle subsidiaryand CIT agreed to terminate the Factoring Agreements between them. Inconnection with the termination of those Factoring Agreements, theCompany's Cynthia Steffe Acquisition subsidiary and CIT enteredinto an amendment of their Factoring Agreement revising only thefactoring commission. Receivables related to sales of Cynthia Steffeproduct lines continue to be factored. At March 31, 2004, approximately98% of the Company's accounts receivable were beingserviced by CIT under the factoring arrangement. Effective April 1,2004 the Company extends credit to its customers, other than customersof CS Acquisition based upon an evaluation of the customer'sfinancial condition and credit history.

F-7

----

At June 30, 2004, approximately 95%of the Company's accounts receivable was non factored. At June30, 2004 and 2003, approximately 77 % and 72 %respectively, of the Company's accounts receivable were due fromcustomers owned by three single corporate entities. During fiscal 2004,approximately 70% of the Company's net revenue was fromthree corporate entities – Dillard's Department Stores35%, TJX Companies 22%, and Sam's Club 13%.During fiscal 2003 approximately 73% of the Company's netrevenue was from three corporate entities – Dillard'sDepartment Stores 40%, TJX Companies 23% and MayDepartment Stores 10%. During fiscal 2002 approximately70% of the Company's net revenue was from three corporateentities – Dillards Department Stores 34%, TJX Companies18% and May Department Stores 18%. As a result of theCompany's dependence on its major customers, such customers mayhave the ability to influence the Company's business decisions.The loss of or significant decrease in business from any of its majorcustomers could have a material adverse effect on the Company'sfinancial position and results of operations. In addition, theCompany's ability to achieve growth in revenues is dependent, inpart, on its ability to identify new distribution channels.

Accounts Receivable:

Accounts Receivable are net ofallowances and anticipated discounts. An allowance for doubtfulaccounts is determined through analysis of the aging of accountsreceivable at the date of the financial statements, assessments ofcollectibility based on historic trends and an evaluation of the impactof economic conditions. This amount is not significant primarily due tothe Company's history of minimal bad debts and the factoringagreement. An allowance for discounts is based on those discountsrelating to open invoices where trade discounts have been extended tocustomers. Costs associated with potential returns of products as wellas allowable customer markdowns and operational charge backs, net ofexpected recoveries, are included as a reduction to net revenue and arepart of the provision for allowances included in Accounts Receivable.These provisions result from seasonal negotiations as well as historicdeduction trends, net expected recoveries and the evaluation of currentmarket conditions. As of June 30, 2004 and June 30, 2003, AccountsReceivable was net of allowances of $1.2 million and $0.9 million,respectively.

Inventories:

Inventories are stated atthe lower of cost or market, cost being determined on the first-in,first-out method. Reserves for slow moving and aged merchandise areprovided based on historical experience and current product demand.Inventory reserves were $0.8 million at June 30, 2004, and $0.7 millionat June 30, 2003. Inventory reserves are based upon the level of excessand aged inventory and the Company's estimated recoveries on thesale of the inventory. While markdowns have been within expectationsand the provisions established, the Company cannot guarantee that itwill continue to experience the same level of markdowns as in thepast.

Cost of goods sold:

Cost of goods sold includesthe costs incurred to acquire and produce inventory for sale, includingproduct costs, freight-in, duty costs, commission cost and provisionsfor inventory losses.

Cash and Cash Equivalents:

Allhighly liquid investments with an original maturity of three months orless at the date of purchase are classified as cash equivalents.

Goodwill and Trademarks

Goodwill represents the excess ofpurchase price over the fair value of net assets acquired in businesscombinations accounted for under the purchase method of accounting.Trademarks relate to the Cynthia Steffe trademarks and were determinedto have an indefinite life. Pursuant to the provisions of SFASNo.  142, "Goodwill and Other IntangibleAssets" the Company does not amortize assets withindefinite lives and conducts impairment testing annually in the fourthquarter of each fiscal year, or sooner if circumstances require. Noamortization expense related to goodwill and trademarks has beenrecorded for the fiscal years ended June 30, 2004, 2003, and 2002.

F-8

----

Long-Lived Assets

The Companyreviews certain long-lived assets for impairment whenever events orchanges in circumstances indicate that the carrying amount may not berecoverable. In that regard, the Company assesses the recoverability ofsuch assets based upon estimated non-discounted cash flow forecasts. Asof June 30, 2004, no impairments of long-lived assets have beenrecognized.

Income Taxes:

The Company accounts forincome taxes under the asset and liability method in accordance withStatement of Financial Accounting Standards("SFAS") No. 109, Accounting for IncomeTaxes. Deferred income taxes reflect the future tax consequences ofdifferences between the tax bases of assets and liabilities and theirfinancial reporting amounts at year-end. The Company periodicallyreviews its historical and projected taxable income and considersavailable information and evidence to determine if it is more likelythan not that a portion of the deferred tax assets will be realized. Avaluation allowance is established to reduce the deferred tax assets tothe amount that is more likely than not to be realized. As of June 30,2004 and 2003, based upon its evaluation, the Company recorded a fullvaluation allowance on its deferred tax assets. See Note 5. If theCompany determines that a portion of the deferred tax assets will berealized in the future, a portion of the valuation allowance will bereduced and the Company will provide for income tax expense (benefit)in its Statement of Operations at its estimated effective tax rate.

Stock-based Compensation:

The Company has a Stock OptionPlan and accounts for the plan under the recognition and measurementprinciples of APB 25, "Accounting for Stock Issued toEmployees", and related interpretations. Under thismethod, compensation cost is the excess, if any, of the quoted marketprice of the stock at the grant date or other measurement date over theamount an employee must pay to acquire the stock. No stock-basedemployee compensation cost is reflected in the statement of operations,as options granted under the plan had an exercise price equal to themarket value of the underlying common stock on the date of grant. Hadcompensation costs for the Company's stock option grants beendetermined based on the fair value at the grant dates for awards underthese plans in accordance with SFAS No. 123, the Company's netincome (loss) and earnings (loss) per share would have been reduced tothe pro forma amounts as follows (Dollars in thousands, except sharedata):

|                                                                                                                    |  |                   |        |              |  |              |        |         |  |        |        |         |  |  |
|--------------------------------------------------------------------------------------------------------------------|--|-------------------|--------|--------------|--|--------------|--------|---------|--|--------|--------|---------|--|--|
|                                                                                                               |  | Forthe Year Ended |
|                                                                                                               |  | June30,2004       |        | June 30,2003 |  | June 30,2002 |
| Net income (loss), as reported                                                                                     |  | $                 | 3,104  |         |  | $            | 4,677  |    |  | $      | (2,224 | )  |
|                                                                                                               |  |              |   |         |  |         |   |    |  |   |   |    |
| Deduct:Total stock-based employee compensation expense determined under fairvalue based method, net of tax effects |  |              | (300   | )       |  |         | (549   | )  |  |   | (900   | )  |
| Proformanet income (loss)                                                                                          |  | $                 | 2,804  |         |  | $            | 4,128  |    |  | $      | (3,124 | )  |
|                                                                                                               |  |              |   |         |  |         |   |    |  |   |   |    |
| Earnings(loss) pershare:                                                                                           |  |              |   |         |  |         |   |    |  |   |   |    |
| Basic-asreported                                                                                                   |  | $                 | 0.11   |         |  | $            | 0.17   |    |  | $      | (0.08  | )  |
| Basic-proforma                                                                                                     |  | $                 | 0.10   |         |  | $            | 0.15   |    |  | $      | (0.12  | )  |
|                                                                                                               |  |              |   |         |  |         |   |    |  |   |   |    |
| Diluted-asreported                                                                                                 |  | $                 | 0.10   |         |  | $            | 0.16   |    |  | $      | (0.08  | )  |
| Diluted-proforma                                                                                                   |  | $                 | 0.09   |         |  | $            | 0.14   |    |  | $      | (0.12  | )  |
|                                                                                                                    |

