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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20549

                                   FORM 10-K
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                    For the fiscal year ended June 30, 1997
                                       or
            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                       For the transition period from to

                         Commission file number 1-9169

                              BERNARD CHAUS, INC.
             (Exact name of registrant as specified in its charter)

            New York                                  13-2807386
(State or other jurisdiction of        (I.R.S. employer identification number)
 incorporation or organization)

   1410 Broadway, New York, New York                    10018
(Address of principal executive offices)              (Zip Code)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

     Title of each class             Name of each exchange on which registered
     -------------------             -----------------------------------------
Common Stock, $0.01 par value                New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:  None

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

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]

         The aggregate market value of the voting stock held by non-affiliates
of the registrant on October 6, 1997 was $11,120,002 .

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

        Date                      Class                  Shares Outstanding
        ----                      -----                  ------------------
   October 6, 1997     Common Stock, $0.01 par value         26,277,274

                                                       LOCATION IN FORM 10-K IN
         DOCUMENTS INCORPORATED BY REFERENCE              WHICH INCORPORATED
         -----------------------------------              ------------------
Portions of registrant's Proxy Statement for the Annual        Part III
 Meeting of Stockholders to be held in November 1997.



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PART I

ITEM 1.  BUSINESS.

GENERAL

         Bernard Chaus, Inc. (the "Company" or "Chaus") designs, arranges for
the manufacture of and markets an extensive range of women's career and casual
sportswear which are marketed principally under the CHAUS(R), CHAUS SPORT(R)
and NAUTICA(R) trademarks. Beginning in late fiscal 1994, the Company
repositioned its Chaus product line at the high end of the "upper moderate"
through the opening price points of the "better" categories. See "-- Products."
By August 1997, the Company had successfully repositioned its Chaus product
line into the opening price points of the "better" category. In September 1995
the Company entered into a license agreement (the "Nautica License Agreement")
with Nautica Apparel Inc. ("Nautica"), a leading name in men's apparel,
pursuant to which the Company has obtained an exclusive license to design,
contract for the manufacture of and market a new women's apparel line under the
Nautica brand name. The Company commenced sales of products in its licensed
Nautica product line in August 1996, with such Nautica product line being
positioned in the "better" to "bridge" categories. In March 1996, the Company,
in order to better utilize its management and financial resources, discontinued
its unprofitable dresses product line, which had accounted for a gross margin
loss of $2.2 million for the twelve months ended June 30, 1996.

RESTRUCTURING

         In June 1997, the Company announced a proposed restructuring program
to be implemented by the Company. In September 1997, the disinterested members
of the Board of Directors of the Company unanimously approved the restructuring
program (the "Restructuring") pursuant to which:

         (i)      the Company will seek to raise up to $20 million, but not
                  less than $12.5 million, of equity through a rights offering
                  (the "Rights Offering");

         (ii)     approximately $40.5 million of the Company's indebtedness to
                  Ms. Chaus, consisting of $28 million of existing subordinated
                  indebtedness (including accrued interest through Janaury 15, 
                  1998) and $12.5 million of indebtedness which will be owed 
                  to Josephine Chaus ("Ms. Chaus" or "J. Chaus"), will be 
                  converted into Common Stock of the Company (the "Conversion 
                  Commitment");

         (iii)    a new revolving credit facility (the "New Revolving
                  Facility"), and a new term loan facility (the "New Term
                  Loan", and together with the New Revolving Facility, the "New
                  Financing Agreement") was entered into with BNY Financial
                  Corporation ("BNYF"), the Company's current working capital
                  lender, on October 10, 1997; and

         (iv)     the Company will implement a 1-for-10 reverse stock split 
                  (the "Stock Split").

                  Consummation of the Restructuring is subject to (i) the 
approval by the Company's stockholders of (a) the Stock Split, (b) the issuance
of 10,510,910 shares of Common Stock of the Company to J. Chaus in connection 
with the Conversion Commitment, (c) the sale by the Company of 6,988,635 shares
to J. Chaus in connection with the Purchase Commitment (as defined below), and 
(d) the sale by the Company of up to 1,747,160 shares to J. Chaus in connection
with the Standby Commitment (as defined below), and (ii) the absence of any 
litigation or governmental action challenging or seeking to enjoin the Rights 
Offering which in the sole judgment of the Company makes it inadvisable to 
proceed with the Rights Offering. Accordingly, until such conditions are 
satisfied, there can be no assurance that the Restructuring will be 
consummated. It is presently contemplated that the Restructuring will be 
consummated by January 15, 1998.

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Ms. Chaus, Chairwoman of the Board, a principal stockholder of the Company, and
the owner of a majority of the Company's Common Stock, has advised the Company
that she intends to vote her shares in favor of all matters relating to the
Restructuring, thereby assuring stockholder approval of such matters.

         Although there can be no assurance, the Company believes that the
Company will have adequate resources after consummation of the Restructuring.

The Rights Offering

         The Company will offer each of Ms. Chaus, and the Company's other
stockholders, the right (collectively, the "Rights") to subscribe for up to $10
million of newly issued Common Stock, for a total of up to $20 million of
additional equity. The proceeds of the Rights Offering will be used to repay
amounts due under the New Financing Agreement. Subject to stockholder approval,
Ms. Chaus has agreed to exercise her full $10 million subscription (the
"Purchase Commitment") and to subscribe for up to an additional $2.5 million of
Common Stock (the "Standby Commitment"), if and to the extent that the
Company's other stockholders do not purchase at least that amount of stock in
the Rights Offering. As described below, it is anticipated that Ms. Chaus will
satisfy her $10 million Purchase Commitment through the contribution of funds
currently used as credit support for the Company's Bank Debt (as defined
below). The Rights will be distributed, at no cost to the stockholders,
following the effectiveness of a registration statement to be filed with the
Securities and Exchange Commission. The Rights, which will be transferable
(other than those distributed to Ms. Chaus), will entitle the holders to
purchase Common Stock for a period of 45 days after the Rights Offering
commences.

         The information contained herein does not constitute an offering, and
no securities, including, without limitation, the Rights, are being offered
hereby. The Rights Offering will only be made by a prospectus filed with the
Securities and Exchange Commission.

         Currently, Ms. Chaus beneficially owns approximately 57% of the Common
Stock of the Company. Upon the conversion of indebtedness owed by the Company
to Ms. Chaus, and prior to the Rights Offering, which is described below, she
will beneficially own approximately 90.3% of the Common Stock of the Company.
Depending on the number of Rights exercised by stockholders of the Company,
other than Ms. Chaus, following completion of the Rights Offering, Ms. Chaus
will beneficially own between approximately 69.5% and 94% of the Common Stock
of the Company.

Exchange of the Company's Indebtedness owed to Ms. Chaus for Equity Securities

         Pursuant to the terms of the Restructuring, subject to stockholder
approval, approximately $40.5 million of the Company's indebtedness to Ms.
Chaus, consisting of $28 million of existing subordinated indebtedness 
(including accrued interest through January 15, 1998) and $12.5 million of 
indebtedness which will be owed to Ms. Chaus after the Subrogated Loan (as 
defined below) is extended by her, will be converted into 10,510,910 shares of 
Common Stock of the Company on a post Stock Split basis.

Restructuring of  Bank Debt

         The senior secured bank debt owing to BNYF by the Company, as of
September 30, 1997 (the "Bank Debt") consisted of approximately (i) $57.5
million in respect of direct borrowings, and (ii) $17.5 million in respect of
letters of credit.



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         In the Restructuring, the $57.5 million in respect of direct
borrowings by the Company has been and will be refinanced as follows: (i) $15
million has been refinanced by BNYF pursuant to the terms of the New Term Loan;
(ii) approximately $20 million has been refinanced under the terms of the New
Revolving Facility; (iii) $12.5 million in respect of borrowings previously
guaranteed by Ms. Chaus will be satisfied in full out of proceeds from a loan
made by BNYF to Ms. Chaus (the "BNYF--J. Chaus Loan"), and Ms. Chaus shall
become subrogated to the rights of BNYF with respect to such loan amount (the
"Subrogated Loan") until the Subrogated Loan is exchanged for equity, as set
forth above; and (iv) $10 million will be satisfied in full out of proceeds
received from the Rights Offering pursuant to the Purchase Commitment.

         Under the terms of the Restructuring, approximately $17.5 million of
Bank Debt owing to BNYF in respect of letters of credit has been refinanced by
BNYF pursuant to the terms of the New Financing Agreement.

         The approximately $75 million of Bank Debt that has been refinanced
as part of the Restructuring, has been refinanced under two facilities that are
part of the New Financing Agreement: (i) the New Revolving Facility which is a
$66 million five-year revolving credit line with a $20 million sublimit for
letters of credit, and (ii) the New Term Loan which is a $15 million term loan
facility. Each facility will mature on December 31, 2002. The Company's
obligations under the New Financing Agreement are secured by a first priority
lien on substantially all of the Company's assets, including the Company's
accounts receivable, inventory and trademarks.

         Interest on the New Revolving Facility accrues at 1/2 of 1% above the
Prime Rate and is payable on a monthly basis, in arrears. Interest on the New
Term Loan accrues at an interest rate ranging from 1/2 of 1% above the Prime
Rate to 1 1/2% above the Prime Rate, which interest rate will be determined,
from time to time, based upon the Company's availability under the New
Revolving Facility. With the exception of warrants issued to BNYF (as discussed
below), the Company's execution of the New Financing Agreement did not require
the payment of any commitment, closing, administration or facility fees. The
New Financing Agreement provides for service charges and letter of credit fees
on substantially the same terms as those existing under the Company's Old Bank
Debt Agreement (as defined below) with BNYF.

         Amortization payments in the amount of $250,000 are payable quarterly
in arrears in connection with the New Term Loan. The first amortization payment
is due on March 31, 1998. A balloon payment in the amount of $10.25 million is
due on December 31, 2002. In the event of the earlier termination by the
Company of the New Financing Agreement, the Company will be liable for
termination fees initially equal to $2.8 million, and declining to $2.2 million
after October 8, 2000.

         BNYF's existing warrants to purchase 125,000 shares of Common Stock
(the "Existing BNYF Warrants") were extinguished, and BNYF received new
warrants (the "New BNYF Warrants") to purchase (i) 375,000 shares of the
Company's Common Stock, with an exercise price of $1.0625 per share, the 
closing price per share of the Common Stock on June 26, 1997, the date on which
BNYF and the Company executed a commitment letter (the "Commitment Letter") 
describing the terms and conditions of the Restructuring, and (ii) 125,000 
shares of the Company's Common Stock, with an exercise price equal to the 
thirty day average trading price on the New York Stock Exchange of the 
Company's Common Stock beginning on the date of the consummation of the Rights
Offering.

         The New Financing Agreement amends certain provisions of the Old Bank
Debt Agreement and provides for maximum availability of $81 million, and 
overadvances of up to $12.8 million. The New Financing Agreement also amends
certain financial covenants contained in the Old Bank Debt Agreement. The New
Financing Agreement provides for certain additional events of default, among 
which are the default by Ms. Chaus


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under the Bank Debt Put (as defined below), and the failure by the Company to
close all of its retail outlets by the end of January 1998.

         As an inducement to BNYF to enter into the New Financing Agreement,
Ms. Chaus has agreed with BNYF that she will purchase, at the option of BNYF, a
$2.5 million junior participation in the New Financing Agreement between the
Company and BNYF, in the event that (i) an event of default occurs under the
New Financing Agreement prior to May 15, 1998, or (ii) the Rights Offering
is not consummated prior to May 15, 1998 (the "Bank Debt Put").

Restructuring of Credit Support Provided by Ms. Chaus

         On October 10, 1997, in substitution for the personal guaranty of
$12.5 million of Bank Debt (the "$12.5 Million Guarantee") previously provided
by Ms. Chaus, she entered into a deposit letter (the "October Deposit Letter")
pursuant to which she provided $12.5 million in cash collateral to secure the
Bank Debt. The cash collateral was provided from the proceeds of the BNYF--J.
Chaus Loan. Immediately prior to the consummation of the Rights Offering, and
subject to the other conditions to the Restructuring being satisfied, the $12.5
million in cash collateral will be released and used to retire $12.5 million of
the Bank Debt. As a result of such repayment, the Company will become indebted
to Ms. Chaus for $12.5 million. Pursuant to the terms of the Subrogated Loan,
as described above, the Subrogated Loan will, immediately thereafter, be
exchanged by Ms. Chaus for shares of Common Stock of the Company.

         Ms. Chaus previously entered into a deposit letter dated July 23, 1997
(the "July Deposit Letter") pursuant to which she provided $10 million in cash
collateral to secure the Bank Debt in substitution for the letter of credit
previously provided by her. The July Deposit Letter was amended on October 10,
1997 to provide that the $10 million in cash collateral shall be held as
collateral to secure indebtedness under the New Financing Agreement.
Immediately prior to the consummation of the Rights Offering, and subject to
the other conditions of the Restructuring being satisfied, such collateral will
be released and used by Ms. Chaus to purchase shares of Common Stock issuable
to her upon the exercise of the Rights, in satisfaction of her Purchase
Commitment in connection with the Rights Offering. The Company will use the
proceeds from the Purchase Commitment to retire $10 million of Bank Debt.

         Pursuant to the New Financing Agreement, in the event that the Rights
Offering is not consummated by May 15, 1998, the cash collateral held under the
October Deposit Letter and the July Deposit Letter will be applied by BNYF to
retire $22.5 million of the Bank Debt.

Warrants and Options

         In connection with the Restructuring, (i) Andrew Grossman, the
Company's Chief Executive Officer, has agreed in principle to relinquish all of
his rights to his existing options, to the extent that they have not been
exercised prior to the consummation of the Restructuring, and (ii) Ms. Chaus
has agreed in principle to relinquish all of her rights to her existing
warrants, to the extent that they have not been exercised prior to the
consummation of the Restructuring.

         The Company currently intends that employees holding options will be
offered the right to exchange such options for new options. 



                                       5

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Other Creditors of the Company; Other Matters in Connection with Restructuring

         Under the proposed Restructuring, the Company's existing trade claims,
which are primarily held by the Company's customers and vendors, would be
unaffected.

         The Company and Mr. Grossman are currently negotiating amendments to
his employment agreement and it is anticipated that a restated and amended
employment agreement will be executed in the near term. It is expected that
such amendments will, among other things, include a cash bonus based upon the 
Company's performance, the grant of new stock options in substitution for his 
existing stock options, and the waiver by Mr. Grossman of his entitlement to 
five percent (5%) of the Company's annual net profits, as currently provided 
in his employment agreement.

PRODUCTS

         The Company's products currently are divided into two principal
product categories: (i) career sportswear and (ii) weekend casual sportswear.
In late fiscal 1994 the Company shifted its product focus from single,
fashion-driven items to full collections with an emphasis on traditional
styling. With this repositioning, the Company also has enhanced its design and
quality and by August 1997, the Company had successfully positioned its Chaus
product line into the opening price points of the "better" category. The
Company's career and weekend casual sportswear are marketed as coordinated
groups of jackets, skirts, pants, blouses, sweaters and related accessories
which, while sold as separates, are coordinated by styles, color schemes and
fabrics and are designed to be merchandised and worn together. The Company
believes that the target consumers for its products are women aged 24 to 64.

         The Company produces collections of each of these product lines for
each of its five principal selling seasons: Spring, Summer, Fall I, Fall II and
Holiday. Spring and Fall traditionally have been the Company's major selling
seasons.

         The Company's major product categories and associated brand names are
summarized in the following table:

                                                   WEEKEND CASUAL
                     CAREER SPORTSWEAR               SPORTSWEAR
                     -----------------             --------------
BRAND NAMES          Chaus                         Chaus Sport
                     Chaus Woman                   Nautica
                     Chaus Petite
                     Nautica

PRODUCT OFFERINGS    Jackets, Skirts, Pants,       Casual Jackets
                     Shorts, Blouses, Shirts,      Sweaters, Skirts, Pants,
                     Knit Tops, Sweaters           Shirts, Knit Tops, Outerwear

INDUSTRY CATEGORIES  Chaus -- Upper Moderate       Chaus -- Upper Moderate
                              and Lower Better              and Lower Better
                     Nautica -- Better and Bridge  Nautica -- Better and Bridge

         Women's apparel is generally divided into five price categories,
namely (listed from lowest to highest) "mass merchandise," "moderate,"
"better," "bridge" and "designer." These categories are distinguished
principally by differences in price and, as a general matter, by differences in
quality.

         During fiscal 1997, the suggested retail prices of the Company's Chaus
products ranged between $20.00 and $280.00. The Company's jackets ranged in
price between $120.00 and $280.00, its blouses and sweaters ranged in


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price between $48.00 and $130.00, its skirts and pants ranged in price between
$28.00 and $130.00, and its knit tops and bottoms ranged in price between
$24.00 and $120.00.

         The following table sets forth a breakdown by percentage of the
Company's net sales by product category for fiscal 1995 through fiscal 1997:

                                         Fiscal Year Ended June 30,
                                  -----------------------------------------
                                   1997              1996             1995
                                   ----              ----             ----
Career Sportswear
  Chaus                              37%               41%              31%
  Chaus Woman                        11                11               13
  Chaus Petite                        6                 5                4
                                   -----             -----            -----
  Total                              54                57               48

Weekend Casual -  Sportswear         30                33               35
Nautica                              15                --               --
Dresses                              --                 8               12
Other (1)                             1                 2                5
                                   -----             -----            -----
Total                               100%              100%             100%

--------------
         (1) Includes sales by outlet stores, offset by intercompany
         eliminations. Also includes, for fiscal 1995, the Company's JOSEPHINE
         and JEANSWEAR labels, which produced blouses and jeans, respectively,
         until the beginning of fiscal 1995 when the Company ceased producing
         garments using these labels.

         Career Sportswear. The Company markets an extensive line of career
sportswear under the CHAUS label for misses sizes, the CHAUS WOMAN label for
larger sizes and the CHAUS PETITE label for smaller sizes. These product lines
offer a full collection of sportswear geared primarily for the working woman.
Each sportswear collection typically includes a broad selection of jackets,
skirts, pants, blouses and sweaters, as well as more casual apparel such as
shorts, shirts and knit tops.