F-9

----

The following assumptions were used in theBlack Scholes option pricing model that was utilized to determinestock-based employee compensation expense under the fair value basedmethod:

|                                                     |  |                                |      |                               |  |                                |      |         |  |        |      |         |  |  |
|-----------------------------------------------------|--|--------------------------------|------|-------------------------------|--|--------------------------------|------|---------|--|--------|------|---------|--|--|
|                                                |  | Forthe YearEnded June 30, 2004 |      | For theYearEndedJune 30, 2003 |  | For the YearEndedJune 30, 2002 |
| Weighted average fair value of stockoptions granted |  | $                              | 0.84 |                          |  | $                              | 0.74 |    |  | $      | 0.42 |    |
| Risk-freeinterest rate                              |  |                           | 4.24 | %                        |  |                           | 3.92 | %  |  |   | 3.36 | %  |
| Expecteddividend yield                              |  |                           | 0    | %                        |  |                           | 0    | %  |  |   | 0    | %  |
| Expectedlife of options                             |  | 10.0years                      |      | 5.5 years                     |  | 2.5 years                      |
| Expectedvolatility                                  |  |                           | 87   | %                        |  |                           | 188  | %  |  |   | 181  | %  |
|                                                     |

EarningsPer Share:

Basic earnings (loss) per share has been computed bydividing the applicable net income (loss) by the weighted averagenumber of common shares outstanding. Diluted earnings per share hasbeen computed for the years end June 30, 2004 and 2003 by dividing theapplicable net income by the weighted average number of common sharesoutstanding and common share equivalents. Potentially dilutive sharesof 651,357 were not included in the calculation of diluted loss pershare for the year ended June 30, 2002, as their inclusion would havebeen antidilutive.

|                                                                             |  |                  |      |              |  |             |      |        |  |        |         |        |  |  |
|-----------------------------------------------------------------------------|--|------------------|------|--------------|--|-------------|------|--------|--|--------|---------|--------|--|--|
|                                                                        |  | Forthe YearEnded |
| Denominatorfor earnings (loss) per share (inmillions):                      |  | June30,2004      |      | June 30,2003 |  | June30,2002 |
| Denominator for basic earnings pershare weighted-average shares outstanding |  |             | 27.5 |         |  |        | 27.4 |   |  |   | 27.2    |   |
| Assumed exerciseof potential common shares                                  |  |             | 3.0  |         |  |        | 2.5  |   |  |   | — |   |
| Denominatorfor diluted earnings per share                                   |  |             | 30.5 |         |  |        | 29.9 |   |  |   | 27.2    |   |
|                                                                             |

AdvertisingExpense:

Advertising costs are expensed when incurred.Advertising expenses of $0.4 million, $0.3 million and $0.7 million,were included in selling, general and administrative expenses for theyears ended June 30, 2004, 2003 and 2002 respectively.

Shippingand handling costs:

Shipping and handling costs are included asa component of selling, general, & administrative expenses in theConsolidated Statements of Operations. In fiscal years 2004, 2003, and2002 shipping and handling costs approximated $0.7 million, $0.4million, and $0.5 million, respectively.

Fixed Assets:

Furniture and equipment are depreciated principally using thestraight-line method over eight years. Leasehold improvements areamortized using the straight-line method over either the term of thelease or the estimated useful life of the improvement, whichever periodis shorter. Computer hardware and software is depreciated using thestraight-line method over three to five years.

OtherAssets:

Other assets primarily consist of security deposits forreal estate leases.

Foreign Currency Transactions:

TheCompany negotiates substantially all of its purchase orders withforeign manufacturers in United States dollars. The Company considersthe United States dollar to be the functional currency of its overseassubsidiaries. All foreign currency gains and losses are recorded in theConsolidated Statement of Operations.

F-10

----

Fair Value of Financial Instruments:

For financial instruments, including accounts receivable, accountspayable, revolving credit borrowings and term loans, the carryingamounts approximated fair value due to their short-term maturity orvariable interest rate.

Deferred Rent Obligations:

TheCompany accounts for rent expense under noncancelable operating leaseswith scheduled rent increases on a straight-line basis over the leaseterm. The excess of straight-line rent expense over scheduled paymentamounts is recorded as a deferred liability. Deferred rent obligationsamounted to $0.5 million at June 30, 2004 and 2003.

OtherComprehensive Income (Loss):

Other comprehensive income (loss)is reflected in the consolidated statements of stockholders'equity. Other comprehensive income reflects adjustments for minimumpension liability.

Reclassifications:

Certainreclassifications have been made to conform to the current periodpresentation.

Segment Reporting:

SFAS No.  131,Disclosures about Segments of an Enterprise and RelatedInformation requires enterprises to report certain informationabout products and services, activities in different geographic areasand reliance on major customers and to disclose certain segmentinformation in their financial statements. The basis for determining anenterprise's operating segments is the manner in which financialinformation is used internally by the enterprise's chiefoperating decision maker. The Company has determined that it operatesin one segment, women's career and casual sportswear. Inaddition, less than 1% of total revenue is derived fromcustomers outside the United States. The majority of theCompany's long-lived assets are located in the United States.

|          |                         |
|----------|-------------------------|
| 3.  | Inventories — net |

|                    |  |               |       |              |  |        |        |         |  |  |
|--------------------|--|---------------|-------|--------------|--|--------|--------|---------|--|--|
|               |  | June30,2004   |       | June 30,2003 |
|               |  | (Inthousands) |
| Rawmaterials       |  | $             | 1,275 |         |  | $      | 698    |    |
| Work-in-process    |  |          | 283   |         |  |   | 140    |    |
| Finished goods     |  |          | 7,885 |         |  |   | 10,597 |    |
| Inventory reserves |  |          | (770  | )       |  |   | (739   | )  |
| Total              |  | $             | 8,673 |         |  | $      | 10,696 |    |
|                    |

Inventoriesare stated at the lower of cost, using the first-in first-out (FIFO)method, or market. Included in inventories is merchandise in transit ofapproximately $5.2 million at June 30, 2004 and $8.9 million at June30, 2003.

|          |              |
|----------|--------------|
| 4.  | Fixed Assets |

|                                                     |  |               |        |              |  |        |        |        |  |  |
|-----------------------------------------------------|--|---------------|--------|--------------|--|--------|--------|--------|--|--|
|                                                |  | June30, 2004  |        | June 30,2003 |
|                                                |  | (Inthousands) |
| Furniture, equipment, computer hardwareand software |  | $             | 14,350 |         |  | $      | 13,388 |   |
| Leaseholdimprovements                               |  |          | 10,494 |         |  |   | 10,025 |   |
|                                                |  |          | 24,844 |         |  |   | 23,413 |   |
| Less:accumulated depreciation and amortization      |  |          | 20,632 |         |  |   | 19,621 |   |
|                                                |  | $             | 4,212  |         |  | $      | 3,792  |   |
|                                                     |

F-11

----

|          |              |
|----------|--------------|
| 5.  | Income Taxes |

Thefollowing are the major components of the provision (benefit) forincome taxes (In thousands):

|           |  |                          |        |        |  |        |         |        |  |        |         |         |  |  |
|-----------|--|--------------------------|--------|--------|--|--------|---------|--------|--|--------|---------|---------|--|--|
|      |  | FiscalYear Ended June30, |
|      |  | 2004                     |        | 2003   |  | 2002   |
| Current:  |  |                     |   |   |  |
| Federal   |  | $                        | 72     |   |  | $      | 88      |   |  | $      | (974    | )  |
| State     |  |                     | 150    |   |  |   | 337     |   |  |   | 30      |    |
|      |  | $                        | 222    |   |  | $      | 425     |   |  | $      | (944    | )  |
|      |  |                     |   |   |  |   |    |   |  |
| Deferred: |  |                     |   |   |  |   |    |   |  |
| Federal   |  | $                        | 63     |   |  | $      | — |   |  | $      | — |    |
| State     |  |                     | 18     |   |  |   | — |   |  |   | — |    |
|      |  | $                        | 303    |   |  | $      | 425     |   |  | $      | (944    | )  |
|           |

Significantcomponents of the Company's net deferred tax assets and deferredtax liabilities are asfollows:

|                                                          |  |               |         |              |  |        |         |         |  |  |
|----------------------------------------------------------|--|---------------|---------|--------------|--|--------|---------|---------|--|--|
|                                                     |  | June30, 2004  |         | June 30,2003 |
|                                                     |  | (Inthousands) |
| Deferred taxassets:                                      |  |          |    |         |  |
| Net federal, state and localoperating loss carryforwards |  | $             | 38,300  |         |  | $      | 40,700  |    |
| Costs capitalizedto inventory for tax purposes           |  |          | 400     |         |  |   | 600     |    |
| Inventory valuation                                      |  |          | 400     |         |  |   | 200     |    |
| Excess of book over taxdepreciation                      |  |          | 2,200   |         |  |   | 2,300   |    |
| Sales allowances notcurrently deductible                 |  |          | 700     |         |  |   | 650     |    |
| Reserves and other itemsnot currently deductible         |  |          | 800     |         |  |   | 850     |    |
|                                                     |  |          | 42,800  |         |  |   | 45,300  |    |
| Less:valuation allowance for deferred tax assets         |  |          | (42,800 | )       |  |   | (45,300 | )  |
| Netdeferred tax asset                                    |  | $             | — |         |  | $      | — |    |
|                                                          |

    

|                                                               |  |               |        |               |  |   |         |        |  |  |
|---------------------------------------------------------------|--|---------------|--------|---------------|--|---|---------|--------|--|--|
|                                                          |  | June30,2004   |        | June 30, 2003 |
|                                                          |  | (Inthousands) |
| Deferred taxliability:                                        |  |          |   |          |  |
| Deferred tax liability relatedto indefinite lived intangibles |  | $             | (81    | )        |  | $ | — |   |
|                                                               |

The Company accounts for income taxesunder the asset and liability method in accordance with SFAS No. 109,Accounting for Income Taxes. Deferred income taxes reflect the futuretax consequences of differences between the tax bases of assets andliabilities and their financial reporting amounts at year-end. TheCompany periodically reviews its historical and projected taxableincome and considers available information and evidence to determine ifit is more likely than not that a portion of the deferred tax assetswill be realized. A valuation allowance is established to reduce thedeferred tax assets to the amount that is more likely than not to berealized. As of June 30, 2004 and 2003, based upon its evaluation ofhistorical and projected results of operation and the current businessenvironment, the Company recorded a full valuation allowance on itsdeferred tax assets. In fiscal 2004, the valuation allowance wasreduced by $2.5 million to $42.8 million at June 30, 2004 from $45.3million at June 30, 2003 to reflect the utilization of NOL's tooffset taxes otherwise payable on current taxable income. If theCompany determines that it is more likely than not that a portion ofthe deferred tax assets will be realized in the future, that portion ofthe valuation allowance will be reduced with a corresponding decreasein income 

F-12

----

tax expense. At such time that the valuationallowance is eliminated and the Company has operating income, theCompany will provide for income tax expense in its Statement ofOperations at its estimated effective tax rate.

The Company hasprovided a deferred tax liability in the amount of $81,000 on thetemporary differences associated with its indefinite-lived intangibles.Under SFAS 142, the timing of the reversal of this liability isindefinite and cannot be offset by the Company's net operatingloss carryforwards.   The Company's indefinite livedintangibles are not amortized for book purposes.   As the Companycontinues to amortize these intangible assets for tax purposes, it willprovide a deferred tax liability on the temporary difference. Thetemporary difference will not reverse until such time as the assets areimpaired or sold. There were no sales or impairments during the yearended June 30, 2004.

At June 30, 2004, the Company has a federalnet operating loss carryforward for income tax purposes ofapproximately $93.0 million, which will expire between fiscal 2010 and2023.

|                                                                          |  |                          |         |         |  |        |         |         |  |        |         |         |  |  |
|--------------------------------------------------------------------------|--|--------------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                     |  | FiscalYear Ended June30, |
|                                                                     |  | 2004                     |         | 2003    |  | 2002   |
|                                                                     |  | (Inthousands)            |
| Expense (benefit) for federal incometaxes at the statutory rate of 35.0% |  | $                        | 1,193   |    |  | $      | 1,786   |    |  | $      | (1,109  | )  |
| State andlocal taxes net of federal benefit                              |  |                     | 207     |    |  |   | 219     |    |  |   | — |    |
| Other                                                                    |  |                     | 116     |    |  |   | 40      |    |  |   | 472     |    |
| Effects ofelimination of tax liabilities no longer required              |  |                     | — |    |  |   | — |    |  |   | (747    | )  |
| Effects ofunrecognized federal tax loss carryforwards                    |  |                     | — |    |  |   | — |    |  |   | 667     |    |
| Effects oftax loss carryforwards                                         |  |                     | (1,213  | )  |  |   | (1,620  | )  |  |   | (227    | )  |
| Provision(benefit) for income taxes                                      |  | $                        | 303     |    |  | $      | 425     |    |  | $      | (944    | )  |
|                                                                          |

Theincome tax benefit in the fiscal year ended June 30, 2002 includes abenefit $0.2 million for refund claims due to tax law changes and abenefit of $0.7 million related to the elimination of tax liabilitiesthat are no longer required.

|          |                     |
|----------|---------------------|
| 6.  | FinancingAgreements |

On September 27, 2002, the Company and certain ofits subsidiaries entered into a new three-year financing agreement (the"Financing Agreement") with The CITGroup/Commercial Services, Inc. ("CIT"), toreplace the Former Financing Agreement discussed below. The FinancingAgreement provides the Company with a $50.5 million facility comprisedof (i) a $40 million revolving line of credit (the"Revolving Facility") with a $25 millionsublimit for letters of credit, a $3 million seasonal overadvance andcertain other overadvances at the discretion of CIT, and (ii) a $10.5million term loan (the "Term Loan").

At the option of the Company, the Revolving Facility and the TermLoan each may bear interest either at the JP Morgan Chase Bank Rate("Prime Rate") or the London InterbankOffered Rate ("LIBOR"). If the Companychooses the Prime Rate, the interest (i) on the Revolving Facilityaccrues at a rate of 1⁄2 of 1% above the Prime Rate (ii) onthe Term Loan accrues at a rate of 1% above the Prime Rate.. Ifthe Company choosesLIBOR, the interest (i) on the Revolving Facilityaccrues at a rate of 31⁄4% above LIBOR (ii) on the TermLoan accrues at a rate of 33⁄4% above Libor. From theinception of the financing agreement through June 30, 2004, the Companyhas elected the Prime Rate option. The interest rate as of June 30,2004 on the Revolving Facility was 4.50% and on the Term Loanwas 5.00%.