         Weekend Casual Sportswear. The CHAUS SPORT label offers casual
jackets, sweaters, skirts, pants, shirts and knit tops. This product line
offers soft career, weekend and leisure sportswear intended for an informal
working environment as well as for casual wear.

LICENSE AGREEMENT WITH NAUTICA

         In September 1995, the Company entered into the Nautica License
Agreement under which the Company has an exclusive license to manufacture,
market, distribute and sell licensed product for women under the Nautica(R)
brand name in the United States and Puerto Rico. The Company currently
distributes its licensed Nautica product line in major department and specialty
stores, at "better" to "bridge" price points. Nautica has developed significant
brand-name recognition with its men's apparel lines. The Company's relationship
with Nautica provides the Company with exposure to "better" to "bridge"
departments, while creating an alliance with a leading company in the apparel
industry. The Company's first sales of its licensed Nautica products occurred
in August 1996. The Company's license from Nautica is limited to women's
sportswear collections including coordinating knits, blouses, wovens, sweaters,
pants, skirts, jackets, and outerwear and sportswear dresses bearing the
Nautica brand names and marks. The Company's license from Nautica excludes
business dresses, suits, coats and raincoats that are not part of a sportswear
collection. The license also excludes shoes, scarves, socks, stockings or
accessories for ladies bearing the Nautica brand names and marks.



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         The initial term of the Nautica License Agreement runs through
December 31, 1999, and is thereafter renewable, at the option of the Company,
for up to two periods of three years each, provided that certain conditions are
met (including the successful attainment of certain sales targets and the
requirement that Andrew Grossman continue in his position as Chief Executive
Officer during the term of the Nautica License Agreement). The Company's
obligations include minimum royalty and advertising payments. A separate
showroom was constructed for the display of the Company's licensed Nautica
products and a full operational merchandising and retail development group has
been dedicated to its licensed Nautica product line.

         Pursuant to the terms of the Nautica License Agreement, the Company
has granted Nautica a ten-year option to purchase up to 150,000 shares of the
Company's Common Stock at a purchase price of $5.00 per share (the closing
price of the Common Stock on the NYSE on September 6, 1995, the date the
Company entered into the Nautica License Agreement).

         In August 1996, the Company commenced sales of its licensed NAUTICA
label. As initially launched, the Nautica product line encompassed both career
sportswear and weekend casual sportswear. In view of the disappointing
performance of the Company's Nautica product line to date, the Company is in
the process of hiring a new executive officer to manage the product line, and
intends to relaunch the Nautica product line. In contrast to the previous
Nautica product line, the relaunched line will have a narrow focus on casual
sportswear items -- a focus that is consistent with the Nautica men's line.

CUSTOMERS

         The Company's products are sold nationwide in an estimated 1,900
individual stores operated by approximately 150 department store chains,
specialty retailers and other retail outlets. The Company does not have any
long-term commitments or contracts with any of its customers.

         The Company extends credit to its customers based upon an evaluation
of the customer's financial condition and credit history and generally does not
require collateral. The Company has historically incurred minimal credit
losses. At June 30, 1997 and 1996, approximately 62% and 66%, of the Company's
accounts receivables were due from department store customers owned by four
single corporate entities. During fiscal 1997, approximately 63% of the
Company's net sales were made to department store customers owned by four
single corporate entities, as compared to 60% in fiscal 1996 and 55% in fiscal
1995. Sales to Dillard's Department Stores accounted for 33% of net sales in
fiscal 1997, 29% of net sales in fiscal 1996 and 22% of net sales in fiscal
1995. Sales to nine department store companies owned by The May Department
Stores Company accounted for approximately 16% of the Company's net sales in
fiscal 1997, 10% of net sales in fiscal 1996 and 15% of net sales in fiscal
1995. Sales to eight department store companies owned by Federated Department
Stores accounted for approximately 8% of net sales in fiscal 1997, 5% of net
sales in fiscal 1996 and 11% of net sales in fiscal 1995. Sales to two
department store customers owned by TJX Companies, Inc. accounted for
approximately 6% of net sales in fiscal 1997, 16% of net sales in fiscal 1996
and 7% of net sales in fiscal 1995. The percentages of net sales are based upon
stores owned by the four corporate entities at the end of fiscal 1997. As a
result of the Company's dependence on these customers, they may have the
ability to influence the Company's business decisions. The loss of or
significant decrease in business from any of its major customers would have a
material adverse effect on the Company's financial position and results of
operations.

SALES AND MARKETING

         The Company's selling operation is highly centralized. Sales to the
Company's department and specialty store customers are made primarily through
the Company's New York City showrooms. The Company has an in-house sales force
of 29, all of whom are located in the New York City showrooms. Senior
management, principally Josephine


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Chaus, Chairwoman of the Board and principal stockholder of the Company, and
Andrew Grossman, Chief Executive Officer, actively participate in the planning
of the Company's marketing and selling efforts. The Company does not employ
independent sales representatives or operate regional sales offices, but it
does participate in various regional merchandise marts. This sales structure
enables management to control the Company's selling operation more effectively,
to limit travel expenses, as well as to deal directly with, and be readily
accessible to, major customers.

         Products are marketed to department and specialty store customers
during "market weeks," generally four to five months in advance of each of the
Company's selling seasons. The Company assists its customers in allocating
their purchasing budgets among the items in the various product lines to enable
consumers to view the full range of the Company's offerings in each collection.
During the course of the retail selling seasons, the Company monitors its
product sell-through at retail in order to directly assess consumer response to
its products.

         The Company emphasizes the development of long-term customer
relationships by consulting with its customers concerning the style and
coordination of clothing purchased by the store, optimal delivery schedules,
floor presentation, pricing and other merchandising considerations. Frequent
communications between the Company's senior management and other sales
personnel and their counterparts at various levels in the buying organizations
of the Company's customers is an essential element of the Company's marketing
and sales efforts. These contacts allow the Company to closely monitor retail
sales volume to maximize sales at acceptable profit margins for both the
Company and its customers. The Company's marketing efforts attempt to build
upon the success of prior selling seasons to encourage existing customers to
devote greater selling space to the Company's product lines and to penetrate
additional individual stores within the Company's existing customers. The
Company's largest customers discuss with the Company retail trends and their
plans regarding their anticipated levels of total purchases of Company products
for future seasons. These discussions are intended to assist the Company in
planning the production and timely delivery of its products.

         The Company maintains a cooperative advertising program under which it
reimburses, in certain circumstances, a portion of a customer's advertising
expenditures promoting the Company's products up to a maximum percentage of the
customer's purchases. Except for this cooperative advertising program, the
Company has not engaged in any direct advertising to the public with respect to
its Chaus product line. There was limited direct advertising for the Company's
Nautica product line. Cooperative advertising expenditures for the Company were
approximately $0.8 million for both fiscal 1995 and fiscal 1996, and $1.1
million in fiscal 1997.

DESIGN

         The Company's products and certain of the fabrics from which they are
made are designed by an in-house staff of fashion designers. The 14 person
design staff, headed by Judith Leech, monitors current fashion trends and
changes in consumer preferences. Josephine Chaus and Andrew Grossman, the
Company's Chief Executive Officer, who are instrumental in the design function,
meet regularly with the design staff to create, develop and coordinate the
seasonal collections. The Company believes that its design staff is known for
its distinctive styling and its ability to contemporize fashion classics.
Emphasis is placed on the coordination of outfits and quality of fabrics to
encourage the purchase of more than one garment.

MANUFACTURING AND DISTRIBUTION

         The Company does not own any manufacturing facilities; all of its
products are manufactured in accordance with its design specifications and
production schedules through arrangements with independent manufacturers. The
Company believes that outsourcing its manufacturing maximizes its flexibility
while avoiding significant capital expenditures, work-in-process buildup and
the costs of a large workforce. A substantial amount (approximately 80%)


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of its product is manufactured by approximately 35 key independent suppliers
located primarily in South Korea, Hong Kong, Taiwan, China, Indonesia and
elsewhere in the Far East. Approximately 20% of the Company's products are
manufactured in the United States and the Caribbean Basin. No contractual
obligations exist between the Company and its manufacturers except on an
order-by-order basis. During fiscal 1997, the Company purchased approximately
68% of its finished goods from its ten largest manufacturers, including
approximately 19% of its purchases from its largest manufacturer. Contracting
with foreign manufacturers enables the Company to take advantage of prevailing
lower labor rates and to use a skilled labor force to produce high quality
products.

         Generally, each manufacturer agrees to produce finished garments on
the basis of purchase orders from the Company, specifying the price and
quantity of items to be produced and supported by a letter of credit naming the
manufacturer as beneficiary to secure payment for the finished garments.

         The Company's technical production support staff, located in New York
City, produces patterns, prepares production samples from the patterns for
modification and approval by the Company's design staff, and marks and grades
the patterns in anticipation of production. While the factories have the
capability to perform these services, the Company believes that its personnel
can best express its design concepts and efficiently supervise production to
better ensure that a quality product is produced. Once production fabric is
shipped to them, the manufacturers produce finished garments in accordance with
the production samples and obtain necessary quota allocations and other
requisite customs clearances. Branch offices of the Company's subsidiaries in
Korea and Hong Kong monitor production at each manufacturing facility to
control quality, compliance with the Company's specifications and timely
delivery of finished garments, and arrange for the shipment of finished
products to the Company's New Jersey distribution center. Almost all finished
goods are shipped to the Company's New Jersey distribution center for final
inspection, assembly into collections, allocation and shipment to customers.

         The Company believes that the number and geographical diversity of its
manufacturing sources minimize the risk of adverse consequences that would
result from termination of its relationship with any of its larger
manufacturers. The Company also believes that it would have the ability to
develop, over a reasonable period of time, adequate alternate manufacturing
sources should any of its existing arrangements terminate. However, should any
substantial number of such manufacturers become unable or unwilling to continue
to produce apparel for the Company or to meet their delivery schedules, or if
the Company's present relationships with such manufacturers were otherwise
materially adversely affected, there can be no assurance that the Company would
find alternate manufacturers of finished goods on satisfactory terms to permit
the Company to meet its commitments to its customers on a timely basis. In such
event, the Company's operations could be materially disrupted, especially over
the short-term. The Company believes that relationships with its major
manufacturers are satisfactory.

         The Company uses a broad range of fabrics in the production of its
clothing, consisting of synthetic fibers (including polyester and acrylic),
natural fibers (including cotton and wool), and blends of natural and synthetic
fibers. The Company does not have any formal, long-term arrangements with any
fabric or other raw material supplier. During fiscal 1997, virtually all of the
fabrics used in the Company's products manufactured in the Far East were
ordered from the Company's five largest suppliers in the Far East, which are
located in Japan, Taiwan and Korea, and virtually all of the fabric used in the
Company's products manufactured in the United States and the Caribbean Basin
were ordered by three major suppliers from these regions. The Company selects
the fabrics to be purchased, which are generally produced for it in accordance
with its own specifications. To date, the Company has not experienced any
significant difficulty in obtaining fabrics or other raw materials and
considers its sources of supply to be adequate.

         The Company operates under substantial time constraints in producing
each of its collections. Orders from the Company's customers generally precede
the related shipping period by up to five months. However, proposed production
budgets are prepared substantially in advance of the Company's initial
commitments for each collection.


                                       10

<PAGE>



In order to make timely delivery of merchandise which reflects current style
trends and tastes, the Company attempts to schedule a substantial portion of
its fabric and manufacturing commitments relatively late in a production cycle.
However, in order to secure adequate amounts of quality raw materials,
especially greige (i.e., "undyed") goods, the Company must make substantial
advance commitments to suppliers of such goods, often as much as seven months
prior to the receipt of firm orders from customers for the related merchandise.
Many of these early commitments are made subject to changes in colors,
assortments and/or delivery dates.

IMPORTS AND IMPORT RESTRICTIONS

         The Company's arrangements with its manufacturers and suppliers are
subject to the risks attendant to doing business abroad, including the
availability of quota and other requisite customs clearances, the imposition of
export duties, political and social instability, currency revaluations, and
restrictions on the transfer of funds. Bilateral agreements between exporting
countries, including those from which the Company imports substantially all of
its products, and the United States' imposition of quotas, limits the amount of
certain categories of merchandise, including substantially all categories of
merchandise manufactured for the Company, that may be imported into the United
States. Furthermore, the majority of such agreements contain "consultation
clauses" which allow the United States to impose at any time restraints on the
importation of categories of merchandise which, under the terms of the
agreements, are not subject to specified limits. The bilateral agreements
through which quotas are imposed have been negotiated under the framework
established by the Arrangement Regarding International Trade 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 trade matters were reviewed and modified. Quotas
established under the MFA will be gradually phased out over a ten year
transition period, after which the textile and clothing trade will be fully
integrated into the General Agreement on Trade and Tariffs ("GATT") and will be
subject to the same disciplines as other sections. The GATT agreement provides
for expanded trade, improved market access, lower tariffs and improved
safeguard mechanisms.

         The United States and the countries in which the Company's products
are manufactured may, from time to time, impose new quotas, duties, tariffs or
other restrictions, or adversely adjust presently prevailing quotas, duty or
tariff levels, with the result that the Company's operations and its ability to
continue to import products at current or increased levels could be adversely
affected. The Company cannot now predict the likelihood or frequency of any
such events occurring. The Company monitors duty, tariff and quota-related
developments, and seeks continually to minimize its potential exposure to
quota-related risks through, among other measures, geographical diversification
of its manufacturing sources, allocation of production of merchandise
categories where more quota is available and shifts of production among
countries and manufacturers. The expansion in the past few years of the
Company's varied manufacturing sources and the variety of countries in which it
has potential manufacturing arrangements, although not the result of specific
import restrictions, have had the result of reducing the potential adverse
effect of any increase in such restrictions.

         Substantially all of the Company's products are subject to United
States customs duties. In the ordinary course of business, the Company, from
time to time, is subject to claims by the United States Customs Service
("Customs") for duties and other charges, is entitled to refunds from Customs
due to overpayment of duties by the Company and may be required to pay
penalties with respect to underpayment of duties.



                                       11

<PAGE>



RETAIL OUTLET STORES

         At June 30, 1997, the Company had 22 retail outlet stores, as compared
to 25 stores at June 30, 1996. The retail outlet stores operate throughout the
country in traditional factory outlet centers in locations intended to minimize
conflict with the Company's major retail department store customers. The
Company plans to close all of its retail outlet stores (other than the retail
outlet store located at the Company's Secaucus facility, the space for which is
leased by the Company as part of its warehouse lease) by the end of January
1998, and does not intend to open any new stores in the foreseeable future.
Failure to close such retail stores by the end of January 1998, is an event of
default under the New Financing Agreement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- New Financing
Agreement" and "-- Fiscal 1997 Compared to Fiscal 1996."

BACKLOG

         As of October 13, 1997, the Company's order book reflected unfilled
customer orders for approximately $92 million of merchandise. As of September
20, 1996 (as disclosed in the prior year) the backlog was $45.0 million. 
Order book data at any date are materially affected by the timing of the 
initial showing of collections to the trade, as well as by the timing of 
recording of orders and of shipments. This year's backlog includes unfilled 
customer orders for the upcoming spring season. The Company does not believe 
that cancellations, rejections or returns will materially reduce the amount of 
sales realized from such backlog.

TRADEMARKS

         CHAUS(R), CHAUS ESSENTIAL(R), CHAUS SPORT(R), CHAUS WOMAN(R) and MS.
CHAUS(R) are registered trademarks of the Company in the United States for use
on ladies' garments. These trademarks are renewable in the years 2004, 2008,
2002, 2004 and 2005, respectively. JOSEPHINE(R) is also a registered trademark
of the Company in the United States, renewable in the year 2001, for use on
ladies' blouses and sweaters. The Company considers its trademarks to be strong
and highly recognized and, to have significant value in the marketing of its
products. See " -- License Agreement with Nautica" for certain information
concerning the Company's Nautica License Agreement.

         The Company has also registered its CHAUS, CHAUS SPORT, CHAUS WOMAN,
and JOSEPHINE marks for women's apparel in certain foreign countries and has
legal trademarks in certain foreign countries for selected women's accessories
including handbags, small leather goods and footwear.

COMPETITION

         The women's apparel industry is highly competitive, both within the
United States and abroad. The Company competes with many apparel companies,
some of which are larger, and have better established brand names and greater
resources than the Company. In some cases the Company also competes with
private-label brands of its department store customers. The Company's Nautica
product line has experienced intense competition from other designer labels.

         The Company believes that an ability to effectively anticipate, gauge
and respond to changing consumer demand and taste relatively far in advance, as
well as an ability to operate within substantial production and delivery
constraints (including obtaining necessary quota allocations), is necessary to
compete successfully in the women's apparel industry. Consumer and customer
acceptance and support, which depend primarily upon styling, pricing, quality
(both in material and production), and product identity, are also important
aspects of competition in this industry. The Company believes that its success
will depend upon its ability to remain competitive in these areas.


                                       12

<PAGE>



         Furthermore, the Company's traditional department store customers,
which account for a substantial portion of the Company's business, encounter
intense competition from so-called "off-price" and discount retailers, mass
merchandisers and specialty stores. The Company believes that its ability to
increase its present levels of sales will depend on such customers' ability to
maintain their competitive position and the Company's ability to increase its
market share of sales to department stores.

EMPLOYEES

         At June 30, 1997, the Company employed 482 employees as compared with
525 employees at June 30, 1996. This total includes 67 in managerial and
administrative positions, approximately 92 in production, production
administration and design, 207 in marketing, merchandising and sales (including
178 employees in the retail outlet store operation) and 61 in distribution. Of
the Company's total employees, 55 were located in the Far East. The Company is
a party to a collective bargaining agreement with the Amalgamated Workers
Union, Local 88, covering 83 full-time employees. This agreement expires in
August 1999.

         The Company considers its relations with its employees to be
satisfactory and has not experienced any business interruptions as a result of
labor disagreements with its employees.