On September 27, 2002, the Company borrowed$18.3 million under the Revolving Facility and $10.5 million under theTerm Loan. These borrowings were used to pay off the balances under theFormer Financing Agreement of $18.3 million and the Former Term Loan of$10.5 million and for working capital purposes. Commencing October 1,2002, amortization payments in the amount of $375,000 increased to$425,000 by the January 2004 amendment to the Financing Agreementdescribed below are payable quarterly in arrears in connection with theTerm Loan. A balloon payment of $6.9 million is due on September 27,2005 under the Term Loan. The Company's obligations under theFinancing Agreement 

F-13

----

are secured by a first priority lien onsubstantially all of the Company's assets, including theCompany's accounts receivable, inventory, intangibles, equipment,and trademarks, and a pledge of the Company's equity interest inits subsidiaries.

The Financing Agreement contains numerousfinancial and operational covenants, including limitations onadditional indebtedness, liens, dividends, stock repurchases andcapital expenditures. In addition, the Company is required to maintain(i) specified levels of tangible net worth, (ii) certain fixed chargecoverage ratios, (iii) certain leverage ratios, and (iv) specifiedlevels of minimum borrowing availability under the Revolving Facility.At June 30, 2004, the Company was in compliance with all of itscovenants. In the event of the early termination by the Company of theFinancing Agreement, the Financing Agreement provides that the Companywill be liable for termination fees of (i) $350,000 if terminationoccurs between the thirteenth and the twenty-fourth month from theclosing date or, (ii) $150,000 if termination occurs after thetwenty-fourth month from the closing date. The Company may prepay atany time, in whole or in part, the Term Loan without penalty. TheFinancing Agreement expires on September 27, 2005. A fee of $125,000was paid in connection with the new Financing Agreement.

OnNovember 27, 2002, the Company and CIT agreed to an amendment to theFinancing Agreement in order to facilitate the S.L. Danielleacquisition discussed in Note 7. The Company and CIT agreed to add theCompany's newly formed wholly-owned subsidiary, S.L. DanielleAcquisition, LLC (the "Additional Borrower"),as a co-borrower under the Financing Agreement and related FactoringAgreement. Accordingly, the Company and CIT (i) amended the FinancingAgreement pursuant to a joinder agreement, which also constitutesAmendment No. 1 to the Financing Agreement (the "AmendedFinancing Agreement") and (ii) entered into a newfactoring agreement with the Additional Borrower, to add the AdditionalBorrower as a co-borrower. The Company's and the AdditionalBorrower's obligations under the Amended Financing Agreement aresecured by a first priority lien on substantially all of theCompany's and the Additional Borrower's assets, includingthe Company's and the Additional Borrower's accountsreceivable, inventory, intangibles, equipment, and trademarks and apledge of the Company's stock interest and membership interest inthe Company's subsidiaries, including the AdditionalBorrower.

On January 30, 2004, the Company and CIT agreed to anamendment to the Financing Agreement in order to facilitate the CynthiaSteffe acquisition discussed in Note 7. The Company and CIT agreed toadd the Company's wholly-owned subsidiary, Cynthia SteffeAcquisition, LLC ("CS Acquisition") as aco-borrower under the Financing Agreement and related FactoringAgreement. Accordingly, the Company and CIT (i) amended the FinancingAgreement pursuant to a joinder agreement, which also constitutesAmendment No. 2 to the Financing Agreement (the "SecondAmended Financing Agreement") and (ii) entered into a newfactoring agreement with CS Acquisition, to add CS Acquisition as aco-borrower. The obligations of the Company, S.L. Danielle and CSAcquisition under the Second Amended Financing Agreement are secured bya first priority lien on substantially all of the assets of theCompany, S.L. Danielle and CS Acquisition, including their respectiveaccounts receivables, inventory, intangibles, equipment, and trademarksand a pledge of the Company's stock interest and membershipinterest in the Company's subsidiaries. The Second AmendedFinancing Agreement also provided, among other things for (i) anincrease in the amount of the Term Loan by $1.2 million to cover aportion of the purchase price of the Cynthia Steffe assets which hadinitially been paid for through revolving credit borrowings under theRevolving Facility; (ii) an increase in the quarterly amortizationpayments on the Term Loan from $375,000 to $425,000; and (iii) theamendment of certain financial covenants for fiscal 2004 (including thefixed charge coverage ratio and the minimum borrowing availabilitycovenants) to provide for the Cynthia Steffe operations and to beconsistent with the Company's latest business plan for fiscal2004.

On September 15, 2004 the Company and CIT agreed tofurther amend the Financing Agreement to modify the financial covenantsto be consistent with the Company's latest business plan forfiscal 2005.

On June 30, 2004, the Company had $8.0 million ofoutstanding letters of credit under the Revolving Facility, totalavailability of approximately $11.6 million under the Amended FinancingAgreement, a balance of $9.0 million on the Term Loan and $8.6 millionin revolving credit borrowings. At June 30, 2003, the Company had $11.6million of outstanding letters of credit, total availability ofapproximately $10.7 million, a balance of $9.4 million on the Term Loanand no revolving credit borrowings.

F-14

----

Factoring Agreement

On September27, 2002 the Company also entered into a factoring agreement with CIT(the "Factoring Agreement"). The FactoringAgreement provided for a factoring commission equal to 4/10 of1% of the gross face amount of all accounts factored by CIT,plus certain customary charges. The minimum factoring commission feeper year was $500,000. The Factoring Agreement provided that it wouldbe terminated after eighteen months if there were no event of defaultunder the Factoring Agreement at such time. Once terminated, theCompany is required to pay to CIT a collateral management fee equal to$5,000 a month.

Effective March 31, 2004, the Company, S.L.Danielle and CIT agreed to terminate the Factoring Agreements betweenthem. Pursuant to the terms of the original agreement, the Company isnow obligated to pay to CIT a collateral management fee of $5,000 amonth. Receivables related to sales of Cynthia Steffe product linescontinue to be factored. In connection with the termination of thoseFactoring Agreements, CS Acquisition and CIT entered into an amendmentof their Factoring Agreement which provides for a factoring commissionequal to 6/10 of 1% of the gross face amount of all accountsfactored by CIT up to $10 million ratably declining to a commissionbetween .55% and .45% of the gross amount of thereceivables in excess of $10 million. The amended Factoring agreementbetween CS Acquisition and CIT has a term of twelve months.

Prior Financing Agreement

Until September 27, 2002, theCompany had a financing agreement with BNY Financial Corporation, awholly owned subsidiary of General Motors Acceptance Corp.("GMAC") (the "Former FinancingAgreement"). The Former Financing Agreement consisted oftwo facilities: (i) the Former Revolving Facility which was a $45.5million five-year revolving credit line (subject to an asset basedborrowing formula) with a $34.0 million sublimit for letters of credit,and (ii) the Former Term Loan which was a $14.5 million term loanfacility. Each facility had been amended to extend the maturity dateuntil April  1, 2003.

Interest on the Former RevolvingFacility accrued at the greater of (i) 6% or (ii) 1⁄2 of1% above the Prime Rate (6.0% at June 30, 2002) and waspayable on a monthly basis, in arrears. Interest on the Former TermLoan accrued at an interest rate equal to the greater of (i)6.0% or (ii) a rate ranging from 1⁄2 of 1% above thePrime Rate to 11⁄2% above the Prime Rate, which interestrate was determined, from time to time, based upon the Company'savailability under the Revolving Facility. The interest rate on theFormer Term Loan was 6.0% at June 30, 2002.

|          |              |
|----------|--------------|
| 7.  | Acquisitions |

|          |                          |
|----------|--------------------------|
| A.  | S.L. DanielleAcquisition |

On November 27, 2002, S.L. Danielle Acquisition,LLC ("S.L. Danielle"), a newly formedsubsidiary of the Company acquired certain assets of S.L. Danielle Inc.The results of S.L. Danielle's operations have been included inthe consolidated financial statements since that date. S.L. Danielledesigns, arranges for the manufacture of, markets and sells awomen's apparel line, principally under private labels.