EXECUTIVE OFFICERS

The executive officers of the Company are:

     NAME                 AGE       POSITION
     ----                 ---       --------    
Josephine Chaus            46       Chairwoman of the Board and member, 
                                      Office of the Chairman
Andrew Grossman            38       Chief Executive Officer and member,
                                      Office of the Chairman
Barton Heminover           43       Vice President-- Corporate Controller and
                                      Assistant Secretary

Executive officers serve at the discretion of the Board of Directors.

         Josephine Chaus has been an employee of the Company in various
capacities since its inception. She has been a director of the Company since
1977, President from 1980 through February 1993, Chief Executive Officer from
July 1991 through September 1994, Chairwoman of the Board since 1991 and member
of the Office of the Chairman since September 1994.

         Andrew Grossman was appointed a director of the Company on September
13, 1994. He has been employed by the Company as its Chief Executive Officer
and member of the Office of the Chairman since September 28, 1994. Prior to
September 1994, Mr. Grossman was President from 1991 to 1994 and Executive Vice
President from 1990 to 1991 of Jones Apparel Group, a manufacturer of women's
apparel, and Vice President of Merchandising for Jones New York from 1987 to
1990. Prior to joining Jones, Mr. Grossman was employed by Willie Wear Ltd.,
Herbert Grossman Enterprises, the Ralph Lauren Womenswear division of Bidermann
Industries, Corp., and the Evan Picone division of Palm Beach, Inc.

         Barton Heminover joined the Company as Vice President -- Corporate
Controller and Assistant Secretary in July 1996. From January 1983 to July 1996
he was employed by Petrie Retail, Inc. (formerly Petrie Stores Corporation), a
woman's retail apparel chain, in various capacities, serving as Vice
President/Treasurer from 1986 to 1994 and as Vice President/Financial
Controller from 1994 to 1996.



                                       13

<PAGE>



         On September 15, 1997, the Company announced the resignation of Wayne
Miller, the Company's Chief Financial Officer. Pending the appointment of a
successor to Mr. Miller, Mr. Heminover, together with the Company's financial
advisors, will be responsible for all of Mr. Miller's duties.

ITEM 2. PROPERTIES.

         The Company's principal executive offices are located at 1410 Broadway
in New York City, where the Company currently leases approximately 29,000
square feet, which represents a reduction of approximately 12,000 square feet
from the aggregate space occupied under several leases that terminated in July
1996. These facilities also house the Company's showrooms and its sales,
design, production and merchandising staffs. This space is occupied under a
lease expiring in July 1998. Net base rental expense aggregated approximately
$0.7 million, $2.3 million and $2.2 million in fiscal 1997, 1996 and 1995,
respectively. Chaus also leases approximately 19,000 square feet of space at
520 Eighth Avenue in New York City, which houses its technical production
support facilities (including its sample and pattern makers). Net base rental
expense for this space aggregated approximately $0.3 million in fiscal 1995,
and $0.2 million in each of fiscal 1996 and fiscal 1997. The lease for this
facility expires in January 1998.

         During fiscal 1995, the Company consolidated its warehouse and
distribution centers located in Secaucus, New Jersey into one building,
reducing the leased square footage from approximately 390,000 square feet to
approximately 275,000 square feet. This facility houses the Company
administrative and finance personnel, its computer operations, one retail
outlet store and its warehouse and distribution center. In September 1995 the
Company renegotiated its Secaucus leases in order to terminate the lease on a
vacant building, and the new lease expires in June 2000. Base rental expense
for the Secaucus facilities aggregated approximately $1.5 million in fiscal
1995, and $1.3 million in each of fiscal 1996 and fiscal 1997.

         Office locations are also leased in Hong Kong and Korea, with annual
aggregate rental expense of approximately $0.3 million for each of fiscal 1996
and fiscal 1997. In July 1995, the Company closed its Taiwan office and in
prior years, terminated its leases as to foreign office locations in the
Philippines and Italy. The aggregate rental payments, including the closed
locations, approximated $0.5 million in fiscal 1995.

         The Company also leases space for its outlet stores operation, with
the average store utilizing approximately 3,000 square feet in fiscal 1997. The
annual aggregate base rental expense for such facilities was approximately $1.9
million for 1995 and $1.7 million for each of fiscal 1996 and 1997. The Company
plans to close all of its retail outlet stores (other than the retail outlet
store located at the Company's Secaucus facility, the space for which is leased
by the Company as part of its warehouse lease) by the end of January 1998.

ITEM 3. LEGAL PROCEEDINGS.

         The Company is a defendant in an action which was commenced in federal
district court in New York by the Equal Employment Opportunity Commission
("EEOC") on behalf of three patternmakers, each of whom was terminated by the
Company in late 1995. The complaint alleges discrimination on the basis of age
and national origin. The Company was served with the complaint on April 7,
1997. The complaint seeks equitable relief, including (i) reinstatement of the 
three individuals at issue, (ii) an injunction against the Company engaging in 
age or national-origin discrimination, and (iii) an order that the Company 
carry out an affirmative action program for individuals over 40 and for 
individuals of Italian and/or non-Asian origin. The complaint also seeks back 
pay, front pay, liquidated damages, compensatory damages, punitive damages, 
and the EEOC's costs in the action. The Company will answer the complaint and
deny the material allegations of the complaint and intends to vigorously oppose
the action.



                                       14

<PAGE>



         There are no other material pending legal proceedings to which the
Company is a party or to which any of its properties is subject.

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

         None.

PART II

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

         The Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "CHS." The following table sets forth for each of the
Company's fiscal periods indicated the high and low sales prices for the Common
Stock as reported on the NYSE.

                                         HIGH        LOW
                                         ----        ---
FISCAL 1996
             First Quarter ..........   $6.125     $4.750
             Second Quarter .........    5.625      3.125
             Third Quarter ..........    5.000      2.875
             Fourth Quarter .........    4.625      3.000

FISCAL 1997
             First Quarter ..........   $3.625     $2.000
             Second Quarter .........    2.875      1.625
             Third Quarter ..........    1.750      0.500
             Fourth Quarter .........    1.500      0.687

As of September 26, 1997, the Company had approximately 1,045 stockholders of
record.

         The Company has not declared or paid cash dividends or made other
distributions on its Common Stock since prior to its initial public offering of
Common Stock in the 1986 Offering. The payment of dividends, if any, in the
future is within the discretion of the Board of Directors and will depend on
the Company's earnings, its capital requirements and financial condition. It is
the present intention of the Board of Directors to retain all earnings, if any,
for use in the Company's business operations and, accordingly, the Board of
Directors does not expect to declare or pay any dividends in the foreseeable
future. In addition, the New Financing Agreement prohibits the Company from
declaring dividends or making other distributions on its capital stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition, Liquidity and Capital Resources."

ITEM 6. SELECTED FINANCIAL DATA.

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



                                       15

<PAGE>



STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
                                                                              FISCAL YEAR ENDED JUNE 30,
                                                         --------------------------------------------------------------
                                                             1997         1996          1995           1994       1993
                                                             ----         ----          ----           ----       ----
                                                                     (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<S>                                                       <C>          <C>           <C>          <C>          <C>     
Net sales .......................................         $160,100     $170,575      $181,697     $206,332     $235,819
Cost of goods sold ..............................          125,422 (4)  147,994       149,097      186,594      187,423
                                                           -------      --------     --------     --------     --------
Gross profit ....................................           34,678       22,581        32,600       19,738       48,396
Selling, general and administrative expenses ....           40,924       40,162        44,794       55,400       57,410
Restructuring expenses ..........................            2,250 (3)       --         1,200 (1)    5,300 (1)      --
Unusual expenses ................................               --           --         8,333 (2)    1,900 (2)      --
Interest expense ................................            8,030        6,560         5,976        3,439        2,322
Other income (expense), net .....................              113           56            91         (190)         449
                                                        ----------    ---------     ---------    ---------   ----------
Loss before income tax
   provision ....................................          (16,413)     (24,085)      (27,612)     (46,491)     (10,887)
Income tax provision ............................               50          301           301          264          102
                                                        ----------    ---------     ---------    ---------   ----------
Net loss ........................................        $ (16,463)    $(24,386)     $(27,913)    $(46,755)    $(10,989)
                                                        ===========   =========     =========    =========   ==========
Net loss per share (5) ..........................        $   (0.63)    $  (1.02)     $  (1.40)    $  (2.55)    $  (0.60)
                                                        ==========    =========     =========    =========   ==========
Weighted average number of common and
  common equivalent shares outstanding ..........           26,277       23,987         19,910      18,352       18,272
                                                        ==========    =========     ==========   =========   ==========

BALANCE SHEET DATA:
<CAPTION>
                                                                                    AS OF JUNE 30,
                                                         --------------------------------------------------------------
                                                             1997         1996          1995         1994         1993
                                                             ----         ----          ----         ----         ----
<S>                                                       <C>         <C>            <C>           <C>          <C>    
Working capital (deficiency) ....................         $(32,729)   $ (19,483)     $(13,914)     $ 3,342      $40,923
Total assets ....................................           34,138       32,742        28,660       51,619       90 208
Short-term debt, including current portion
  of long-term debt .............................           37,756       26,077        18,698       21,365       17,504
Long-term debt ..................................           26,374       23,588        21,066       18,789       14,730
Stockholders' equity (deficiency) ...............          (57,060)     (40,610)      (32,379)     (13,614)      33,147
</TABLE>

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

(1)      Includes, in fiscal 1995, $1.2 million of employee severance, and in
         fiscal 1994, $2.1 million for closing selected outlet stores, $2.5
         million for consolidation of office and warehouse space, and $0.7
         million for employee severance.

(2)      Includes, in fiscal 1995, $7.8 million primarily relating to the costs
         associated with the signing of the Company's new Chief Executive
         Officer and $0.5 million related to certain legal matters, and in
         fiscal 1994, expenses relating primarily to abandonment of fixed
         assets, certain legal matters and the winding down of the Company's
         Canadian joint venture.

(3)      The Company recorded a $2.3 million restructuring charge in the fourth
         quarter of fiscal 1997 for costs to be incurred in connection with the
         Restructuring, which was announced in June 1997. The costs incurred
         relate to the closing of the Company's outlet stores (such as
         professional fees, lease termination expenses, and write-off of fixed
         assets), in addition to professional fees and other expenses
         associated with the implementation of the Company's proposed
         Restructuring.

(4)      Includes $1.1 million for liquidation of inventory as a result of
         closing the Company's outlet stores.

(5)      Computed by dividing net income (loss) by the weighted average number
         of Common and Common Equivalent Shares outstanding during the years.
         For the fiscal years ended 1997, 1996, 1995, 1994 and 1993, Common
         Equivalent Shares were not included in the calculation as their
         inclusion would have been antidilutive.



                                       16

<PAGE>



Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS

         The following table sets forth, for the years indicated, certain items
expressed as a percentage of net sales.

                                                  Fiscal Year Ended June 30
                                                 ---------------------------
                                                  1997      1996       1995
                                                  ----      ----       ----
Net sales ...................................... 100.0%    100.0%     100.0%
Gross profit ...................................  21.7      13.2       17.9
Selling, general and administrative expenses ...  25.6      23.5       24.7
Restructuring expenses .........................   1.4        --        0.7
Unusual expenses ...............................    --        --        4.6
Interest expense ...............................   5.0       3.8        3.3
Net loss ....................................... (10.3)    (14.3)     (15.4)

Fiscal 1997 Compared to Fiscal 1996

         In fiscal 1997, net sales decreased by $10.5 million, or 6.1%,
compared to the prior year. The decrease in net sales was due predominately to
a reduction in off-price sales, and the discontinuation of dresses as a product
category in March 1996. The decrease in net sales was partially offset by sales
of the Company's licensed Nautica product of approximately $25.0 million, which
commenced in August 1996. Sales by the Company's outlet stores decreased by
$1.2 million, or 6.5%, as compared to the prior year. This decrease was due to
the closing of nine outlet stores during the past two years.

         Gross profit as a percentage of net sales was 21.7% as compared to
13.2% in the previous year. The increase in gross profit as a percentage of net
sales is primarily the result of a decrease in off-price sales volume and the
impact of eliminating dresses as a product category in February 1996.

         Selling, general and administrative expenses increased by $0.8
million, to 25.6% of net sales in fiscal 1997 from 23.5% of net sales in fiscal
1996. This increase is primarily due to costs associated with the licensed
Nautica product line such as payroll, advertising, sample expense, and royalty
fees. The increase in such expenses was partially offset by a decrease in
payroll expenses throughout other areas of the Company, and a decrease in
occupancy costs. The decrease in occupancy costs was due to a decrease in
occupancy costs at the corporate headquarters which resulted from a decrease in
the space leased and the reduction in the number of outlet stores and the
attendant leases.

         The Company recorded a $2.3 million restructuring charge in the fourth
quarter of fiscal 1997 for costs to be incurred in connection with the
Restructuring, which was announced in June 1997. The costs incurred relate to
the closing of the Company's outlet stores (such as professional fees, lease
termination expenses, and write-off of fixed assets), in addition to
professional fees and other expenses associated with the implementation of the
Company's proposed Restructuring. In addition, the Company recorded a $1.1
million charge to cost of goods sold related to the liquidation of the retail
outlet store inventory.




                                       17

<PAGE>

Fiscal 1996 Compared to Fiscal 1995

         In fiscal 1996, net sales decreased by $11.2 million, or 6.1%,
compared to the prior year. Approximately $8.6 million is due to the decrease
in dress sales as a result of the discontinuation of dresses as a product
category. The sales decrease is also the result of lower sales at regular and
incentive prices combined with an increase in off-price sales at deeper
discounts than the prior year.

         Sales by the Company's outlet stores decreased by $5.7 million
compared to the prior year. This decrease is largely due to the closing of six
outlet stores in fiscal 1996 and a decline in same-store sales of approximately
$2.2 million.

         Gross profit as a percentage of net sales was 13.2% as compared to
17.9% for the previous year. The decrease in gross profit as a percentage of
net sales reflects the impact of increased off-price sales volume at deeper
discounts. The Company's dress division realized a negative gross margin of
$2.2 million for fiscal 1996 which adversely impacted gross profit as a
percentage of net sales.

         Selling, general and administrative expenses decreased by $4.6
million, from 24.7% of net sales in fiscal 1995 to 23.5% of net sales in fiscal
1996. This decrease is due to a decrease in payroll and payroll related items
of approximately $2.7 million, a decrease in occupancy costs of $1.2 million
and a decrease in other expenses of $0.7 million. The decrease in payroll and
payroll related items was predominately due to a decrease of approximately $0.7
million as a result of the closing of six stores in fiscal 1996 and a decrease
of approximately $2.0 million due to employee reductions as the Company
continues to improve the efficiency of its operations. The decrease in
occupancy costs was primarily due to a $1 million decrease associated with the
consolidation of the distribution facility and a $0.5 million decrease due to
the reduction in outlet stores.

         At the end of fiscal 1995 the balance of the restructuring reserve was
$2.8 million. During fiscal 1996 $2.6 million was charged against the
restructuring reserve, consisting of charges relating to consolidation of
warehouse and office space ($1.3 million), severance related costs ($0.8
million) and outlet store closing costs ($0.5 million). At June 30, 1996 the
balance in the restructuring reserve was $0.2 million.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

General

         Net cash used in operating activities was $11.0 million in fiscal
1997, $22.7 million in fiscal 1996, and $4.8 million in fiscal 1995. The net
cash used in operating activities in fiscal 1997 resulted primarily from the
net loss of $16.5 million, inclusive of $3.6 million of non-cash charges, and
increases in inventory of $2.5 million, partially offset by an increase in
accrued restructuring expenses of $1.7 million and an increase in accounts
payable of $2.4 million.

         Historically, the Company has not required major capital expenditures.
In fiscal 1997 and 1996, purchases of fixed assets were $0.2 million and $0.5
million, respectively, consisting primarily of improvements in the Company's
New Jersey warehouse facilities, and New York design and showroom facilities.
In fiscal 1997, the Company incurred expenditures of $0.4 million for "in
store" fixtures and signs purchased in connection with the Nautica product
line. These "in store" fixtures and signs were placed in approximately 120
department stores. In fiscal 1998, the Company anticipates capital expenditures
of approximately $0.5 million, consisting primarily of expenditures for the
Company's New Jersey warehouse facility, and New York design and showroom
facilities. The Company also anticipates expenditures of approximately $1
million for "in store" fixtures and signs purchased in connection with the
Nautica product line.



                                       18

<PAGE>



Old Bank Debt Agreement

         The Company and BNY Financial Corporation ("BNYF"), a wholly owned
subsidiary of The Bank of New York, entered into a financing agreement in July
1991, which was amended and restated effective as of February 21, 1995 and
further amended, effective as of September 28, 1995 (the "September 1995
Amendment"), May 9, 1996 (the "May 1996 Amendment"), September 17, 1996 (the
"September 1996 Amendment"), January 31, 1997 (the "January 1997 Amendment"),
March 21, 1997 (the "March 1997 Amendment"), and April 1, 1997 (the "April 1,
1997 Amendment") and April 29, 1997 (the "April 29, 1997 Amendment")
(collectively, the "Old Bank Debt Agreement"). The Old Bank Debt Agreement
provided the Company with a $72 million credit facility for letters of credit
and direct borrowings, with a sublimit for loans and advances ranging between
$40.0 and $58.0 million. The amount of financing available was based upon a
formula incorporating eligible receivables and inventory, cash balances, other
collateral and permitted overadvances, all as defined in the Old Bank Debt
Agreement. At June 30, 1997, the Company had availability of approximately $2.1
million (inclusive of overadvance availability) under the Old Bank Debt
Agreement. The Company's obligations under the Old Bank Debt Agreement were
secured by the Company's accounts receivable, inventory and trademarks.

         The Old Bank Debt Agreement contained certain financial covenants
including covenants regarding the Company's tangible net worth deficit and
working capital deficiency. In addition to a cap on personal property leases,
the Company was also prohibited from declaring or paying dividends or making
other distributions on its capital stock, with certain exceptions. In a Waiver,
dated May 5, 1997 (the "Waiver"), BNYF waived covenant compliance with net
worth, working capital and quarterly minimum profit requirement for the period
ended March 31, 1997.