The aggregate purchase price was approximately $5.1 million,including cash of $4.4 million, 100,000 shares of common stock of theCompany ("Common Stock") valued at $84,000and stock options to purchase 500,000 shares of Common Stock valued at$384,000 and transaction costs of approximately $250,000. Theacquisition was funded by CIT through revolving credit borrowings of$4.6 million. The value of the 100,000 shares of Common Stock wasdetermined based on the average market price of the Common Stock overthe 3-day period before and after the date of the acquisition. The500,000 stock options were granted at the fair market value on the dateof the acquisition and were valued using the Black Scholes optionpricing model. The following table summarizes the fair values of theassets acquired and liabilities assumed at the date of acquisition.

F-15

----

|                                |  |                     |       |        |  |  |
|--------------------------------|--|---------------------|-------|--------|--|--|
|                           |  | AtNovember 27, 2002 |
|                           |  | (Inthousands)       |
| Current assets                 |  | $                   | 3,609 |   |
| Property, plant, and equipment |  |                | 36    |   |
| Intangible assets              |  |                | 90    |   |
| Goodwill                       |  |                | 1,437 |   |
| Total assetsacquired           |  | $                   | 5,172 |   |
|                                |

|          |                           |
|----------|---------------------------|
| B.  | CynthiaSteffe Acquisition |

On January 2, 2004, Cynthia SteffeAcquisition, LLC ("CS Acquisition"), a newlyformed subsidiary of the Company acquired certain assets of the CynthiaSteffe division of LF Brands Marketing, Inc., including inventory andshowroom fixtures. The Company also acquired the Cynthia Steffetrademarks from Cynthia Steffe for consideration equal to $1.0 millionunder a separate agreement. The Cynthia Steffe business designs,arranges for the manufacture of, markets and sells a women'sapparel line, under the Cynthia Steffe trademarks. As a result of theacquisition, the Company expects to increase its sales volume throughthe sale of Cynthia Steffe product lines. The results of CynthiaSteffe's operations have been included in the consolidatedfinancial statements commencing January 2, 2004. The aggregate purchaseprice was approximately $2.2 million, plus the payment of $0.5 millionin satisfaction of certain liabilities, plus transaction fees andrelated acquisition costs of $0.2 million. The acquisition wasinitially funded out of borrowings under the Revolving Facility ofwhich $1.2 million was subsequently rolled into the Term Loan.

The following table summarizes the fair values of the net assetsacquired at the date of acquisition.

|                                |  |                   |       |         |  |  |
|--------------------------------|--|-------------------|-------|---------|--|--|
|                           |  | AtJanuary 2, 2004 |
|                           |  | (inthousands)     |
| Inventory                      |  | $                 | 578   |    |
| Property, plant, and equipment |  |              | 458   |    |
| Intangible assets              |  |              | 1,062 |    |
| Goodwill                       |  |              | 820   |    |
| Total assetsacquired           |  | $                 | 2,918 |    |
| Current liabilities            |  |              | (457  | )  |
| Net assetsacquired             |  | $                 | 2,461 |    |
|                                |

Intangible assetsinclude i) $1.0 million related to the Cynthia Steffe trademark, whichwas determined to be an indefinite lived intangible asset and thus notsubject to amortization, and ii) $62,000 related to the sales orderbacklog which was amortized over the sales period of fourmonths. 

The following unaudited pro formainformation presents financial information of the Company as though theacquisitions had been completed as of the beginning of the periods setforth below.

|                         |  |                                        |         |               |  |        |         |        |  |  |
|-------------------------|--|----------------------------------------|---------|---------------|--|--------|---------|--------|--|--|
|                    |  | Forthe Year Ended                      |
|                    |  | June30,2004                            |         | June 30, 2003 |
|                    |  | (Unaudited)                            |
|                    |  | (In thousands except per shareamounts) |
| Net revenue             |  | $                                      | 162,796 |          |  | $      | 158,344 |   |
| Net income              |  |                                   | 3,232   |          |  |   | 4,350   |   |
| Basic income per share  |  | $                                      | 0.12    |          |  | $      | 0.16    |   |
| Diluted income pershare |  | $                                      | 0.11    |          |  | $      | 0.15    |   |
|                         |

F-16

----

8.    TrademarksAnd Goodwill

Intangible assets were as follows:

|                                   |  |         |        |         |  |        |         |        |  |  |
|-----------------------------------|--|---------|--------|---------|--|--------|---------|--------|--|--|
|                              |  | 6/30/04 |        | 6/30/03 |
| Indefinitelived intangibleassets: |  |    |   |    |  |   |    |   |
| Trademarks                        |  | $       | 1,000  |    |  | $      | — |   |
|                                   |

The Company owns the CynthiaSteffe and related trademarks, therefore they are classified asindefinite lived intangibles at June 30, 2004 and notamortized.

The following table summarizes trademarks andgoodwill:

|                                                                                        |  |            |         |          |  |        |         |        |  |  |
|----------------------------------------------------------------------------------------|--|------------|---------|----------|--|--------|---------|--------|--|--|
|                                                                                   |  | Trademarks |         | Goodwill |
| Balanceat July 1, 2002                                                                 |  | $          | — |     |  | $      | — |   |
| Acquisition of S LDanielle                                                             |  |       | — |     |  |   | 1,395   |   |
| Balanceat June 30,2003                                                                 |  |       | — |     |  |   | 1,395   |   |
| Adjustment ofpreviously allocated purchase price related to acquisition of S LDanielle |  |       | — |     |  |   | 42      |   |
| Acquisition ofCynthiaSteffe                                                            |  |       | 1,000   |     |  |   | 820     |   |
| Balanceat June 30,2004                                                                 |  | $          | 1,000   |     |  | $      | 2,257   |   |
|                                                                                        |

9.    EmployeeBenefit Plans

Pension Plan:

Pursuant to a collectivebargaining agreement, the Company's union employees are eligibleto participate in the Company's defined benefit pension planafter completion of one year of eligible service. Pension benefits arebased on the number of years of service times a predetermined factor.The Company uses June 30, 2004 as its measurement date for the pensionplan.

Pension expense amounted to approximately $123,000,$81,000, and $50,000 in fiscal 2004, 2003, and 2002, respectively.

F-17

----

Obligations and Funded Status

Thereconciliation of the benefit obligation and funded status of thepension plan as of June 30, 2004 and 2003 is asfollows:

|                                                                     |  |               |        |         |  |        |         |         |  |  |
|---------------------------------------------------------------------|--|---------------|--------|---------|--|--------|---------|---------|--|--|
|                                                                |  | 2004          |        | 2003    |
|                                                                |  | (inthousands) |
| **Change in benefitobligation**                                     |  |          |   |    |  |   |    |    |
| Benefit obligationat beginning ofyear                               |  | $             | 1,375  |    |  | $      | 1,049   |    |
| Servicecost                                                         |  |          | 71     |    |  |   | 58      |    |
| Interestcost                                                        |  |          | 78     |    |  |   | 72      |    |
| Change in assumption(discount rate)                                 |  |          | (146   | )  |  |   | 220     |    |
| Actuarialloss/(gain)                                                |  |          | 9      |    |  |   | 5       |    |
| Benefitspaid                                                        |  |          | (39    | )  |  |   | (29     | )  |
| Benefitobligation at end ofyear                                     |  | $             | 1,348  |    |  | $      | 1,375   |    |
| **Changein plan assets**                                            |  |          |   |    |  |   |    |    |
| Fair value ofplan assets at beginning ofyear                        |  | $             | 774    |    |  | $      | 779     |    |
| Actual return/(loss)on plan assets                                  |  |          | 82     |    |  |   | 27      |    |
| Employercontributions                                               |  |          | 41     |    |  |   | — |    |
| Benefitspaid                                                        |  |          | (39    | )  |  |   | (29     | )  |
| Expensespaid                                                        |  |          | (3     | )  |  |   | (3      | )  |
| Fairvalue of plan assets at end ofyear                              |  | $             | 855    |    |  | $      | 774     |    |
| Fundedstatus                                                        |  | $             | (493   | )  |  | $      | (601    | )  |
| Unrecognizednet actuarial loss(gain)                                |  |          | 305    |    |  |   | 494     |    |
| Netamountrecognized                                                 |  | $             | (188   | )  |  | $      | (107    | )  |
| Amountsrecognized in the statement of financial position consistof: |  |          |   |    |  |   |    |    |
| Accrued benefitcost                                                 |  | $             | (493   | )  |  | $      | (601    | )  |
| Accumulated othercomprehensiveincome                                |  |          | 305    |    |  |   | 494     |    |
| Netamountrecognized                                                 |  | $             | (188   | )  |  | $      | (107    | )  |
|                                                                     |

Theaccumulated benefit obligation for the pension plan was $1,348,000 and$1,375,000 at June 30, 2004 and 2003,respectively.

|                              |  |               |       |              |  |   |       |        |  |  |
|------------------------------|--|---------------|-------|--------------|--|---|-------|--------|--|--|
| (Inthousands)                |  | June 30, 2004 |       | June 30,2003 |
| Projected benefitobligation  |  | $             | 1,348 |         |  | $ | 1,375 |   |
| Accumulatedbenefitobligation |  | $             | 1,348 |         |  | $ | 1,375 |   |
| Fair valueof planassets      |  | $             | 855   |         |  | $ | 774   |   |
|                              |

|                                                          |  |            |     |         |  |        |     |         |  |        |         |         |  |  |
|----------------------------------------------------------|--|------------|-----|---------|--|--------|-----|---------|--|--------|---------|---------|--|--|
|                                                     |  | FiscalYear |
| (Inthousands)                                            |  | 2004       |     | 2003    |  | 2002   |
| Componentsof Net Periodic Benefit Cost:                  |  |
| Servicecost                                              |  | $          | 71  |    |  | $      | 58  |    |  | $      | 59      |    |
| Interestcost                                             |  |       | 78  |    |  |   | 72  |    |  |   | 67      |    |
| Expectedreturn on planassets                             |  |       | (67 | )  |  |   | (64 | )  |  |   | (76     | )  |
| Amortizationof accumulated unrecognized net loss /(gain) |  |       | 41  |    |  |   | 15  |    |  |   | — |    |
| Netperiodic benefitcost                                  |  | $          | 123 |    |  | $      | 81  |    |  | $      | 50      |    |
|                                                          |

F-18

----

Additional Information

Increase(decrease) in minimum liability included in other comprehensive(income) loss was ($189,000), $252,000 and $242,000 for the years endedJune 30, 2004, 2003 and 2002, respectively.

Assumptions

|                                                                                                   |  |        |      |         |  |        |      |         |  |        |      |         |  |  |
|---------------------------------------------------------------------------------------------------|--|--------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--|
| Weightedaverage assumptions used to determine net periodic benefit cost for theyears ended June30 |  | 2004   |      | 2003    |  | 2002   |
| DiscountRate                                                                                      |  |   | 6.50 | %  |  |   | 5.75 | %  |  |   | 7.00 | %  |
| ExpectedLong Term Rate of Return on planassets                                                    |  |   | 8.50 | %  |  |   | 8.50 | %  |  |   | 8.50 | %  |
|                                                                                                   |

Theexpected long-term rate of return on plan assets was determined basedon long-term return analysis for equity, debt and other securities aswell as historical returns. Long-term trends are evaluated relative tomarket factors such as inflation and interest rates.

PlanAssets

The Company's pension plan weighted-average assetallocations at June 30, 2004 and 2003, by asset category are asfollows:

|                  |  |                          |     |                          |  |        |     |         |  |  |
|------------------|--|--------------------------|-----|--------------------------|--|--------|-----|---------|--|--|
| AssetCategory    |  | Plan Assetsat June302004 |     | Plan Assetsat June302003 |
| Equitysecurities |  |                     | 60  | %                   |  |   | 62  | %  |
| Debtsecurities   |  |                     | 32  | %                   |  |   | 32  | %  |
| Other            |  |                     | 8   | %                   |  |   | 6   | %  |
| Total            |  |                     | 100 | %                   |  |   | 100 | %  |
|                  |

TheCompany's investment strategy for the pension plan is to investin a diversified portfolio of assets managed by an outside portfoliomanager. The Company's goal is to provide for steady growth inthe pension plan assets, exceeding the Company's expected returnon plan assets of 8.5%. The portfolio is balanced to maintainthe Company's targeted allocation percentage by type ofinvestment. See table below. Investments are made by the portfoliomanager based upon guidelines of the Company.

The parametersmaintained by the portfolio manager are asfollows:

|                            |  |                               |  |  |  |  |
|----------------------------|--|-------------------------------|--|--|--|--|
| PercentageofTotalPortfolio |  | AssetCategory                 |
| 5-15%                      |  | Cashand short terminvestments |
| 25-35%                     |  | Long-term fixedincome         |
| 50-65%                     |  | Commonstock                   |
|                            |

Cash Flows

Contributions

The Company expects to contribute $88,000 to the pension plan infiscal 2005.

F-19

----

Estimated Future Benefit Payments

The following benefit payments, which reflect expected futureservice, as appropriate, are expected to be paid (In thousands):

|            |  |                 |     |        |  |  |
|------------|--|-----------------|-----|--------|--|--|
| FiscalYear |  | PensionBenefits |
| 2005       |  | $               | 46  |   |
| 2006       |  |            | 53  |   |
| 2007       |  |            | 59  |   |
| 2008       |  |            | 66  |   |
| 2009       |  |            | 75  |   |
| 2010-2014  |  |            | 535 |   |
|            |

SavingsPlan:

The Company has a savings plan (the"Savings Plan") under which eligibleemployees may contribute a percentage of their compensation and theCompany (subject to certain limitations) as of January 2003 contributes10% of the employee's contribution. From February 2002 toJanuary 2003 there was no employer matching contribution. Prior toFebruary 2002 the Company matched 50% of the employee'scontribution. The Company contributions are invested in investmentfunds selected by the participants and are subject to vestingprovisions of the Savings Plan. Expense under the Savings Plan wasapproximately $68,000 in fiscal 2004, $15,000 in fiscal 2003 and$200,000 in fiscal 2002.

10.    Stock BasedCompensation:

The Company has a Stock Option Plan (the"Option Plan"). Pursuant to the Option Plan,the Company may grant to eligible individuals incentive stock options,as defined in the Internal Revenue Code of 1986, and non-incentivestock options. Under the Option Plan, 6,750,000 shares of Common Stockare reserved for issuance. The maximum number of Shares that any oneEligible Individual may be granted in respect of options may not exceed4,000,000 shares of Common Stock. No stock options may be grantedsubsequent to October 29, 2007. The exercise price may not be less than100% of the fair market value on the date of grant for incentivestock options.