         Interest on direct borrowings was payable monthly at an annual rate
equal to the higher of (i) The Bank of New York's prime rate (8.50% at June 30,
1997) plus 0.5% (The Bank of New York prime rate plus 1.5% in the event the
Company's overadvance position exceeded the allowable overadvances) or (ii) the
Federal Funds Rate (8.50% at June 30, 1997) in effect plus 1% (Federal Funds
Rate in effect plus 2% in the event the Company's overadvance position exceeded
the allowable overadvances). There was an annual commitment fee of 0.375% of
the unused portion of the line, payable monthly, and letter of credit fees
equal to 0.125% of the outstanding letter of credit balance, payable monthly.
The Old Bank Debt Agreement required the payment of minimum service charges of
$0.6 million per annum. In connection with the May 1996 Amendment, BNYF was
paid a fee of $25,000, and additional fees of $10,000 per month through
December 1996 were provided for, with BNYF agreeing to provide specified levels
of overadvances up to $10.0 million through the same period. In connection with
the Waiver, BNYF was paid a fee of $25,000 and the Company issued the Existing
BNYF Warrants. In connection with the Restructuring, the Existing BNYF Warrants
were extinguished, and BNYF received the New BNYF Warrants. See "Business --
Restructuring -- Restructuring of Bank Debt." BNYF could have terminated the
Old Bank Debt Agreement after February 20, 1999, upon 60 days' written notice
to the Company.

         On October 10, 1997, the Company and BNYF entered into the New
Financing Agreement which amended and restated in its entirety the Old Bank
Debt Agreement. The New Financing Agreement amends certain provisions of the
Old Bank Debt Agreement and provides for maximum availability of $81 million,
and overadvances of up to $12.8 million. The New Financing Agreement also 
amends certain financial covenants contained in the Old Bank Debt Agreement.
The New Financing Agreement provides for certain additional events of default,
among which are the default by Ms. Chaus under the Bank Debt Put (as defined 
below), and the failure by the Company to close all of its retail outlets by
the end of January 1998. See "Business -- Restructuring -- Restructuring of 
Bank Debt".



                                       19

<PAGE>



New Financing Agreement

         The New Financing Agreement consists of two facilities: (i) the New
Revolving Facility which is a $66 million five-year revolving credit line with
a $20 million sublimit for letters of credit, and (ii) the New Term Loan which
is a $15 million term loan facility. Each facility matures on December 31,
2002. See "Business -- Restructuring -- Restructuring of Bank Debt".

         The New Financing Agreement contains financial covenants requiring,
among other things, the maintenance of minimum levels of tangible net worth,
working capital and maximum permitted loss (minimum permitted profit).

Credit Support

         Josephine Chaus has arranged for a letter of credit (the "Letter of
Credit") in various amounts since April 1994 in return for which BNYF has
increased the availability under the Old Bank Debt Agreement. In consideration
for credit support provided by Ms. Chaus to the Company prior to February 1995,
Ms. Chaus was granted 1,216,500 warrants (the "1994 Warrants"), exercisable
through November 22, 1999, at prices ranging between $2.25 and $4.62 per share.
As part of the negotiations with BNYF in connection with the Old Bank Debt
Agreement, in February 1995 Josephine Chaus increased the Letter of Credit to
$10.0 million and extended its term to October 31, 1995 (the "February 1995
Increase/Extension"). In addition, in February 1995, Ms. Chaus provided a $5.0
million personal guarantee (the "$5.0 Million Guarantee"), to be in effect
during the Old Bank Debt Agreement's term. In September 1995, Ms. Chaus further
extended the term of the Letter of Credit to January 31, 1996 (the "September
1995 Extension"). In consideration of her provision of the February 1995
Increase/Extension, the $5.0 Million Guarantee and the September 1995
Extension, a special committee consisting of disinterested members of the Board
of Directors of the Company (the "Special Committee") authorized the issuance
to Ms. Chaus of warrants (the "1995 Warrants") to purchase an aggregate of
1,580,000 shares of Common Stock at prices ranging between $4.05 and $6.75 per
share. The issuance of the 1995 Warrants was approved at the 1995 Annual
Meeting of Stockholders. The issuance of the 1994 Warrants, the warrants for
the February 1995 Increase/Extension and the warrants for the $5.0 Million
Guarantee was recorded in fiscal 1995 at a value of $1.1 million, and was
included as a charge to interest expense with a corresponding increase to
additional paid-in capital. The issuance of the warrants for the September 1995
Extension was recorded in the second quarter of fiscal 1996 at a value of $0.2
million, and was included as a charge to interest expense with a corresponding
increase to additional paid-in capital. Ms. Chaus received warrant compensation
for her provision of the $5.0 Million Guarantee only through October 31, 1995.
Thereafter, for each three month period of the $5.0 Million Guarantee, she has
received cash compensation of $50,000, as authorized by the Special Committee.

         In connection with the September 1995 Amendment, Ms. Chaus provided
the Company with an option to further extend the Letter of Credit to July 31,
1996 (the "July 1996 Option"), subject to the consummation of the Company's
November 1995 public offering of Common Stock. In January 1996, the Company
exercised the July 1996 Option to extend the Letter of Credit to July 31, 1996
(the "July 1996 Extension"). In consideration of her provision of the July 1996
Extension, the Special Committee authorized the issuance to Ms. Chaus, of
warrants (the "1996 Warrants") to purchase an aggregate of 682,012 shares of
Common Stock at a price of $4.20 per share. The issuance of the 1996 Warrants
was approved by the stockholders of the Company at the 1996 Annual Meeting of
Stockholders. The issuance of the 1996 Warrants ($0.3 million) was recorded in
the third quarter of fiscal 1996, at a value of $0.3 million and was included
as a charge to interest expense with a corresponding increase to additional
paid-in capital.

         In connection with the May 1996 Amendment, Ms. Chaus agreed to extend
the Letter of Credit to January 31, 1997 (the "January 1997 Extension") and
additionally provided a collateralized increase of $5.0 million in the $5.0
million Guarantee to $10.0 million (the "$10.0 Million Guarantee"). In
connection with the January 1997 Extension, the Special Committee approved the
payment of cash compensation to Ms. Chaus of $100,000 for each three month


                                       20

<PAGE>



period of the Letter of Credit as extended from July 31, 1996 to January 31,
1997. For her provision of the $10.0 Million Guarantee, the Special Committee
approved an increase in the amount of cash compensation payable to Ms. Chaus
for her guaranty, to $100,000 for each three month period of the $10.0 Million
Guarantee.

         In connection with the September 1996 Amendment, Ms. Chaus agreed to
extend the Letter of Credit to July 31, 1997 (the "July 1997 Extension"),
increase the amount of the $10.0 Million Guarantee by $2.5 million to $12.5
million (the "$12.5 Million Guarantee") and fully collateralize the $12.5
Million Guarantee. In connection with the July 1997 Extension, the Special
Committee approved the payment of cash compensation to Ms. Chaus of $100,000
for each additional three month period of the Letter of Credit as extended from
January 31, 1997 to July 31, 1997. For her provision of the $12.5 Million
Guarantee, the Special Committee approved an increase in the amount of cash
compensation payable to Ms. Chaus for her guaranty, to $125,000 for each three
month period of the $12.5 Million Guarantee.

         Ms. Chaus previously entered into the July Deposit Letter pursuant to
which she provided $10 million in cash collateral to secure the Bank Debt in
substitution for the letter of credit previously provided by her. The July
Deposit Letter was amended on October 10, 1997 to provide that the $10 million
in cash collateral shall be held as collateral to secure indebtedness under the
New Financing Agreement. Immediately prior to the consummation of the Rights
Offering, and subject to the other conditions of the Restructuring being
satisfied, such collateral will be released and used by Ms. Chaus to purchase
shares of Common Stock issuable to her upon the exercise of the Rights, in
satisfaction of her Purchase Commitment in connection with the Rights Offering.
See "Business -- Restructuring -- Restructuring of Credit Support Provided by
Ms. Chaus."

         On October 10, 1997, in substitution for the $12.5 Million Guarantee
previously provided by Ms. Chaus, she entered into the October Deposit Letter
pursuant to which she provided $12.5 million in cash collateral and secured the
Bank Debt. The cash collateral was provided from the proceeds of the BNYF-J.
Chaus Loan. Immediately prior to the consummation of the Rights Offering, and
subject to the other conditions to the Restructuring being satisfied, the $12.5
million in cash collateral will be released and used to retire $12.5 million of
the Bank Debt. As a result of such repayment, the Company will become indebted
to Ms. Chaus for $12.5 million. Pursuant to the terms of the Subrogated Loan,
as described above, the Subrogated Loan will, immediately thereafter, be
exchanged by Ms. Chaus for shares of common stock of the Company. See "Business
-- Restructuring -- Restructuring of Credit Support Provided by Ms. Chaus," and
"Business -- Restructuring -- Exchange of the Company's Indebtedness Owed to
Ms. Chaus for Equity Securities."

Subordinated Debt

         The Company has outstanding at June 30, 1997, $26.4 million of
subordinated notes payable to Josephine Chaus (the "Subordinated Notes"). In
connection with the Company's November 1995 public offering (see "--Nautica
License Agreement and Future Financing Requirements"), Josephine Chaus extended
the maturity date of the Subordinated Notes (which were to mature on July 1,
1996) to July 1, 1998. The Company has been unable to pay principal or
interest, with certain exceptions, under the Subordinated Notes as a result of
covenants in the Old Bank Debt Agreement. See Note 7 to Notes to the Company's
Consolidated Financial Statements. The Subordinated Notes will, as part of the
Restructuring, be exchanged for equity. See "Business - Restructuring -
Exchange of the Company's Indebtedness owed to Ms. Chaus for Equity
Securities."



                                       21

<PAGE>


Proposed Restructuring of Indebtedness

         In June 1997, the Company announced a proposed restructuring program
to be implemented by the Company. In September 1997, the disinterested members
of the Board of Directors of the Company unanimously approved the Restructuring
pursuant to which: (i) the Company will seek to raise up to $20 million, but
not less than $12.5 million, of equity through the Rights Offering; (ii)
approximately $40.5 million of the Company's indebtedness to Ms. Chaus,
consisting of $28 million of existing subordinated indebtedness (including 
accrued interest through January 15, 1998) and $12.5 million of indebtedness 
which will be owed to Ms. Chaus, will be converted into Common Stock of the 
Company; (iii) the New Financing Agreement (entered into on October 10, 1997);
and (iv) the Company will implement the Stock Split. In connection with the 
Restructuring, BNYF has agreed that the credit support, described above, 
heretofore provided by Ms. Chaus, will be terminated once the New Financing 
Agreement becomes effective. Consummation of the Restructuring is subject to 
the approval of certain aspects of the Restructuring by the stockholders of 
the Company. Accordingly, until such approval is obtained, there can be no 
assurances that the Restructuring will occur or be consummated. It is presently
contemplated that the Restructuring will be consummated by January 15, 1998. 
See "Business -- Restructuring".

 Future Financing Requirements

         At June 30, 1997, the Company had a working capital deficiency of
$32.7 million. The Company requires the availability of sufficient cash flow
and borrowing capacity to finance its existing product lines and to develop and
market its licensed Nautica product lines. The Company expects to satisfy such
requirements through cash flow from operations, borrowings under the New
Financing Agreement and proceeds from the Rights Offering.

         Although there can be no assurance, the Company believes that if the
Restructuring is consummated, the Company will have sufficient cash flow and
credit availability to meet its needs at least through the end of the fiscal
1998. 

         The foregoing discussion contains forward-looking statements which are
based upon current expectations and involve a number of uncertainties,
including the Company's ability to obtain additional financing, retail market
conditions, consumer acceptance of the Company's products, shareholder approval
of certain matters related to the Restructuring and consummation of the
Restructuring.

INFLATION

         The Company does not believe that the relatively moderate rates of
inflation which recently have been experienced in the United States, where it
competes, have had a significant effect on its net sales or profitability.

SEASONALITY

         Historically, the Company's sales and operating results fluctuate by
quarter, with the greatest sales occurring in the Company's first and third
fiscal quarters. It is in these quarters that the Company's Fall and Spring
product lines, which traditionally have had the highest volume of net sales,
are shipped to customers, with revenues generally being recognized at the time
of shipment. As a result, the Company experiences significant variability in
its quarterly results and working capital requirements. Moreover, delays in
shipping can cause revenues to be recognized in a later quarter, resulting in
further variability in such quarterly results.



                                       22

<PAGE>



NEW ACCOUNTING PRONOUNCEMENTS

         Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
per Share, effective for interim and annual periods ending after December 15,
1997, establishes standards for computing and presenting earnings per share
("EPS") and simplifies the standards for computing EPS currently found in
Accounting Principles Board Opinion No. 15, Earnings per Share, Common stock
equivalents under APB No. 15, with the exception of contingently issuable
shares (shares issuable for little or no cash consideration), are no longer
included in the calculation of primary, or basic EPS. Under SFAS No. 128,
contingently issuable shares are included in the calculation of basic EPS. For
the year ended February 1, 1997, the adoption of SFAS No. 128 would not have
had a material effect on the calculation of EPS.

         SFAS No. 129, Disclosure of Information about Capital Structure,
effective for periods ending after December 15, 1997, establishes standards for
disclosing information about an entity's capital structure. This statement
requires disclosure of the pertinent rights and privileges of various
securities outstanding (stocks, options, warrants, preferred stock, debt and
participation rights) including dividend and liquidation preferences,
participant rights, call prices and dates, conversion or exercise prices and
redemption requirements. Adoption of this statement will have no effect on the
Company as it currently discloses the information required.

         In June 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", ("SFAS 130"). SFAS 130 established standards for reporting
comprehensive income and its components in a full set of general-purpose
financial statements. This Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement,
and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This statement is effective for
fiscal periods beginning after December 15, 1997. The Company has not yet
determined the impact, if any, of adopting this standard.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The financial statements are included herein commencing on page F-1.

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

         None.



                                       23

<PAGE>



                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Information with respect to the executive officers of the Company is
set forth in Part I of this Annual Report on Form 10-K.

         Information with respect to the directors of the Company is
incorporated by reference to the information to be set forth under the heading
"Election of Directors" in the Company's definitive proxy statement relating to
its 1997 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A
(the "Company's 1997 Proxy Statement").

ITEM 11.          EXECUTIVE COMPENSATION.

         Information called for by Item 11 is incorporated by reference to the
information to be set forth under the heading "Executive Compensation" in the
Company's 1997 Proxy Statement.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT.

         Information called for by Item 12 is incorporated by reference to the
information to be set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's 1997 Proxy Statement.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information called for by Item 13 is incorporated by reference to the
information to be set forth under the headings "Executive Compensation" and
"Certain Transactions" in the Company's 1997 Proxy Statement.



                                    PART IV

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

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

         (b) The Company did not file a Form 8-K during the last quarter of its
fiscal year ended June 30, 1997.

         (c)      Exhibits filed herewith are denoted by an (*):

<TABLE>
<CAPTION>
                                                                                      SEQUENTIALLY
                                                                                        NUMBERED
EXHIBIT NO.                                                                              PAGES
-----------                                                                              -----
<S>     <C>                                                                        <C>
3.1      Restated Certificate of Incorporation (the "Restated Certificate") of
         the Company (incorporated by reference to Exhibit 3.1 of the Company's
         Registration Statement on Form S-1, Registration No. 33-5954 (the
         "1986 Registration Statement").

3.11     Amendment dated November 18, 1987 to the Restated Certificate
         (incorporated by reference to Exhibit 3.11 of the Company's
         Registration Statement on Form S-2, Registration No. 33-63317 (the
         "1995 Registration Statement").


                                       24

<PAGE>


                                                                                      SEQUENTIALLY
                                                                                        NUMBERED
EXHIBIT NO.                                                                              PAGES
-----------                                                                              -----
3.12     Amendment dated November 15, 1995 to the Restated Certificate 
         (incorporated by reference to Exhibit 3.12 of Amendment No. 1 to the 
         1995 Registration Statement).

3.2      By-Laws of the Company, as amended (incorporated by reference to
         Exhibit 3.1 of the Company's Form 10-Q for the quarter ended December
         31, 1987).

3.3      Amendment dated September 13, 1994 to the By-Laws (incorporated by
         reference to Exhibit 10.105 of the Company's Form 10-Q for the quarter
         ended September 30, 1994).

10.1     Restricted Stock Purchase Plan (incorporated by reference to Exhibit
         10.1 of the Company's Form 10-K for the year ended June 30, 1987).

10.2     1986 Stock Option Plan, as amended and restated as of January 1, 1987
         (the "1986 Stock Option Plan") (incorporated by reference to Exhibit
         10.2 of the Company's Form 10-K for the year ended July 1, 1989 (the
         "1989 Form 10-K")).

10.3     Amendment No. 1 to the 1986 Stock Option Plan (incorporated by 
         reference to Exhibit 10.3 of the 1989 Form 10-K).

10.4     Amendment No. 2 to the 1986 Stock Option Plan (incorporated by 
         reference to the Company's Proxy Statement for its 1990 Annual Meeting 
         of Stockholders).

10.5     Amendment No. 3 to the 1986 Stock Option Plan (incorporated by 
         reference to the Company's Proxy Statement for its 1991 Annual Meeting 
         of Stockholders).

10.6     Amendment No. 4 to the 1986 Stock Option Plan (incorporated by 
         reference to the Company's Proxy Statement for its 1993 Annual Meeting 
         of Stockholders).

10.7     Amendment No. 5 to the 1986 Stock Option Plan as amended (incorporated
         by reference to the Company's Proxy Statement for its 1995 Annual 
         Meeting of Stockholders).

10.8     Incentive Award Plan (incorporated by reference to Exhibit 10.6 of the
         1986 Registration Statement).

10.9     Agreement dated December 3, 1990 among the Company, Bernard Chaus,
         Josephine Chaus and National Union Fire Insurance Company of
         Pittsburgh, Pa., the Company's directors and officers liability
         carrier (incorporated by reference to Exhibit 10.31 of the Company's
         Form 10-Q for the quarter ended December 31, 1990).

10.10    Employment Agreement, dated July 1, 1991, between the Company and
         Josephine Chaus (incorporated by reference to Exhibit 10.39 of the
         Company's Form 10-K for the year ended June 30, 1991).



                                       25

<PAGE>


                                                                                      SEQUENTIALLY
                                                                                        NUMBERED
EXHIBIT NO.                                                                              PAGES
-----------                                                                              -----
10.11    Employment Agreement dated June 3, 1994 between the Company and Wayne
         Miller (incorporated by reference to Exhibit 10.89 of the Company's
         Form 10-K for the year ended June 30, 1994 (the "1994 Form 10-K")).

10.12    Employment Agreement dated September 1, 1994 between the Company and
         Andrew Grossman with Stock Option Agreement dated as of September 1,
         1994 by and between the Company and Andrew Grossman (incorporated by
         reference to Exhibit 10.90 of the 1994 Form 10-K).

10.13    Employment Agreement dated December 14, 1996 between the Company and
         Michael Winter (incorporated by reference to Exhibit 10.68 of the
         Company's Form 10-Q for the quarter ended December 31, 1995 (the
         "December 1995 Form 10-Q").

10.14    Waiver dated September 23, 1993 to the Restated and Amended Financing
         Agreement between the Company and BNY Financial Corporation (the
         "Financing Agreement") effective July 1, 1992 (incorporated by
         reference to Exhibit 10.82 of the Company's Form 10-K for the year
         ended June 30, 1993 (the "1993 form 10-K).

10.15    Waiver dated November 5, 1993 to the Financing Agreement (incorporated
         by reference to Exhibit 10.83 of the Company's Form 10-Q for the
         quarter ended September 30, 1993).

10.16    Amendment, effective October 1, 1993, to the Financing Agreement
         (incorporated by reference to Exhibit 10-84 of the Company's Form 10-Q
         for the quarter ended December 31, 1993 (the "December 1993 Form
         10-Q")).

10.17    Waiver dated January 13, 1994 to the Financing Agreement (incorporated
         by reference to Exhibit 10.85 of the December 1993 Form 10-Q).

10.18    Waiver dated February 10, 1994 to the Financing Agreement
         (incorporated by reference to Exhibit 10.86 of the December 1993 Form
         10-Q).

10.19    Waiver dated May 4, 1994 to the Financing Agreement (incorporated by
         reference to Exhibit 10.87 of the Company's Form 10-Q for the quarter
         ended March 31, 1994).

10.20    Waiver dated September 20, 1994 to the Financing Agreement
         (incorporated by reference to Exhibit 10.93 of the 1994 Form 10-K).

10.21    Agreement, dated June 15, 1988, between the Company and Bernard Chaus
         and Josephine Chaus, amending the terms of the Company's subordinated
         promissory notes to each of them, each in the principal amount of
         $7,365,000, the form of which was filed as Exhibit 10.13 of the 1986
         Registration Statement (incorporated by reference to Exhibit 10.11 of
         the Company's Form 10-K for the year ended July 2, 1988).



                                       26

<PAGE>


                                                                                      SEQUENTIALLY
                                                                                        NUMBERED
EXHIBIT NO.                                                                              PAGES
-----------                                                                              -----
10.22    Agreement, dated May 17, 1990, between the Company and Bernard Chaus
         and Josephine Chaus amending the terms of the Company's subordinated
         promissory notes to each of them, each in the principal amount of
         $7,365,000, the form of which was filed as Exhibit 10.13 of the 1986
         Registration Statement.

10.23    Agreement, dated February 21, 1991, between the Company and Bernard
         Chaus and Josephine Chaus amending the terms of the Company's
         subordinated promissory notes to each of them, each in the principal
         amount of $7,365,000 (incorporated by reference to Exhibit 10.74 of
         the 1993 Form 10-K).

10.24    Subordinated promissory notes, dated March 12, 1991, between the
         Company and Bernard Chaus and Josephine Chaus, separately, each in the
         amount of $5,000,000 (incorporated by reference to Exhibit 10.75 of
         the 1993 Form 10-K).

10.25    Agreement, dated July 31, 1991, between the Company and the Estate of
         Bernard Chaus and Josephine Chaus amending the terms of the Company's
         subordinated promissory notes to each of them, each in the principal
         amount of $7,365,000 (incorporated by reference to Exhibit 10.76 of
         the 1993 Form 10-K).

10.26    Agreement, dated July 31, 1991, between the Company and the Estate of
         Bernard Chaus and Josephine Chaus amending the terms of the Company's
         subordinated promissory notes to each of them, each in the principal
         amount of $5,000,000 (incorporated by reference to Exhibit 10.77 of
         the 1993 Form 10-K).

10.27    Agreement, dated July 15, 1992, between the Company and the Estate of
         Bernard Chaus and Josephine Chaus amending the terms of the Company's
         subordinated promissory notes to each of them, each in the principal
         amount of $5,000,000 (incorporated by reference to Exhibit 10.78 of
         the 1993 Form 10-K).

10.28    Agreement, dated October 30, 1992, between the Company and the Estate
         of Bernard Chaus and Josephine Chaus amending the terms of the
         Company's subordinated promissory notes to each of them, each in the
         principal amount of $7,365,000 (incorporated by reference to Exhibit
         10.79 of the 1993 Form 10-K).

10.29    Demand Notes, dated June 30, 1993, between the Company and the Estate
         of Bernard Chaus and Josephine Chaus, each in the principal amount of
         $1,520,216 (incorporated by reference to Exhibit 10.80 of the 1993
         Form 10-K).

10.30    Agreement, dated September 21, 1993, between the Company and the
         Estate of Bernard Chaus and Josephine Chaus amending the terms of the
         Company's subordinated promissory notes to each of them, each in the
         principal amount of $7,365,000 (incorporated by reference to Exhibit
         10.81 of the 1993 Form 10-K).



                                       27

<PAGE>


                                                                                      SEQUENTIALLY
                                                                                        NUMBERED
EXHIBIT NO.                                                                              PAGES
-----------                                                                              -----
10.31    Subordinated promissory notes, dated August 1, 1993, between the
         Company and Josephine Chaus and the Estate of Bernard Chaus,
         separately, each in the amount of $208,716 (incorporated by reference
         to Exhibit 10.94 of the 1994 Form 10-K).

10.32    Subordinated promissory note, dated August 1, 1993, between the
         Company and Josephine Chaus in the amount of $1,311,500 (incorporated
         by reference to Exhibit 10.95 of the 1994 Form 10-K.)

10.33    Subordinated Promissory Note, dated August 1, 1993, between the
         Company and the Estate of Bernard Chaus in the amount of $1,000,000
         (incorporated by reference to Exhibit 10.96 of the 1994 Form 10-K).

10.34    Subordinated promissory note, dated August 1, 1993, between the
         Company and the Estate of Bernard Chaus, in the amount of $311,500
         (incorporated by reference to Exhibit 10.97 of the 1994 Form 10-K).

10.35    Subordinated promissory notes, dated December 31, 1993, between the
         Company and Josephine Chaus and the Estate of Bernard Chaus,
         separately, each in the amount of $181,056 (incorporated by reference
         to Exhibit 10.98 of the 1994 Form 10-K).

10.36    Subordinated promissory notes, dated December 31, 1993, between the
         Company and Josephine Chaus and the Estate of Bernard Chaus,
         separately, each in the amount of $412,950 (incorporated by reference
         to Exhibit 10.99 of the 1994 Form 10-K).

10.37    Agreements, dated September 9, 1993, between the Company and Josephine
         Chaus and the Estate of Bernard Chaus, separately, reflecting
         amendments to subordinated promissory notes, each in the principal
         amount of $5,000,000 (incorporated by reference to Exhibit 10.100 of
         the 1994 Form 10-K).

10.38    Agreements, dated October 18, 1993, between the Company and Josephine
         Chaus and the Estate of Bernard Chaus, separately, reflecting
         amendments to subordinated promissory notes, each in the principal
         amount of $1,520,216 (incorporated by reference to Exhibit 10.101 of
         the 1994 Form 10-K).

10.39    Agreements, dated October 18, 1993, between the Company and Josephine
         Chaus and the Estate of Bernard Chaus, separately, reflecting
         amendments to subordinated promissory notes, each in the principal
         amount of $7,365,000 (incorporated by reference to Exhibit 10.102 of
         the 1994 Form 10-K).

10.40    Agreement, dated December 31, 1993, between the Company and Josephine
         Chaus reflecting amendments to a subordinated promissory note in the
         principal amount of $1,311,500 (incorporated by reference to Exhibit
         10.103 of the 1994 Form 10-K).

10.41    Agreement, dated December 31, 1993, between the Company and the Estate
         of Bernard Chaus, reflecting amendments to subordinated promissory
         notes, in the


                                       28

<PAGE>


                                                                                      SEQUENTIALLY
                                                                                        NUMBERED
EXHIBIT NO.                                                                              PAGES
-----------                                                                              -----
         principal amounts of $1,000,000 and $311,500 (incorporated by
         reference to Exhibit 10.104 of the 1994 Form 10-K).

10.42    Agreement, dated November 9, 1994, between the Company and Josephine
         Chaus extending the due dates on subordinated promissory notes
         (incorporated by reference to Exhibit 10.107 of the Company's Form
         10-Q for the quarter ended September 30, 1994 (the "September 1994
         Form 10-Q")).

10.43    Agreement, dated November 9, 1994, between the Company and the Estate
         of Bernard Chaus extending the due dates on subordinated promissory
         notes (incorporated by reference to Exhibit 10.108 of the September
         1994 Form 10-Q).

10.44    Agreement, dated December 19, 1994, assigning the subordinated notes
         from the Estate of Bernard Chaus to Josephine Chaus (incorporated by
         reference to Exhibit 10.110 of the Company's Form 10-Q for the quarter
         ended December 30, 1994 (the "December 1994 Form 10-Q").

10.45    Agreement, dated January 11, 1995, between the Company and Josephine
         Chaus extending the due dates on subordinated promissory notes
         (incorporated by reference to Exhibit 10.111 of the December 1994 Form
         10-Q).

10.46    Agreement, dated November 22, 1994, between the Company and Josephine
         Chaus issuing 32,500 warrants to purchase Common Stock of the Company
         (incorporated by reference to Exhibit 10.112 of the Company's Form
         10-Q for the quarter ended March 31, 1995 (the "March 1995 Form
         10-Q")).

10.47    Agreement, dated November 22, 1994, between the Company and Josephine
         Chaus issuing 206,000 warrants to purchase Common Stock of the Company
         (incorporated by reference to Exhibit 10.113 of the March 1995 Form
         10-Q).

10.48    Agreement, dated November 22, 1994, between the Company and Josephine
         Chaus issuing 338,000 warrants to purchase Common Stock of the Company
         (incorporated by reference to Exhibit 10.114 of the March 1995 Form
         10-Q).

10.49    Agreement, dated November 22, 1994, between the Company and Josephine
         Chaus issuing 640,000 warrants to purchase Common Stock of the Company
         (incorporated by reference to Exhibit 10.115 of the March 1995 Form
         10-Q).

10.50    Waiver dated November 7, 1994, to the Financing Agreement
         (incorporated by reference to Exhibit 10.106 of the September 1994
         Form 10-Q).

10.51    Waiver dated February 10, 1995 to the Financing Agreement
         (incorporated by reference to Exhibit 10.109 of the December 1994 Form
         10-Q).



                                       29

<PAGE>


                                                                                      SEQUENTIALLY
                                                                                        NUMBERED
EXHIBIT NO.                                                                              PAGES
-----------                                                                              -----
10.52    Agreement effective February 21, 1995 (the "Old Bank Debt Agreement")
         between the Company and BNY Financial Corporation restating and
         amending the Financing Agreement (incorporated by reference to Exhibit
         10.116 of the March 1995 Form 10-Q).

10.53    Waiver dated September 14, 1995 to the Old Bank Debt Agreement
         (incorporated by reference to Exhibit 10.5 of the 1995 Registration
         Statement).

10.54    Agreement effective as of September 28, 1995 relating to the Old Bank
         Debt Agreement (incorporated by reference to Exhibit 10.58 of the 1995
         Registration Statement).

10.55    Agreement dated April 28, 1995 between the Company and Josephine Chaus
         extending the due dates on subordinated promissory notes (incorporated
         by reference to Exhibit 10.117 of the March 1995 Form 10-Q).

10.56    Agreement dated September 8, 1995 between the Company and Josephine
         Chaus extending the due dates on subordinated promissory notes
         (incorporated by reference to Exhibit 10.60 of the 1995 Registration
         Statement).

10.57    License Agreement dated as of September 6, 1995 between the Company
         and Nautica Apparel Inc. (incorporated by reference to Exhibit 10.61
         of the 1995 Registration Statement, confidential portions of which
         have been omitted and filed separately with the Commission subject to
         an order granting confidential treatment).

10.58    Agreement dated October 9, 1995, between the Company and Josephine
         Chaus, extending the due dates on subordinated promissory notes and
         clarifying the subordination provision (incorporated by reference to
         Exhibit 10.65 of the 1995 Registration Statement).

10.59    Agreement dated October 9, 1995, between the Company and Josephine
         Chaus, providing the Company with an option to extend the Letter of
         Credit to July 31, 1996 (incorporated by reference to Exhibit 10.66 of
         the 1995 Registration Statement).

10.60    Agreement dated October 27, 1995 between the Company and Josephine
         Chaus extending the due dates on subordinated promissory notes
         (incorporated by reference to Exhibit 10.67 of the Company's Form 10-Q
         for the quarter ended September 30, 1995).

10.61    Agreement dated November 15, 1995 between the Company and Josephine
         Chaus issuing 815,000 warrants to purchase Common Stock of the Company
         (incorporated by reference to Exhibit 10.69 of the December 1995 Form
         10-Q).



                                       30

<PAGE>


                                                                                      SEQUENTIALLY
                                                                                        NUMBERED
EXHIBIT NO.                                                                              PAGES
-----------                                                                              -----
10.62    Agreement dated November 15, 1995 between the Company and Josephine
         Chaus issuing 535,000 warrants to purchase Common Stock of the Company
         (incorporated by reference to Exhibit 10.70 of the December 1995 Form
         10-Q).

10.63    Agreement dated November 15, 1995 between the Company and Josephine
         Chaus issuing 230,000 warrants to purchase Common Stock of the Company
         (incorporated by reference to Exhibit 10.71 of the December 1995 Form
         10-Q).

10.64    Amendment and waiver dated May 9, 1996 to the Financing Agreement
         (incorporated by reference to Exhibit 10.73 of the Company's Form 10-Q
         for the quarter ended March 31, 1996).

10.65    Amendment No. 4 dated September 17, 1996 to the Financing Agreement
         (incorporated by reference to Exhibit 10.65 of the Company's Form 10-K 
         for the year ended June 30, 1996).

10.66    Lease dated June 12, 1996 between the Company and L. H. Charney
         Associates, relating to the Company's facility at 1410 Broadway, New
         York, New York (incorporated by reference to Exhibit 10.66 of the
         Company's Form 10-K for the year ended June 30, 1996).

10.67    Amendment No. 5 dated January 31, 1997 to the Financing Agreement 
         (incorporated by reference to Exhibit 10.67 of the Company's Form 10-Q 
         for the quarter ended December 31, 1996).

10.68    Waiver dated February 4, 1997 to the Financing Agreement (incorporated
         by reference to Exhibit 10.68 of the Company's Form 10-Q for the
         quarter ended December 31, 1996).

10.69    Consulting Agreement dated as of December 31, 1996 between the Company
         and Michael Winter (incorporated by reference to Exhibit 10.69 of the
         Company's Form 10-Q for the quarter ended December 31, 1996).

10.70    Agreement dated February 19, 1997, between the Company and BNY
         Financial Corp. issuing 125,000 warrants to purchase Common Stock of
         the Company (incorporated by reference to Exhibit 10.70 of the
         Company's Form 10-Q for the quarter ended March 31, 1997).

10.71    Amendment No. 6 dated March 21, 1997, to the Financing Agreement 
         (incorporated by reference to Exhibit 10.71 of the Company's Form 10-Q 
         for the quarter ended March 31, 1997).

10.72    Amendment No. 7 dated April 1, 1997, to the Financing Agreement 
         (incorporated by reference Exhibit 10.72 of the Company's Form 10-Q 
         for the quarter ended March 31, 1997).


                                       31

<PAGE>


                                                                                      SEQUENTIALLY
                                                                                        NUMBERED
EXHIBIT NO.                                                                              PAGES
-----------                                                                              -----
10.73    Amendment No. 8 dated April 29, 1997, to the Financing Agreement 
         (incorporated by reference Exhibit 10.73 of the Company's Form 10-Q 
         for the quarter ended March 31, 1997).

10.74    Waiver dated May 5, 1997, to the Financing Agreement (incorporated by
         reference Exhibit 10.74 of the Company's Form 10-Q for the quarter
         ended March 31, 1997).

*10.75   Commitment Letter dated as of June 26, 1997, between the Company and
         BNY Financial Corp.

*10.76   Cash Collateral Deposit Letter dated as of July 23, 1997, between
         Josephine Chaus and BNY Financial Corp.

*10.77   Cash Collateral Deposit Letter dated as of October 10, 1997, between
         Josephine Chaus and BNY Financial Corp.

*10.78   Amended and Restated Cash Collateral Deposit Letter dated as of
         October 10, 1997, between Josephine Chaus and BNY Financial Corp.

*10.79   Second Restated and Amended Financing Agreement dated as of October
         10, 1997, between the Company and BNY Financial Corp.

21       List of Subsidiaries of the Company (incorporated by reference to
         Exhibit 21 of the Company's Form 10-K for the year ended June 30,      
         1995).

*27      Financial Data Schedule.
</TABLE>

--------------
* Filed herewith.


                                       32

<PAGE>



                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, on
October 14, 1997.

                                            BERNARD CHAUS, INC.


                                            By: /s/  Josephine Chaus
                                                -------------------------------
                                                Josephine Chaus
                                                Chairwoman of the Board and
                                                Office of the Chairman

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities indicated, on October 14, 1997.