On January 10, 2001, the Company entered into anemployment agreement (the "Agreement") withNicholas DiPaolo, who has been serving as the Company's ViceChairman and Chief Operating Officer since November 1, 2000, theeffective date of the Agreement. The Agreement had an initial termending November 30, 2003, which was subsequently extended by anamendment to the agreement until June 30, 2005. Under the Agreement onNovember 1, 2000, Mr. DiPaolo was granted 300,000 fully vested optionsto purchase Common Stock at the fair market value on the date of grant(the "Sign-On Options"). Under the Agreementon January 10, 2001, Mr. DiPaolo was granted 3,000,000 options topurchase Common Stock of the Company at the fair market value on thedate of the grant (the "Put Options"). Theexercise price of the Put Options is $0.375. The Put Options vest inthree equal annual installments upon each of the first twoanniversaries of the Agreement's effective date and November 1,2003, respectively. In the event that the Company achieved a cumulativeearnings before income taxes, depreciation and amortization("EBITDA") target determined by theCompany's Board of Directors for the three year period ended June30, 2003, Mr. DiPaolo would have been entitled to require the Companyto purchase his Put Options, for a purchase price equal to $1,125,000,(i.e., the aggregate exercise price of the Put Options). The Companydid not meet the cumulative EBITDA target therefore the company is notrequired to purchase the Put Options. In the event, however, there is a"Change of Control" of the Company or hisemployment is terminated without "Cause" (assuch terms are defined in the Agreement), Mr. DiPaolo shall also havethe right to require the Company to purchase his vested Put Options ata purchase price equal to the aggregate exercise price of the vestedPut Options.

During February 2001, employee and director optionsfor an aggregate of 1,400,401 shares of the Company's commonstock were surrendered under a stock option replacement program offeredby the Company.   Under the program, employees had the right tosurrender their outstanding, out-of-the- money 

F-20

----

options in exchange for a commitment by theCompany to grant new options to them for the same number of shares on adate, which is in excess of six months (183 days) after the surrenderdate. To be eligible to receive the new options, which have an exerciseprice equal to the fair market value on the future grant date (August8, 2001), employees (or directors as the case may be) must have beenemployed by the Company (or to serve as directors) on such  grantdate. On August 8, 2001, 1,400,401 options were granted to employeesand directors under this program. The new options vested in incrementsof 50% on August  8, 2002 and 50% on August 8,2003.

Information regarding the Company's stock options issummarizedbelow:

|                             |  |                |           |                     |  |                               |  |   |      |        |  |  |  |  |
|-----------------------------|--|----------------|-----------|---------------------|--|-------------------------------|--|---|------|--------|--|--|--|--|
|                        |  | StockOptions   |
|                        |  | NumberofShares |           | ExercisePrice Range |  | WeightedAverageExercise Price |
| Outstanding at June30,2001  |  |           | 3,340,000 |                |  | $..38 - $3.50                 |  | $ | .41  |   |
| Optionsgranted              |  |           | 1,920,401 |                |  | $ .50 - $ .50                 |  | $ | ..50 |   |
| Optionscanceled             |  |           | (29,417   | )              |  | $ .50 - $3.11                 |  | $ | ..94 |   |
| Outstanding at June 30,2002 |  |           | 5,230,984 |                |  | $ .38 - $3.50                 |  | $ | ..44 |   |
| Options granted             |  |           | 910,000   |                |  | $ .75 -$ .84                  |  | $ | .80  |   |
| Optionsexercised            |  |           | (6,100    | )              |  | $ .50 - $ .50                 |  | $ | ..50 |   |
| Optionscanceled             |  |           | (15,290   | )              |  | $ .50 - $ .50                 |  | $ | ..75 |   |
| Outstanding at June 30,2003 |  |           | 6,119,594 |                |  | $ .38 - $3.50                 |  | $ | ..49 |   |
| Options granted             |  |           | 690,000   |                |  | $ .94 -$1.12                  |  | $ | .97  |   |
| Optionsexercised            |  |           | (595,001  | )              |  | $ .86 - $1.42                 |  | $ | ..50 |   |
| Optionscanceled             |  |           | (227,766  | )              |  | $ .50 - $ .84                 |  | $ | ..58 |   |
| Outstanding at June 30,2004 |  |           | 5,986,827 |                |  | $ .38 -$3.50                  |  | $ | .55  |   |
|                             |

The following table summarizesinformation about the Company's outstanding and exercisable stockoptions at June 30,2004:

|                       |  |             |           |                                                |  |                               |      |        |  |                               |      |        |  |        |           |        |  |   |      |        |  |  |
|-----------------------|--|-------------|-----------|------------------------------------------------|--|-------------------------------|------|--------|--|-------------------------------|------|--------|--|--------|-----------|--------|--|---|------|--------|--|--|
|                  |  | Outstanding |           | Exercisable                                    |
| Rangeof ExercisePrice |  | Shares      |           | Weighted-AverageRemainingContractualLife(Yrs.) |  | Weighted-AverageExercisePrice |      | Shares |  | Weighted-AverageExercisePrice |
| $0.38                 |  |        | 3,000,000 |                                           |  |                          | 1.34 |   |  | $                             | 0.38 |   |  |   | 3,000,000 |   |  | $ | .38  |   |
| $0.50                 |  |        | 1,421,827 |                                           |  |                          | 5.89 |   |  | $                             | 0.50 |   |  |   | 1,411,827 |   |  | $ | .50  |   |
| $0.69                 |  |        | 10,000    |                                           |  |                          | 6.00 |   |  | $                             | 0.69 |   |  |   | 7,500     |   |  | $ | .69  |   |
| $0.75                 |  |        | 340,000   |                                           |  |                          | 8.16 |   |  | $                             | 0.75 |   |  |   | 85,000    |   |  | $ | .75  |   |
| $0.84                 |  |        | 500,000   |                                           |  |                          | 3.41 |   |  | $                             | 0.84 |   |  |   | 250,000   |   |  | $ | .84  |   |
| $0.94                 |  |        | 560,000   |                                           |  |                          | 9.51 |   |  | $                             | 0.94 |   |  |   | 105,000   |   |  | $ | .94  |   |
| $0.98                 |  |        | 30,000    |                                           |  |                          | 9.00 |   |  | $                             | 0.98 |   |  |   | 0         |   |  | $ | .00  |   |
| $1.12                 |  |        | 100,000   |                                           |  |                          | 9.39 |   |  | $                             | 1.12 |   |  |   | 0         |   |  | $ | .00  |   |
| $3.00                 |  |        | 10,000    |                                           |  |                          | 5.00 |   |  | $                             | 3.00 |   |  |   | 10,000    |   |  | $ | 3.00 |   |
| $3.11                 |  |        | 10,000    |                                           |  |                          | 3.65 |   |  | $                             | 3.11 |   |  |   | 10,000    |   |  | $ | 3.11 |   |
| $3.50                 |  |        | 5,000     |                                           |  |                          | 4.00 |   |  | $                             | 3.50 |   |  |   | 5,000     |   |  | $ | 3.50 |   |
|                  |  |        | 5,986,827 |                                           |  |                          | 3.94 |   |  | $                             | 0.55 |   |  |   | 4,884,327 |   |  | $ | 0.47 |   |
|                       |

Allstock options are granted at fair market value of the Common Stock atgrant date. The outstanding stock options have a weighted averagecontractual life of 3.94 years, 4.75 years, and 5.45 years in 2004,2003, and 2002, respectively. The number of stock options exercisableat June 30, 2004, 2003, and 2002 were 4,884,327, 3,180,916, and1,321,250, respectively.