     SIGNATURE            TITLE
     ---------            -----
 /s/ Josephine Chaus      Chairwoman of the Board and Office of the Chairman
-----------------------
Josephine Chaus

 /s/ Andrew Grossman      Chief Executive Officer and Office of the Chairman
-----------------------
Andrew Grossman

 /s/ Barton Heminover     Vice President -- Corporate Controller and Assistant
-----------------------   Secretary
Barton Heminover          

 /s/ Philip G. Barach     Director
-----------------------
Philip G. Barach

 /s/ S. Lee Kling         Director
-----------------------
S. Lee Kling

 /s/ Harvey M. Krueger    Director
-----------------------
Harvey M. Krueger



                                       33

<PAGE>



                      BERNARD CHAUS, INC. AND SUBSIDIARIES

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

         The following consolidated financial statements of Bernard Chaus, Inc.
         and subsidiaries are included in Item 8:


Report of Independent Auditors......................................... F-2
Consolidated Balance Sheets -- June 30, 1997 and 1996 ................. F-3
Consolidated Statements of Operations -- Years Ended 
  June 30, 1997, 1996 and 1995......................................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency) --
  Years Ended June 30,  1997, 1996 and 1995............................ F-5
Consolidated Statements of Cash Flows -- Years 
  Ended June 30, 1997, 1996 and 1995................................... F-6
Notes to Consolidated Financial Statements............................. F-7

The following consolidated financial statement schedule of Bernard Chaus, Inc.
and subsidiaries is included in Item 14(a)(2):

Schedule II -- Valuation and Qualifying Accounts....................... S-1

         The other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.


                                      F-1

<PAGE>



                         REPORT OF INDEPENDENT AUDITORS


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


We have audited the accompanying consolidated balance sheets of Bernard Chaus,
Inc. and subsidiaries as of June 30, 1997 and June 30, 1996 and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for each of the three years in the period ended June 30, 1997. Our audits also
included the financial statement schedule listed in the Index at item 14(a)(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Bernard Chaus, Inc. and
subsidiaries at June 30, 1997 and June 30, 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.


Deloitte & Touche LLP

New York, New York
September 19, 1997
(October 10, 1997 as to Note 6)



                                      F-2

<PAGE>



                      BERNARD CHAUS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                    (In thousands, except number of shares)

<TABLE>
<CAPTION>
                                                                                  June 30,          June 30,
                                                                                    1997              1996
                                                                                  --------          --------
<S>                                                                              <C>               <C>       
ASSETS
Current Assets
  Cash and cash equivalents ....................................................  $     330         $     247
  Accounts receivable, less allowances of $5,375 and $5,070 ....................      7,451             7,995
  Inventories ..................................................................     23,746            21,256
  Prepaid expenses .............................................................        568               783
                                                                                  ---------         ---------
     Total current assets ......................................................     32,095            30,281
Fixed assets-- net .............................................................      1,295             1,898
Other assets ...................................................................        748               563
                                                                                  ---------         ---------
                                                                                  $  34,138         $  32,742
                                                                                  =========         =========

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
  Notes payable-- bank .........................................................  $  37,756         $  26,077
  Accounts payable .............................................................     19,825            17,435
  Accrued expenses .............................................................      5,393             6,056
  Accrued restructuring expenses ...............................................      1,850               196
                                                                                  ---------         ---------
     Total current liabilities .................................................     64,824            49,764
Subordinated promissory notes ..................................................     26,374            23,588
                                                                                  ---------         ---------
                                                                                     91,198            73,352
STOCKHOLDERS' DEFICIENCY
  Preferred stock, $.01 par value, authorized shares -- 1,000,000; outstanding
     shares -- none
  Common stock, $.01 par value; authorized shares -- 50,000,000; issued shares
     -- 26,899,974 at June 30, 1997 and 26,893,724
     at June 30, 1996 ..........................................................        269               269
  Additional paid-in capital ...................................................     65,463            65,450
  Deficit ......................................................................   (121,312)         (104,849)
  Less:  Treasury stock, at cost-- 622,700 shares ..............................     (1,480)           (1,480)
                                                                                  ---------         ---------
     Total stockholders' deficiency ............................................    (57,060)          (40,610)
                                                                                  ---------         ---------
                                                                                  $  34,138         $  32,742
                                                                                  =========         =========
</TABLE>



          See accompanying notes to consolidated financial statements.



                                      F-3

<PAGE>



                      BERNARD CHAUS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                   Fiscal Year Ended June 30,
                                                      ------------------------------------------------
                                                            1997             1996              1995
                                                            ----             ----              ----
<S>                                                    <C>              <C>               <C>        
Net sales ........................................     $   160,100      $   170,575       $   181,697
Cost of goods sold ...............................         125,422          147,994           149,097
                                                       -----------      -----------       -----------

Gross profit .....................................          34,678           22,581            32,600
Selling, general and administrative expenses .....          40,924           40,162            44,794
Restructuring expenses ...........................           2,250              --              1,200
Unusual expenses .................................             --               --              8,333
                                                       -----------      -----------       -----------
                                                           ( 8,496)         (17,581)          (21,727)

Interest expense .................................          (8,030)          (6,560)           (5,976)
Other income (expense), net ......................             113               56                91
                                                       -----------      -----------       -----------

Loss before provision for income taxes ...........         (16,413)         (24,085)          (27,612)
Provision for income taxes .......................              50              301               301
                                                       -----------      -----------       -----------

Net loss .........................................     $   (16,463)     $   (24,386)      $  ( 27,913)
                                                       ===========      ===========       ===========  

Net loss per share ...............................     $     (0.63)     $     (1.02)      $     (1.40)
                                                       ===========      ===========       =========== 

Weighted average number of common  shares
  outstanding ....................................      26,277,000       23,987,000        19,910,000
                                                       ===========      ===========       =========== 
</TABLE>



          See accompanying notes to consolidated financial statements.



                                      F-4

<PAGE>



                     BERNARD CHAUS, INC. AND SUBSIDIARIES
              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
                    (In thousands, except number of shares)

<TABLE>
<CAPTION>

                                          Common Stock                                          Treasury Stock
                                   --------------------------- Additional                --------------------------
                                   Number of                   Paid-in                      Number of
                                   Shares           Amount      Capital      (Deficit)       Shares        Amount         Total
                                   -------          ------     ---------    -----------  ------------    ----------       -----
<S>             <C>               <C>             <C>           <C>           <C>            <C>          <C>           <C>      
Balance at July 1, 1994           18,975,031      $    190      $40,226       $(52,550)      622,700      $ (1,480)     $(13,614)
Net loss .....................                                                 (27,913)                                  (27,913)
Exchange of notes for
  common stock ...........         1,914,500            19        7,352            --           --             --          7,371
Issuance of warrants .....               --            --         1,136            --           --             --          1,136
Exercise of stock options            183,550             2          639            --           --             --            641
                                  ----------        ------     --------       --------     --------      ---------      --------


Balance at June 30, 1995..        21,073,081           211       49,353        (80,463)      622,700        (1,480)      (32,379)
Net loss ......................                                                (24,386)                                  (24,386)
Net proceeds from issuance
  of common stock..........        5,750,000            57       15,366             --           --             --        15,423
Issuance of warrants .......             --            --           520             --           --             --           520
Exercise of stock options             70,643             1          211                                                      212
                                ------------        ------    ---------      ----------   ----------     ---------      --------


Balance at June 30, 1996          26,893,724           269       65,450       (104,849)      622,700        (1,480)      (40,610)
Net loss ......................                                                (16,463)                                  (16,463)
Exercise of stock options              6,250           --             13                                                      13
                               -------------        ------    ----------  ------------  ------------   -----------     ---------

Balance at June 30, 1997          26,899,974        $  269       $65,463     $(121,312)      622,700       $(1,480)     $(57,060)
                                  ==========        ======       =======     =========       =======       =======      ========
</TABLE>




         See accompanying notes to consolidated financial statements.



                                      F-5

<PAGE>



                     BERNARD CHAUS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)

<TABLE>

                                                                         Year Ended June 30,
                                                               ------------------------------------------
                                                               1997             1996                 1995
                                                               ----             ----                 ----
<S>                                                          <C>              <C>               <C>      
Operating Activities
  Net loss ................................................  $(16,463)        $(24,386)         $(27,913)
  Adjustments to reconcile net loss to net cash used
    in operating activities:
    Depreciation and amortization ........................        865              974             1,305
    Loss on disposal of fixed assets .....................         --               --               358
    (Recovery of) provision for losses on accounts
      receivable .........................................        (20)             (69)              225
    Deferred interest on subordinated promissory
      notes ..............................................      2,786            2,522             2,277
    Non-cash interest expense ............................         --              520             1,307
  Changes in operating assets and liabilities:
      Accounts receivable ................................        564             (280)            9,886
      Inventories ........................................     (2,490)          (5,053)            9,300
      Prepaid expenses and other assets ..................        372              655             2,278
      Accounts payable ...................................      2,390            4,513            (1,368)
      Accrued expenses ...................................       (663)             507            (1,161)
      Accrued restructuring expenses .....................      1,654           (2,608)           (1,275)
                                                             --------        ---------          ---------

Net Cash Used In Operating Activities ....................    (11,005)         (22,705)           (4,781)
                                                             --------        ---------          --------

Investing Activities
  Purchases of fixed assets ..............................      (186)             (480)             (443)
  Purchases of other assets...............................      (418)             ---               ---
                                                             --------       ------------       ---------

Net Cash Used In Investing Activities ....................       (604)            (480)             (443)

Financing Activities
  Net proceeds from (repayments of) short-term bank
    borrowings ...........................................     11,679            7,379            (2,417)
  Net proceeds from issuance of stock ....................         --           15,423                --
  Principal payments on subordinated promissory
    notes ................................................         --               --              (250)
  Proceeds from issuance of subordinated promissory
    notes ................................................         --               --             7,200
  Net proceeds from exercise of options ..................         13              212               641
                                                             --------      -----------       -----------

Net Cash Provided by Financing Activities ................     11,692           23,014             5,174
                                                              -------        ---------        ----------
Increase (Decrease) In Cash And Cash Equivalents .........         83             (171)              (50)
Cash and Cash Equivalents, Beginning of Year .............        247              418               468
                                                             --------       ----------       -----------
Cash and Cash Equivalents, End of Year ...................        330       $      247       $       418
                                                             ========       ==========       ===========

Cash paid for:
  Taxes ..................................................         13               14                 7
  Interest ...............................................      4,822            3,809             2,283
Supplemental schedule of non-cash financing activities:
    Exchange of subordinated promissory notes for
      common stock .......................................         --               --             7,200
    Issuance of warrants for credit support by
      principal stockholder ..............................         --              520             1,136
</TABLE>


         See accompanying notes to consolidated financial statements.



                                      F-6

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  BUSINESS

         Bernard Chaus, Inc. (the "Company") designs, arranges for the
manufacture of and markets an extensive range of women's career and casual
sportswear which are marketed principally under the CHAUS(R), CHAUS SPORT(R),
and NAUTICA(R) trademarks. The Company's products are sold nationwide through
department store chains, specialty retailers and other retail outlets.

         In the latter part of fiscal 1994, the Company initiated a
restructuring plan (the "1994 Restructuring Plan") which entailed several
initiatives to improve its financial position. These initiatives included,
among other things, a $7.2 million cash infusion from Josephine Chaus to fund
the costs associated with hiring Andrew Grossman as its new Chief Executive
Officer, negotiation of a new bank financing agreement with BNY Financial
Corporation ("BNYF"), a wholly owned subsidiary of The Bank of New York,
expiring in February 1999, overhead reductions, centralization of certain
functions, closing of selected outlet stores.

         On November 22, 1995, the Company issued 5,750,000 shares of Common
Stock at a price of $3.00 per share in an underwritten public offering.
Proceeds from the offering, net of commissions and other expenses were $15.4
million.

         In June 1997, the Company announced a proposed restructuring program
to be implemented by the Company. In September 1997, the disinterested members
of the Board of Directors of the Company unanimously approved a restructuring
program (the "Restructuring"). See Notes 6 and 7.

         The Company's business plan requires the availability of sufficient
cash flow and borrowing capacity to finance its existing product lines and the
development and marketing of its new licensed Nautica lines. The Company
expects to satisfy such requirements through cash flow from operations, and its
proposed Restructuring, including the New Financing Agreement.

         Although there can be no assurance that the plans set forth above will
provide the Company with adequate resources, the Company believes that these
initiatives will have a positive impact on future operating results.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:

         The consolidated financial statements include the accounts of the
Company and its subsidiaries. Material intercompany accounts and transactions
have been eliminated.

Use of Estimates:

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




                                      F-7

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Net Loss Per Share:

         Net loss per share has been computed by dividing the applicable net
loss by the weighted average number of common shares outstanding during the
year. Common equivalent shares were not included as their inclusion would have
been antidilutive.

Revenue Recognition:

         Revenues are recorded at the time merchandise is shipped, and with
regard to the outlet stores, at the time when goods are sold to the customer.

Credit Terms:

                  The Company extends credit to its customers based upon an
evaluation of the customer's financial condition and credit history and
generally does not require collateral. The Company has historically incurred
minimal credit losses. At June 30, 1997 and 1996, approximately 62% and 66%, of
the Company's accounts receivables were due from department store customers
owned by four single corporate entities. During fiscal 1997, approximately 63%
of the Company's net sales were made to department store customers owned by
four single corporate entities, as compared to 60% in fiscal 1996 and 55% in
fiscal 1995. Sales to Dillard's Department Stores accounted for 33% of net
sales in fiscal 1997, 29% of net sales in fiscal 1996 and 22% of net sales in
fiscal 1995. Sales to nine department store companies owned by The May
Department Stores Company accounted for approximately 16% of the Company's net
sales in fiscal 1997, 10% of net sales in fiscal 1996 and 15% of net sales in
fiscal 1995. Sales to eight department store companies owned by Federated
Department Stores accounted for approximately 8% of net sales in fiscal 1997,
5% of net sales in fiscal 1996 and 11% of net sales in fiscal 1995. Sales to
two department store customers owned by TJX Companies, Inc. accounted for
approximately 6% of net sales in fiscal 1997, 16% of net sales in fiscal 1996
and 7% of net sales in fiscal 1995.

         The percentages of net sales are based upon stores owned by the four
corporate entities at the end of fiscal 1997. As a result of the Company's
dependence on these customers, they may have the ability to influence the
Company's business decisions. The loss of or significant decrease in business
from any of its major customers would have a material adverse effect on the
Company's financial position and results of operations.


Cash Equivalents:

         Cash equivalents are short-term, highly liquid investments purchased
with an original maturity of three months or less.

Inventories:

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

Fixed Assets:

         Furniture and equipment are depreciated principally using the
straight-line method over eight years. Leasehold improvements are amortized
using the straight-line method over either the term of the lease or the
estimated useful



                                      F-8

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

life of the improvement, whichever period is shorter. Computer software is
depreciated using the straight-line method over three years.

Other Assets:

         "In store" fixtures and signs are depreciated using the straight line
method over five years.

Foreign Currency Transactions:

         The Company negotiates substantially all of its purchase orders with
foreign manufacturers in United States dollars. The Company considers the
United States dollar to be the functional currency of its overseas
subsidiaries. All foreign currency gains and losses are recorded in the
Consolidated Statement of Operations.

Income Taxes:

         The Company records income taxes in accordance with Financial
Accounting Standards Board Statement SFAS No. 109, "Accounting for Income
Taxes". Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to enter into the determination of
taxable income (loss).

Fair Value of Financial Instruments

         For financial instruments, including cash and cash equivalents,
accounts receivable and payable, accruals and notes payable -- bank, it was
assumed that the carrying amounts approximated fair value due to their short
maturity.

         It is not practicable to determine the fair value of the subordinated
debt with the principal shareholder as alternative sources of financing have
not been evaluated by the Company.

Effect of Accounting Pronouncements Not Yet Adopted:

         Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
per Share, effective for interim and annual periods ending after December 15,
1997, establishes standards for computing and presenting earnings per share
("EPS") and simplifies the standards for computing EPS currently found in
Accounting Principles Board Opinion No. 15, Earnings per Share, Common stock
equivalents under APB No. 15, with the exception of contingently issuable
shares (shares issuable for little or no cash consideration), are no longer
included in the calculation of primary, or basic EPS. Under SFAS No. 128,
contingently issuable shares are included in the calculation of basic EPS. For
the year ended February 1, 1997, the adoption of SFAS No. 128 would not have
had a material effect on the calculation of EPS.

         SFAS No. 129, Disclosure of Information about Capital Structure,
effective for periods ending after December 15, 1997, establishes standards for
disclosing information about an entity's capital structure. This statement
requires disclosure of the pertinent rights and privileges of various
securities outstanding (stocks, options, warrants, preferred stock, debt and
participation rights) including dividend and liquidation preferences,
participant rights, call prices and dates, conversion or exercise prices and
redemption requirements. Adoption of this statement will have no effect on the
Company as it currently discloses the information required.




                                      F-9

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         In June 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", ("SFAS 130"). SFAS 130 established standards for reporting
comprehensive income and its components in a full set of general-purpose
financial statements. This Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement,
and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This statement is effective for
fiscal periods beginning after December 15, 1997. The Company has not yet
determined the impact, if any, of adopting this standard.


3. INVENTORIES

Inventories consist of:
                                                 JUNE 30,         JUNE 30,
                                                   1997             1996
                                                 -----------     -----------
                                                          (IN THOUSANDS)
          Finished goods ..................        $19,981           18,151
          Work-in-process .................          1,027            1,471
          Raw materials ...................          2,738            1,634
                                                   -------          -------
                                                   $23,746          $21,256
                                                   =======          =======

Inventories include merchandise in transit (principally finished goods) of
approximately $8.5 million at June 30, 1997 and $9.0 million at June 30, 1996.