F-21

----

11.    Accumulated Other ComprehensiveLoss

|                                    |  |                   |      |               |  |   |      |         |  |  |
|------------------------------------|--|-------------------|------|---------------|--|---|------|---------|--|--|
|                               |  | Forthe Year Ended |
|                               |  | June30, 2004      |      | June 30, 2003 |
| Minimum PensionLiability           |  | $                 | (305 | )        |  | $ | (494 | )  |
| AccumulatedOther ComprehensiveLoss |  | $                 | (305 | )        |  | $ | (494 | )  |
|                                    |

12.    Commitments,Contingencies and Other Matters

Lease Obligations:

TheCompany leases showroom, distribution and office facilities, andequipment under various noncancellable operating lease agreements whichexpire through 2014. Rental expense for the years ended June 30, 2004,2003 and 2002 was approximately $2.7 million, $2.6 million and $2.6million, respectively.

The minimum aggregate rental commitmentsat June 30, 2003 are as follows (in thousands):

|                   |  |        |        |        |  |  |
|-------------------|--|--------|--------|--------|--|--|
| Fiscalyearending: |  |   |
| 2005              |  | $      | 3,085  |   |
| 2006              |  |   | 2,280  |   |
| 2007              |  |   | 1,509  |   |
| 2008              |  |   | 1,477  |   |
| 2009              |  |   | 1,385  |   |
| Subsequentto 2010 |  |   | 1,392  |   |
|              |  | $      | 11,128 |   |
|                   |

Lettersof Credit:

The Company was contingently liable under letters ofcredit issued by banks to cover primarily contractual commitments formerchandise purchases of approximately $7.8 million and $11.6 millionat June 30, 2004 and June 30, 2003, respectively.

Inventorypurchase commitments:

The Company was contingently liable forcontractual commitments for merchandise purchases of approximately$10.7 million and $11.6 million at June 30, 2004 and June 30, 2003,respectively.

Litigation:

The Company is involved inlegal proceedings from time to time arising out of the ordinary conductof its business. The Company believes that the outcome of theseproceedings will not have a material adverse effect on theCompany's financial condition or results of operations.

F-22

----

13.    Unaudited Quarterly Results ofOperations

Unaudited quarterly financial information for fiscal2004 and fiscal 2003 is set forth in the tablebelow:

|                                        |  |              |        |               |  |              |        |               |  |        |        |        |  |        |        |        |  |  |
|----------------------------------------|--|--------------|--------|---------------|--|--------------|--------|---------------|--|--------|--------|--------|--|--------|--------|--------|--|--|
| (Inthousands, except per shareamounts) |
|                                   |  | FirstQuarter |        | SecondQuarter |  | ThirdQuarter |        | FourthQuarter |
| **Fiscal2004**                         |  |
| Netrevenue                             |  | $            | 38,805 |          |  | $            | 34,566 |          |  | $      | 43,713 |   |  | $      | 40,023 |   |
| Grossprofit                            |  |         | 9,210  |          |  |         | 8,017  |          |  |   | 11,691 |   |  |   | 10,738 |   |
| Netincome(loss)                        |  |         | 1,010  |          |  |         | (191   | )        |  |   | 1,804  |   |  |   | 481    |   |
| Basicearnings (loss) pershare          |  |         | 0.04   |          |  |         | (0.01  | )        |  |   | 0.07   |   |  |   | 0.02   |   |
| Dilutedearnings (loss) pershare        |  |         | 0.03   |          |  |         | (0.01  | )        |  |   | 0.06   |   |  |   | 0.02   |   |
| **Fiscal2003**                         |  |
| Netrevenue                             |  | $            | 34,791 |          |  | $            | 30,879 |          |  | $      | 40,893 |   |  | $      | 33,572 |   |
| Grossprofit                            |  |         | 9,457  |          |  |         | 8,202  |          |  |   | 10,359 |   |  |   | 7,809  |   |
| Netincome                              |  |         | 1,563  |          |  |         | 580    |          |  |   | 2,094  |   |  |   | 440    |   |
| Basicearnings pershare                 |  |         | 0.06   |          |  |         | 0.02   |          |  |   | 0.08   |   |  |   | 0.02   |   |
| Dilutedearnings pershare               |  |         | 0.05   |          |  |         | 0.02   |          |  |   | 0.07   |   |  |   | 0.01   |   |
|                                        |

Thesum of the quarterly net earnings per share amounts may not equal thefull-year amount since the computations of the weighted average numberof common-equivalent shares outstanding for each quarter and the fullyear are made independently.

F-23

----

SCHEDULEII

BERNARD CHAUS, INC. & SUBSIDIARIES VALUATION ANDQUALIFYING ACCOUNTS(In thousands)

|                                               |  |                           |        |                                     |  |            |        |                      |  |        |        |         |  |        |        |        |  |  |
|-----------------------------------------------|--|---------------------------|--------|-------------------------------------|--|------------|--------|----------------------|--|--------|--------|---------|--|--------|--------|--------|--|--|
| Description                                   |  | BalanceatBeginningof Year |        | AdditionsCharged toCostsandExpenses |  | Deductions |        | Balance atEnd ofYear |
| Year ended June 30,2004                       |  |
| Allowance for doubtful accounts               |  | $                         | 80     |                                |  | $          | 180    |                 |  | $      | 67     | 1  |  | $      | 193    |   |
|                                          |  |                      |   |                                |  |       |   |                 |  |   |   |    |  |   |   |   |
| Reservefor customer allowances and deductions |  | $                         | 835    |                                |  | $          | 5,539  |                 |  | $      | 5,402  | 2  |  | $      | 972    |   |
|                                          |  |                      |   |                                |  |       |   |                 |  |   |   |    |  |   |   |   |
| Yearended June 30,2003                        |  |                      |   |                                |  |       |   |                 |  |   |   |    |  |   |   |   |
| Allowancefor doubtful accounts                |  | $                         | 340    |                                |  | $          | (260   | )               |  | $      | 0      | 1  |  | $      | 80     |   |
|                                          |  |                      |   |                                |  |       |   |                 |  |   |   |    |  |   |   |   |
| Reservefor customer allowances and deductions |  | $                         | 1,093  |                                |  | $          | 9,352  |                 |  | $      | 9,610  | 2  |  | $      | 835    |   |
|                                          |  |                      |   |                                |  |       |   |                 |  |   |   |    |  |   |   |   |
| Yearended June 30,2002                        |  |                      |   |                                |  |       |   |                 |  |   |   |    |  |   |   |   |
| Allowancefor doubtful accounts                |  | $                         | 273    |                                |  | $          | 75     |                 |  | $      | 8      | 1  |  | $      | 340    |   |
|                                          |  |                      |   |                                |  |       |   |                 |  |   |   |    |  |   |   |   |
| Reservefor customer allowances and deductions |  | $                         | 1,074  |                                |  | $          | 11,248 |                 |  | $      | 11,229 | 2  |  | $      | 1,093  |   |
|                                               |

|  |
|--|
|  |  |
|  |

|   |                                   |
|---|-----------------------------------|
| 1 | Uncollectibleaccounts written off |

|   |                                                      |
|---|------------------------------------------------------|
| 2 | Allowancescharged to reserve and granted tocustomers |

S-1

----

```

                                INDEX TO EXHIBITS

Exhibit Number                           Exhibit Title

10.114            Amendment No. 3 to Financing Agreement among the Company, S.L.
                  Danielle, Cynthia Steffe Acquisition, LLC nd the CIT
                  Group/Commercial Services, Inc. as agent, dated September 15,
                  2004.

21                List of Subsidiaries of the Company.

23                Consent of Deloitte & Touche LLP.

31.1              Certification Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002 for Josephine Chaus.

31.2              Certification Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002 for Barton Heminover.

32.1              Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
                  Josephine Chaus.

32.2              Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
                  Barton Heminover.
```