                                     F-10

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


4. FIXED ASSETS

Fixed assets at cost, net of accumulated depreciation and amortization, consist
of:

                                                      JUNE 30,         JUNE 30,
                                                       1997             1996
                                                   ----------       --------
                                                          (IN THOUSANDS)
     Furniture and equipment ....................    $10,233          $10,234
     Leasehold improvements .....................      7,955            8,118
                                                      ------          -------
                                                     $18,188          $18,352
     Less accumulated depreciation and 
        amortization ............................     16,893           16,454
                                                     -------          -------
                                                     $ 1,295          $ 1,898
                                                     =======          =======

5.  INCOME TAXES

Significant components of the Company's net deferred tax assets are as follows:

<TABLE>
<CAPTION>
                                                                    JUNE 30,          JUNE 30,
                                                                     1997              1996
                                                                   ------------      ----------
                                                                             (IN THOUSANDS)
<S>                                                               <C>               <C>     
      Deferred tax assets:
        Net operating loss carryforwards ...........................$ 42,500          $ 38,200
        Costs capitalized to inventory for tax purposes............    1,300               900
        Accrued interest, subordinated debt/warrants .............     4,000             3,000
        Book over tax depreciation ................................... 2,000             1,900
        Sales allowances not currently deductible ..................   2,100             1,600
        Reserves and other items not currently deductible .......      1,700             1,200
                                                                   ---------          --------
                                                                      53,600            46,800
      Valuation allowance for deferred tax assets .................  (53,600)          (46,800)
                                                                   ---------          --------
      Net deferred tax asset ...................................... $      0          $      0
                                                                    ========          =========
</TABLE>

There was a change in the valuation allowance for the year ended June 30, 1997
of $6.8 million.
<TABLE>
                                                                              FISCAL YEAR ENDED JUNE 30,
                                                                              --------------------------
                                                                       1997              1996              1995
                                                                   ------------      ------------      --------
                                                                                    (IN THOUSANDS)
<S>                                                               <C>            <C>                <C>  
        Benefit for federal
          income taxes at the statutory rate of
          35.0% in each of 1997, 1996 and 1995  ............          ($5,694)       ($8,430)        ($9,665)
        State and local income taxes
          net of federal tax benefit .......................               50            301             301
        Executive compensation in excess of
          amount deductible for tax purposes ...............               --             --           2,100
        Other ..............................................               51             35              35
        Effect of unrecognized federal tax loss
          carryforwards ....................................            5,643          8,395           7,530
                                                                    ---------       ---------        -------
        Provision for income taxes .........................        $      50       $    301         $   301
                                                                    =========       =========        =======
</TABLE>




                                     F-11

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         At June 30, 1997, the Company has a federal net operating loss
carryforward for income tax purposes of approximately $101 million, which will
expire between 2006 and 2011.

6.  FINANCIAL AGREEMENT

         The Company and BNYF, a wholly owned subsidiary of The Bank of New
York, entered into a financing agreement in July 1991, which was amended and
restated effective as of February 21, 1995 and further amended, effective as of
September 28, 1995 (the "September 1995 Amendment"), May 9, 1996 (the "May 1996
Amendment"), September 17, 1996 (the "September 1996 Amendment"), January 31,
1997 (the "January 1997 Amendment"), March 21, 1997 (the "March 1997
Amendment"), and April 1, 1997 (the "April 1, 1997 Amendment") and April 29,
1997 (the "April 29, 1997 Amendment")(collectively, the "Old Bank Debt
Agreement"). The Old Bank Debt Agreement provided the Company with a $72
million credit facility for letters of credit and direct borrowings, with a
sublimit for loans and advances ranging between $40.0 and $58.0 million. The
amount of financing available was based upon a formula incorporating eligible
receivables and inventory, cash balances, other collateral and permitted
overadvances, all as defined in the Old Bank Debt Agreement. At June 30, 1997,
the Company had availability of approximately $2.1 million (inclusive of
overadvance availability) under the Old Bank Debt Agreement. The Company's
obligations under the Old Bank Debt Agreement were secured by the Company's
accounts receivable, inventory and trademarks.

         The Old Bank Debt Agreement contained certain financial covenants
including covenants limiting the Company's tangible net worth deficit and
working capital deficiency. In addition to a cap on personal property leases,
the Company was also prohibited from declaring or paying dividends or making
other distributions on its capital stock, with certain exceptions. During the
third quarter of fiscal year 1996, the Company was not in compliance with
certain financial covenants. BNYF had waived such noncompliance.

         Interest on direct borrowings was payable monthly at an annual rate
equal to the higher of (i) The Bank of New York's prime rate (8.25% at June 30,
1997) plus 0.5% (The Bank of New York prime rate plus 1.5% in the event the
Company's overadvance position exceeded the allowable overadvances) or (ii) the
Federal Funds Rate in effect plus 1% (Federal Funds Rate in effect plus 2% in
the event the Company's overadvance position exceeded the allowable
overadvances). There was a commitment fee of 0.375% of the unused portion of
the line, payable monthly, and letter of credit fees equal to 0.125% of the
outstanding letter of credit balance, payable monthly. The Old Bank Debt
Agreement required the payment of minimum service charges of $0.6 million per
annum. In connection with the May 1996 Amendment, BNYF was paid a fee of
$25,000, and additional fees of $10,000 per month through December 1996 were
provided for, with BNYF agreeing to provide specified levels of overadvances up
to $10.0 million through the same period. In connection with the September 1996
Amendment, BNYF agreed to provide overadvances of up to $15.0 million through
June 1997. BNYF could have terminated the Old Bank Debt Agreement after
February 20, 1999, upon 60 days' written notice to the Company. The weighted
average interest rate was 6.7%, 8.9% and 9.0% for the years ended June 30,
1994, 1995, and 1996, respectively.

         Josephine Chaus has arranged for the Letter of Credit in various
amounts since April 1994 in return for which BNYF has increased the
availability under the Old Bank Debt Agreement. In consideration for credit
support provided by Ms. Chaus to the Company prior to February 1995, Ms. Chaus
was granted 1,216,500 warrants (the "1994 Warrants"), exercisable through
November 22, 1999, at prices ranging between $2.25 to $4.62 per share. In
February 1995 Josephine Chaus increased the Letter of Credit to $10.0 million
and extended its term to October 31, 1995 (the "February 1995
Increase/Extension"). In addition, in February 1995, Mrs. Chaus provided a $5.0
million personal guarantee (the "$5.0 Million Guarantee"), to be in effect
during the Old Bank Debt Agreement's term. In September 1995, Ms. Chaus further
extended the term of the Letter of Credit to January 31, 1996 (the



                                     F-12

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

"September 1995 Extension"). In consideration of the February 1995
Increase/Extension, the $5.0 Million Guarantee and the September 1995
Extension, a special committee consisting of disinterested members of the Board
of Directors of the Company (the "Special Committee") authorized the issuance
of warrants (the "1995 Warrants") to purchase an aggregate of 1,580,000 shares
of Common Stock at prices ranging between $4.05 and $6.75 per share. The
issuance of the 1995 Warrants was approved at the 1995 Annual Meeting of
Stockholders. Ms. Chaus received warrant compensation for her provision of the
$5.0 Million Guarantee only through October 31, 1995. Thereafter, for each
three month period of the $5.0 Million Guarantee, she has received cash
compensation of $50,000, as authorized by the Special Committee. The issuance
of the 1994 Warrants, the warrants for the February 1995 Increase/Extension and
the warrants for the $5.0 Million Guarantee were recorded in fiscal 1995 at a
value of $1.1 million, included as a charge to interest expense with a
corresponding increase to additional paid-in capital. The issuance of the
warrants for the September 1995 Extension was recorded in the second quarter of
fiscal 1996 at a value of $0.2 million, included as a charge to interest
expense with a corresponding increase to additional paid-in capital.

         In connection with the September 1995 Amendment, Ms. Chaus provided
the Company with an option to further extend the Letter of Credit to July 31,
1996 (the "July 1996 Option"), subject to the consummation of the Company's
November 1995 public offering of Common Stock. In January 1996, the Company
exercised the July 1996 Option to extend the Letter of Credit to July 31, 1996
(the "July 1996 Extension"). In consideration of her provision of the July 1996
Extension, the Special Committee authorized the issuance to Ms. Chaus, of
warrants (the "1996 Warrants") to purchase an aggregate of 682,012 shares of
Common Stock at a price of $4.20 per share. The issuance of the 1996 Warrants
was approved by the stockholders of the Company at the 1996 Annual Meeting of
Stockholders. The issuance of the 1996 Warrants ($0.3 million) was recorded in
the third quarter of fiscal 1996, at a value of $0.3 million and was included
as a charge to interest expense with a corresponding increase to additional
paid-in capital.

         In connection with the May 1996 Amendment, Ms. Chaus agreed to extend
the Letter of Credit to January 31, 1997 (the "January 1997 Extension") and
additionally provided a collateralized increase of $5.0 million in the $5.0
Million Guarantee to $10.0 million (the "$10.0 Million Guarantee"). In
connection with the January 1997 Extension, the Special Committee approved the
payment of cash compensation to Ms. Chaus of $100,000 for each three month
period of the Letter of Credit as extended from July 31, 1996 to January 31,
1997. For her provision of the $10.0 Million Guarantee, the Special Committee
approved an increase in the amount of cash compensation payable to Ms. Chaus
for her guaranty, to $100,000 for each three month period of the $10.0 Million
Guarantee.

         In connection with the September 1996 Amendment, Ms. Chaus agreed to
extend the Letter of Credit to July 31, 1997 (the "July 1997 Extension") and
increase the amount of the $10.0 Million Guarantee by $2.5 million to $12.5
million (the "$12.5 Million Guarantee") and fully collateralize the $12.5
Million Guarantee. In connection with the July Extension, the Special Committee
approved the payment of cash compensation to Ms. Chaus of $100,000 for each
additional three month period of the Letter of Credit as extended from January
31, 1997 to July 31, 1997. For her provision of the $12.5 Million Guarantee,
the Special Committee approved an increase in the amount of cash compensation
payable to Ms. Chaus for her guaranty, to $125,000 for each three month period
of the $12.5 Million Guarantee.

         The senior secured bank debt owing to BNYF by the Company, as of
September 30, 1997 (the "Bank Debt") consisted of approximately (i) $57.5
million in respect of direct borrowings, and (ii) $17.5 million in respect of
letters of credit.




                                     F-13

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         In the Restructuring, the $57.5 million in respect of direct
borrowings by the Company has been and will be refinanced as follows: (i) $15
million has been refinanced by BNYF pursuant to the terms of the New Term Loan;
(ii) approximately $20 million has been refinanced under the terms of the New
Revolving Facility; (iii) $12.5 in respect of borrowings previously guaranteed
by Ms. Chaus will be satisfied in full out of proceeds from a loan made by BNYF
to Ms. Chaus (the "BNYF--J. Chaus Loan"), and Ms. Chaus shall become subrogated
to the rights of BNYF with respect to such loan amount (the "Subrogated Loan")
until the Subrogated Loan is exchanged for equity, as set forth above; and (iv)
$10 million will be satisfied in full out of proceeds received from the Rights
Offering pursuant to the Purchase Commitment.

         Under the terms of the Restructuring the $17.5 million of Bank Debt
owing to BNYF in respect of letters of credit will be refinanced by BNYF
pursuant to the terms of the New Financing Agreement.

         The approximately $75 million of Bank Debt that has been refinanced
as part of the Restructuring, has been refinanced under two facilities that are
part of the New Financing Agreement: (i) the New Revolving Facility which is a
$66 million five-year revolving credit line with a $20 million sublimit for
letters of credit, and (ii) the New Term Loan which is a $15 million term loan
facility. Each facility will mature on December 31, 2002. The Company's
obligations under the New Financing Agreement are secured by a first priority
lien on substantially all of the Company's assets, including the Company's
accounts receivable, inventory and trademarks.

         Interest on the New Revolving Facility accrues at 1/2 of 1% above the
Prime Rate and is payable on a monthly basis, in arrears. Interest on the New
Term Loan accrues at an interest rate ranging from 1/2 of 1% above the Prime
Rate to 1 1/2% above the Prime Rate, which interest rate will be determined,
from time to time, based upon the Company's availability under the New
Revolving Facility. With the exception of warrants issued to BNYF (as discussed
below), the Company's execution of the New Financing Agreement did not require
the payment of any commitment, closing, administration or facility fees. The 
New Financing Agreement provides for service charges and letter of credit fees 
on substantially the same terms as those existing under the Company's Old Bank 
Debt Agreement with BNYF.

         Amortization payments in the amount of $250,000 are payable quarterly
in arrears in connection with the New Term Loan. The first amortization payment
is due on March 31, 1998. A balloon payment in the amount of $10.25 million is
due on December 31, 2002. In the event of the earlier termination by the
Company of the New Financing Agreement, the Company will be liable for
termination fees initially equal to $2.8 million, and declining to $2.2 million
after October 8, 2000.

         BNYF's existing warrants to purchase 125,000 shares of Common Stock
(the "Existing BNYF Warrants") were extinguished, and BNYF received new
warrants (the "New BNYF Warrants") to purchase (i) 375,000 shares of the
Company's Common Stock, with an exercise price of $1.0625 per share, the 
closing price per share of the Common Stock on June 26, 1997, the date on 
which BNYF and the Company executed a commitment letter (the "Commitment 
Letter") describing the terms and conditions of the Restructuring and (ii) 
125,000 shares of the Company's Common Stock, with an exercise price equal to 
the thirty day average trading price on the New York Stock Exchange beginning 
on the date of the consummation of the Rights Offering.

         The New Financing Agreement amends certain provisions of the Old Bank
Debt Agreement and provides for maximum availability of $81 million, and
overadvances of up to $12.8 million. The New Financing Agreement also amends
certain financial covenants contained in the Old Bank Debt Agreement. The New



                                     F-14

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Financing Agreement provides for certain additional events of default, among
which are the default by Ms. Chaus under the Bank Debt Put (as defined below),
and the failure by the Company to close all of its retail outlets by the end of
January 1988.

         As an inducement to BNYF to enter into the New Financing Agreement,
Ms. Chaus has agreed with BNYF that she will purchase, at the option of BNYF, a
$2.5 million junior participation in the New Financing Agreement between the
Company and BNYF, in the event that (i) an event of default occurs under the
New Financing Agreement prior to May 15, 1998, or (ii) the Rights Offering 
is not consummated prior to May 15, 1998 (the "Bank Debt Put").

         Ms. Chaus previously entered into a deposit letter dated July 23, 1997
(the "July Deposit Letter") pursuant to which she provided $10 million in cash
collateral to secure the Bank Debt in substitution for the letter of credit
previously provided by her. The July Deposit Letter was amended on October 10,
1997 to provide that the $10 million in cash collateral shall be held as
collateral to secure indebtedness under the New Financing Agreement.
Immediately prior to the consummation of the Rights Offering, and subject to
the other conditions of the Restructuring being satisfied, such collateral will
be released and used by Ms. Chaus to purchase shares of Common Stock issuable
to her upon the exercise of the Rights, in satisfaction of her Purchase
Commitment in connection with the Rights Offering. The Company will use the
proceeds from the Purchase Commitment to retire $10 million of Bank Debt.

         On October 10, 1997, in substitution for the personal guaranty of
$12.5 million of Bank Debt (the "$12.5 Million Guarantee") previously provided
by Ms. Chaus, she entered into a deposit letter (the "October Deposit Letter")
pursuant to which she provided $12.5 million in cash collateral to secure the
Bank Debt. The cash collateral was provided from the proceeds of the BNYF--J.
Chaus Loan. Immediately prior to the consummation of the Rights Offering, and
subject to the other conditions to the Restructuring being satisfied, the $12.5
million in cash collateral will be released and shall be used to retire $12.5
million of the Bank Debt. As a result of such repayment, the Company will
become indebted to Ms. Chaus for $12.5 million. Pursuant to the terms of the
Subrogated Loan, as described above, the Subrogated Loan will, immediately
thereafter, be exchanged by Ms. Chaus for shares of Common Stock of the
Company.

         Pursuant to the New Financing Agreement, in the event that the Rights
Offering is not consummated by May 15, 1998, the cash collateral held under the
October Deposit Letter and the July Deposit Letter will be applied by BNYF to
retire $22.5 million of the Bank Debt.

         In connection with the Restructuring, Ms. Chaus has agreed in
principle to relinquish all of her rights in and to her existing warrants, and
such warrants, to the extent they have not been exercised, shall be
extinguished.

7.       RESTRUCTURING

         In June 1997, the Company announced a proposed restructuring program
to be implemented by the Company. In September 1997, the disinterested members
of the Board of Directors of the Company unanimously approved the restructuring
program (the "Restructuring") pursuant to which:

         (i)      the Company will seek to raise up to $20 million, but not
                  less than $12.5 million, of equity through a rights offering
                  (the "Rights Offering");

         (ii)     approximately $40.5 million of the Company's indebtedness to 
                  Ms. Chaus, consisting of $28 million of existing subordinated 
                  indebtedness (including accrued interest through January 15,
                  1998) and $12.5 million of indebtedness



                                     F-15

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  which will be owed to Josephine Chaus ("Ms. Chaus" or "J.
                  Chaus"), will be converted into Common Stock of the Company 
                  (the "Conversion Commitment");

         (iii)    a new revolving credit facility (the "New Revolving
                  Facility"), and a new term loan facility (the "New Term
                  Loan", and together with the New Revolving Facility, the "New
                  Financing Agreement") was entered into with BNY Financial
                  Corporation ("BNYF"), the Company's current working capital
                  lender, on October 10, 1997; and

         (iv)     the Company will implement a 1-for-10 reverse stock split 
                  (the "Stock Split").

         Under the proposed Restructuring, the Company's existing trade claims,
which are primarily held by the Company's customers and vendors, would be
unaffected.

         In connection with the Restructuring, (i) Andrew Grossman, the
Company's Chief Executive Officer, has agreed in principle to relinquish all of
his rights to his existing options, to the extent that they have not been
exercised prior to the consummation of the Restructuring, and (ii) Ms. Chaus
has agreed in principle to relinquish all of her rights to her existing
warrants, to the extent that they have not been exercised prior to the
consummation of the Restructuring.

         The Company currently intends that employees holding options will be
offered the right to exchange such options for new options. See Note 9.

         Consummation of the Restructuring is subject to (i) the approval by 
the Company's stockholders of (a) the Stock Split, (b) the issuance of 
10,510,910 shares of Common Stock of the Company to J. Chaus in connection 
with the Conversion Commitment, (c) the sale by the Company of 6,988,635 shares
to J. Chaus in connection with the Purchase Commitment (as defined below), and 
(d) the sale by the Company of up to 1,747,160 shares to J. Chaus in connection
with the Standby Commitment (as defined below), and (ii) the absence of any 
litigation or governmental action challenging or seeking to enjoin the Rights 
Offering which in the sole judgment of the Company makes it inadvisable to 
proceed with the Rights Offering. Accordingly, until such conditions are 
satisfied, there can be no assurance that the Restructuring will be consummated.
It is presently contemplated that the Restructuring will be consummated by 
January 15, 1998. Ms. Chaus, Chairwoman of the Board, a principal stockholder 
of the Company, and the owner of a majority of the Company's Common Stock, has 
advised the Company that she intends to vote her shares in favor of all matters
relating to the Restructuring, thereby assuring stockholder approval of such 
matters.

         The Company recorded a $2.3 million restructuring charge in the fourth
quarter of fiscal 1997 for costs to be incurred in connection with the
Restructuring, which was announced in June 1997. The costs incurred relate to
the closing of the Company's outlet stores (such as professional fees, lease
termination expenses, and write-off of fixed assets), in addition to
professional fees and other expenses associated with the implementation of the
Company's proposed Restructuring. In addition, the Company recorded a $1.1
million charge to cost of goods sold related to the liquidation of the retail
outlet store inventory.

         The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997 and the unaudited pro forma consolidated
capitalization of the Company after giving effect to the Restructuring as if
the Restructuring had occurred at June 30, 1997.




                                     F-16

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

	The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997 and the unaudited pro forma consolidated
capitalization of the Company after giving effect to the Restructuring if
certain items had occurred at June 30, 1997. Such items include (i) the
subordinated indebtedness owed and to be owed to Josephine Chaus, being
converted by J. Chaus into Common Stock of the Company, (ii) as part of the 
Rights Offering, the Company raising at least $12.5 million of equity (less
expenses of the Rights Offering of $.5 million) from the principal stockholder 
and/or other stockholders, (iii) $12.5 million in respect of borrowings 
previously guaranteed by Ms. Chaus being satisfied in full out of proceeds 
from the BNYF--J. Chaus Loan, and (iv) obtaining the New Term Loan in the 
amount of $15 million.

                                                 As of
                                             June 30, 1997
                                  --------------------------------------
                                     Actual                  Pro forma
                                     ------                  ---------
Total Debt
   Bank Debt                       $  37,756                 $      -
   Subordinated Promissory Notes      26,374                        -
   Term Loan-Bank                    -                         15,000
                                  ----------                 --------
         Total debt                   64,130                   15,000
Total stockholders' deficiency       (57,060)                  (6,186)
                                  -----------                ---------
         Total capitalization     $    7,070                 $  8,814
                                  ==========                 ========

         Although there can be no assurance, the Company believes that it 
will have adequate resources after the consummation of the Restructuring.

8.       SUBORDINATED PROMISSORY NOTES

         The Company had outstanding at June 30, 1997, $26.4 million, including
accrued interest at 12% per annum, of subordinated promissory notes payable to
Josephine Chaus, certain of which were originally issued on June 30, 1986 and
the remainder of which were issued in February and March 1991 (the
"Subordinated Notes"). The Company has been prohibited from making payments of
principal or interest on the Subordinated Notes since 1993 (with the exception
of principal payments of approximately $0.5 million, $0.3 million and $0.3
million in November 1993, February 1994 and August 1994, respectively) as a
result of restrictive covenants under the Old Bank Debt Agreement. In
connection with the public offering, Ms. Chaus extended the maturity date of
the Subordinated Notes (which were to mature on July 1, 1996) to July 1, 1998.

         In September 1994, Josephine Chaus loaned $7.2 million to the Company
in exchange for subordinated promissory notes bearing interest at 12% per
annum. Proceeds of such cash infusion were used for costs and associated
expenses related to the signing of the Company's new chief executive officer.
In November 1994, in order to provide additional equity to the Company, to
enhance the Company's balance sheet and to accommodate the bank, Josephine
Chaus subsequently agreed, at the request of the Special Committee, to exchange
such notes for shares of Common Stock of the Company on terms determined by a
Special Committee of the Board of Directors. In November 1994, following
stockholder approval, Josephine Chaus exchanged such notes, including accrued
interest thereon ($.2 million), for 1,914,500 shares of Common Stock (based
upon a purchase price of $3.85 per share). The purchase price was determined by
the Special Committee and the purchase was approved by the Company's
stockholders at the November 22, 1994 Annual Meeting of Stockholders.

         In connection with the Restructuring, Ms. Chaus has agreed to convert
all indebtedness owed to her by the Company into Common Stock. See Notes 6 
and 7.




                                     F-17

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. EMPLOYEE BENEFIT PLANS

Pension Plan:

         Pursuant to a collective bargaining agreement, all of the Company's
union employees are covered by a defined benefit pension plan. Pension expense
amounted to approximately $53,000, $105,000 and $69,000 in fiscal 1995, 1996
and 1997, respectively. As of December 31, 1996, the actuarial present value of
the accumulated vested and non-vested plan benefits amounted to $0.5 million
and net assets available for benefits amounted to $0.5 million. Actuarial
assumptions related to weighted average interest rate and weighted average rate
of return were 8.0% and 8.5%, respectively, for each of 1995, 1996 and 1997.

Savings Plan:

         The Company has a savings plan (the "Savings Plan") under which
eligible employees may contribute a percentage of their compensation and the
Company (subject to certain limitations) will match 50% of the employee's
contribution. Company contributions will be invested half in the Common Stock
of the Company and half in investment funds selected by the participant and are
subject to vesting provisions of the Savings Plan. Expense under the Savings
Plan was approximately $0.2 in each of fiscal 1995, 1996 and 1997. An aggregate
of 100,000 shares of Common Stock has been reserved for issuance under the
Savings Plan.

Restricted Stock Plan:

         In November 1987, the Company's stockholders approved the adoption of
a restricted stock plan (the "Restricted Plan"). Pursuant to the Restricted
Plan, 250,000 restricted shares of the Company's Common Stock were reserved for
allocation to key employees of the Company. The restrictions on the shares
terminate as to 25 percent of such shares on each anniversary of their date of
allocation. As of June 30, 1997, no restricted shares have been granted under
this plan.

Stock Option Plan:

         Pursuant to the Company's 1986 Stock Option Plan, as amended (the
"Option Plan"), the Company may grant to eligible individuals incentive stock
options, as defined in the Internal Revenue Code, and non-incentive stock
options. At the annual meeting of stockholders in November 1993, the
stockholders approved the increase in the number of shares of Common Stock with
respect to which options may be granted from 1,500,000 shares to 2,500,000
shares. No stock options may be granted subsequent to 2006 and the exercise
price may not be less than 100% of the fair market value on the date of grant
for incentive stock options and 85% of the fair market value on the date of
grant for non-incentive stock options.

         In connection with the Restructuring, the Company currently intends
that employees holding options will be offered the right to exchange such
options for new options. 


                                     F-18

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Grossman Option Plan:

         At the annual meeting of stockholders in November 1994, the
stockholders approved the issuance of options for the Company's new Chief
Executive Officer (the "Grossman Option Plan") to purchase 3,000,000 shares of
Common Stock. Of this amount, 1,500,000 options were granted in September 1994
(and included in the followingtable), and the balance were granted in
September 1995 in connection with the extension of the term of his employment
agreement. The Company and Mr. Grossman are currently negotiating amendments
to his employment agreement. See Note 11.


Total Options Reserved for Issuance

         At June 30, 1997, a total of approximately 4,936,000 shares of Common
Stock were reserved for issuance under the Stock Option, Savings and Grossman
Option Plans.

                                                    NON-INCENTIVE
                                                    STOCK OPTIONS
                                       ----------------------------------------

                                          NUMBER               EXERCISE
                                        OF SHARES              PRICE RANGE
                                        ---------              -----------

Outstanding at July 1, 1994             1,419,148              $1.875--$9.375
Options granted                         2,186,688              $2.250--$4.750
Options canceled                         (555,428)             $2.000--$9.375
Options exercised                        (183,550)             $2.000--$4.750
                                       ----------              --------------

Outstanding at June 30, 1995            2,866,858              $1.875--$4.875
Options granted                         2,064,000              $3.625--$5.875
Options canceled                         (687,201)             $1.875--$5.875
Options exercised                        ( 70,643)             $1.875--$4.880
                                      -----------              --------------

Outstanding at June 30, 1996            4,173,014              $1.875--$5.625
Options granted                            95,000              $2.375--$3.125
Options canceled                          (67,006)             $2.000--$4.880
Options exercised                          (6,250)             $2.000--$2.000
                                      ------------             --------------

Outstanding at June 30, 1997            4,194,758              $1.875--$5.625
                                      ============             ==============

         The stock options become exercisable in annual 25% increments
commencing one year after issuance. As of June 30, 1997 options to purchase
approximately 1,205,000 shares were exercisable.

Stock Based Compensation:

         All stock options are granted at fair market value of the Common Stock
at grant date. The weighted average fair value of stock options granted during
1997 and 1996 was $1.93 and $3.29, respectively. The fair value of each option
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for the grants in 1996:
risk-free interest rate of 6.38%; expected dividend yield of 0%; expected life
of 3.05 years; and expected volatility of 97.25%. The outstanding stock options
at June 30, 1997 have 

                                     F-19

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

a weighted average contractual life of 7.68 years. The number of stock options
exercisable at June 30, 1997 was 4,219,758. These options have a weighted
average exercise price of $3.85 per share.

         The Company accounts for the stock option plans in accordance with
the Accounting Principles Board Opinion No. 25, under which no compensation
cost is recognized for stock option awards. Had compensation cost been
determined consistent with Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's pro
forma net loss for 1997 and 1996 would have been $19,658 and $26,469,
respectively. The Company's pro forma net loss per share for 1997 and 1996
would have been $0.73 and $1.10, respectively. Because the SFAS 123 method of
accounting has not been applied to options granted prior to 1995, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.

10.      1994 RESTRUCTURING PLAN AND UNUSUAL EXPENSES

         Relative to the 1994 Restructuring Plan discussed in Note 1, during
the first fiscal quarter of 1995 the Company recorded restructuring expenses of
$1.2 million. These costs primarily related to employee severance as the
Company continued to reduce overhead costs.

         In January 1995, the Company signed favorable early termination
agreements with the landlords of certain outlet stores, for which the Company
had previously provided a reserve as part of its restructuring expenses at June
30, 1994. As a result, the Company was able to reduce its restructuring
expenses by approximately $1.3 million. The benefit of this reduction was
offset, however, by certain additional expenses provided by the Company related
to its retail and overseas operations.

         During the first fiscal quarter of 1995, the Company recorded unusual
expenses of $7.8 million primarily related to costs associated with the signing
of the Company's new Chief Executive Officer. In the fourth quarter of fiscal
1995, the Company recorded an additional $0.5 million related to certain legal
matters.


11. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

Lease Obligations:

         The Company leases showroom, distribution and office facilities,
retail outlet facilities and equipment under various noncancellable operating
lease agreements which expire through 2006. In connection with the
Restructuring, the Company will close all of its retail outlet stores (other
than the retail outlet store located at the Company's Secaucus facility, the
space for which is leased by the Company as part of its warehouse lease) by the
end of January 1998. See Note 7. Rental expense for the years ended June 30,
1995, 1996 and 1997 was approximately 7.0 million, $5.8 million, and $4.7
respectively.




                                     F-20

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         The minimum aggregate rental commitments at June 30, 1997 are as
follows (in thousands): 

               Fiscal year ending:
               1998 ..............................           $3,460
               1999 ..............................            2,318
               2000 ..............................            2,000
               2001 ..............................              610
               2002 ..............................              436
               Subsequent to 2002 ...............               576
                                                             ------ 
                                                             $9,400
                                                             ======

         The above table reflects rental commitments under the present lease
agreements including approximately $4.9 million related to retail store leases.
Under the proposed Restructuring, the Company plans to close substantially all
of its retail outlet stores (see Note 1). The lease termination cost associated
with these closings is approximately $800,000.

Letters of Credit:

         The Company is contingently liable under letters of credit issued by
banks to cover contractual commitments for merchandise purchases of
approximately $13.6 million at June 30, 1997.

Litigation:

          On April 19, 1993, a Class Action Complaint was filed in the Superior
Court of New Jersey, Hudson County, against the Company and others, including
the lead underwriter of the Company's 1986 initial public offering, alleging
common law fraud and negligent misrepresentation in the sale of the Company's
stock in its initial public offering. During fiscal 1996 the Company reached
settlement regarding these claims for approximately $0.3 million, which expense
had been provided for in a prior year. In connection with the Class Action
Complaint, a claim for indemnification was asserted by the Company's former
Underwriters against the Company. The indemnification claim demanded repayment
of the legal fees and expenses incurred by the Underwriters in connection with
the consolidated class actions entitled Phifer v. Chaus, et al. During fiscal
1996 the Company reached settlement regarding this matter for approximately
$0.8 million, which expense had been provided for in a prior year.

         The Company is a defendant in an action which was commenced in federal
district court in New York by the Equal Employment Opportunity Commission
("EEOC") on behalf of three patternmakers, each of whom was terminated by the
Company in late 1995. The complaint alleges discrimination on the basis of age
and national origin. The Company was served with the complaint on April 7,
1997. The complaint seeks equitable relief, including (i) reinstatement of the 
three individuals at issue, (ii) an injunction against the Company engaging in 
age or national-origin discrimination, and (iii) an order that the Company 
carry out an affirmative action program for individuals over 40 and for 
individuals of Italian and/or non-Asian origin. The complaint also seeks back 
pay, front pay, liquidated damages, compensatory damages, punitive damages, and
the EEOC's costs in the action. The Company will answer the complaint and deny
the material allegations of the complaint and intends to vigorously oppose the 
action.

         The Company is also involved in various other legal proceedings
arising out of the conduct of its business. The Company believes that the
eventual outcome of the proceedings referred to above will not have a material
adverse effect on the Company's financial condition or results of operations.



                                     F-21

<PAGE>


                     BERNARD CHAUS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Employment Agreement:

         The Company has entered into a number of employment agreements with
various senior executives. In addition to his $1 million salary, Mr. Grossman
is entitled to a bonus equal to 5% of the Company's annual net profits, as
defined, for the duration of his agreement, which expires in 2004. The Company
and Mr. Grossman are currently negotiating amendments to his employment
agreement and it is anticipated that a restated and amended employment
agreement will be executed in the near term. It is expected that such
amendments will, among other things, include a cash bonus based upon the 
Company's performance, the grant of new stock options in substitution for his 
existing stock options, and the waiver by Mr. Grossman of his entitlement to
five percent (5%) of the Company's annual net profits, as currently provided 
in his employment agreement.


Nautica License Agreement

         In September 1995, the Company entered into a license agreement (the
"Nautica License Agreement") with Nautica Apparel Inc. ("Nautica"), pursuant to
which the Company will arrange for the manufacture of, market, distribute and
sell a new women's career and casual sportswear line under the Nautica name.
The initial term of the Nautica License Agreement runs through December 31,
1999, and is thereafter renewable, at the option of the Company, for up to two
periods of three years each, provided that certain conditions are met
(including the successful attainment of certain sales targets and the
requirement that Andrew Grossman continue in his position as Chief Executive
Officer during the term of the Nautica License Agreement). The Company's
obligations include minimum royalty and advertising payments.

         Pursuant to the terms of the Nautica License Agreement, the Company
has granted Nautica a ten-year option to purchase up to 150,000 shares of the
Company's Common Stock at a purchase price of $5.00 per share (the closing
price of the Common Stock on the NYSE on September 6, 1995, the date the
Company entered into the Nautica License Agreement).

12.               COMMON STOCK OFFERING

         On November 22, 1995, the Company issued 5,750,000 shares of Common
Stock at a price of $3.00 per share in an underwritten public offering.
Proceeds from the offering, net of commissions and other expenses totaling $1.8
million, were $15.4 million.




                                     F-22

<PAGE>

                                                                   SCHEDULE II

                      BERNARD CHAUS, INC. & SUBSIDIARIES
                       VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                                                 ADDITIONS
                                               BALANCE AT        CHARGED TO                   BALANCE
                                                BEGINNING        COSTS AND                    AT END
DESCRIPTION                                     OF YEAR           EXPENSES     DEDUCTIONS     OF YEAR
-----------                                     -------           --------     ----------     -------
                                                                           (IN THOUSANDS)
<S>                                             <C>            <C>          <C>              <C>    
Year ended June 30, 1997
  Allowance for doubtful accounts .......        $   378        $     (20)   $      17 (1)     $   341
                                                 =======        =========    =========        ========

  Reserve for sales discounts and
    customer allowances and deductions ..         $4,692          $18,976    $  18,634 (2)     $ 5,034
                                                   -----          -------    ---------         --------

  Accrued restructuring expenses ........        $   196          $ 1,850    $     196 (4)     $ 1,850
                                                 -------          -------    ---------         -------

Year ended June 30, 1996
  Allowance for doubtful accounts .......        $   619          $   (70)   $     171 (1)     $   378
                                                 -------          -------    ---------         -------

  Reserve for sales discounts and
    customer allowances and deductions ..         $3,607          $17,519    $  16,434 (2)     $ 4,692
                                                  ------           ------    ---------         --------

  Accrued restructuring expenses ........         $2,804          $     0    $   2,608 (4)     $   196
                                                  ------         --------    ---------         -------

Year ended June 30, 1995
  Allowance for doubtful accounts .......         $  355          $   225    $     (39)(1)     $   619
                                                  ------          --------   ---------         -------

  Reserve for sales discounts and
    customer allowances and deductions ..         $5,985          $33,695    $  36,073 (2)     $ 3,607
                                                  ------           -------   ---------         -------

  Accrued restructuring expenses ........         $4,079          $ 1,200    $   2,475 (3)     $ 2,804
                                                  ------         ---------   ---------         -------
</TABLE>




--------------
1  Uncollectible accounts written off.

2  Allowances charged to reserve and granted to customers.

3  Reversal of provision no longer required and expenses charged to reserve.

4  Expenses charged to reserve.


                                      S-1