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UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D. C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30,2005

or

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

For the transition period from                     to                    

Commission file number 1-9169

BERNARD CHAUS, INC.

(Exact name of registrant as specified inits charter)

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

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

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

|                               |  |                                                              |  |  |  |  |
|-------------------------------|--|--------------------------------------------------------------|--|--|--|--|
| Title of eachclass            |  | Name of each exchange on which registered                    |
| Common Stock, $0.01 par value |  | None; securities quotedon the Over the Counter BulletinBoard |
|                               |

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

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

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (Section 229.405 of this chapter) is not containedherein, and will not be contained, to the best of registrant'sknowledge, in definitive proxy or information statements incorporatedby reference in Part III of this Form 10-K or any amendment to thisForm 10-K.    [          ]

Indicateby check mark whether the registrant is an accelerated filer (asdefined in Exchange Act Rule 12b-2)    Yes                      No      X   

The aggregate market value of the voting stock held bynon-affiliates of the registrant on December 31, 2004 was$9,240,000

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

|                   |  |                              |  |                   |  |  |  |  |  |  |
|-------------------|--|------------------------------|--|-------------------|--|--|--|--|--|--|
| Date              |  | Class                        |  | SharesOutstanding |
| September 15,2005 |  | Common Stock, $0.01 parvalue |  | 36,031,720        |
|                   |

|                                                                                                             |  |                                            |  |  |  |  |
|-------------------------------------------------------------------------------------------------------------|--|--------------------------------------------|--|--|--|--|
| Documents Incorporated byReference                                                                          |  | Location in Form 10-K in whichincorporated |
| Portions ofregistrant's Proxy Statement for the Annual Meeting ofStockholders to be held November 17, 2005. |  | PartIII                                    |
|                                                                                                             |

    

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PART I

Item1.    Business.

General

Bernard Chaus, Inc.(the "Company" or"Chaus") designs, arranges for themanufacture of and markets an extensive range of women's careerand casual sportswear principally under the JOSEPHINECHAUS® COLLECTION, JOSEPHINE CHAUS®SPORT, CHAUS®, CYNTHIA STEFFE®, CYNTHIACYNTHIA STEFFE®, and FRANCES & RITA®trademarks and under private label brand names. The Company'sproducts are sold nationwide through department store chains, specialtyretailers and other retail outlets. The Company has positioned itsJOSEPHINE CHAUS product line into the opening price points of the"better" category. In November 2002, theCompany acquired certain assets of S.L. Danielle, Inc.("SL Danielle"). SL Danielle designs,arranges for the manufacture of and markets women's moderatelypriced clothing primarily under private labels. In January 2004, theCompany acquired certain assets of the Cynthia Steffe division of LFBrands Marketing, Inc., including inventory and intellectual property.In connection with such acquisition, the Company also acquired theCynthia Steffe trademarks from Cynthia Steffe. The Cynthia Steffebusiness designs, arranges for the manufacture of, markets and sells anupscale modern women's apparel line, under the Cynthia Steffetrademarks. In June 2005 the Company signed a licensing agreement withKenneth Cole Productions, Inc. to manufacture and sell women'ssportswear under the Kenneth Cole Reaction ® label. The Companyexpects that these products will be sold nationwide through majorretail department stores and select specialty stores starting in spring2006. These products will offer high-quality fabrications and stylingat "better" price points. As used herein,fiscal 2005 refers to the fiscal year ended June 30, 2005, fiscal 2004refers to the fiscal year ended June 30, 2004 and fiscal 2003 refers tothe fiscal year ended June 30, 2003.

On June 13, 2005, theCompany and Kenneth Cole Productions, Inc. (the"Purchaser") entered into a Stock PurchaseAgreement (the "Stock Purchase Agreement"),pursuant to which the Purchaser purchased from the Company six millionshares of newly issued shares of common stock for an aggregate purchaseprice of $6.0 million dollars. The stock purchase agreement providesthe Purchaser with one demand and one piggy-back registrationright.

Products

The Company markets its products ascoordinated groups of jackets, skirts, pants, blouses, sweaters andrelated accessories principally under the following brand names thatalso include products for women and petite sizes:

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

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

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

**KennethCole Reaction** – a better sportswear line focused on acontemporary customer to be launched for Spring 2006.On June 13, 2005,the Company entered into a license agreement with Kenneth ColeProductions (LIC), Inc. (the "Licensor"). Thelicense agreement grants the Company an exclusive license to design,manufacture, sell and distribute women's sportswear under theLicensor's trademark "KENNETH COLEREACTION" in the women's better sportswear andbetter petite sportswear department of approved department stores andapproved specialty retailers. The licensed territory is the UnitedStates. The initial term of the license expires on December 31, 2010.The Company has the option to renew the license agreement for anadditional term of three years if it meets specified sales targets andis in compliance with the agreement. The license agreement provides forthe payment to Licensor of specified royalties on net sales. Thelicense agreement also requires the Company to achieve certain minimumsales levels, to pay certain minimum royalties and to maintain aminimum net worth. The Company is also obligated to pay specifiedpercentages of net sales to support advertising and to expend a totalof $4 million in the period ending December 31, 2007 to support theinitial launch of the licensed products.

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**Private Label** – theCompany also sells private label apparel manufactured according tocustomers' specifications.

The above products, while soldas separates, are coordinated by styles, color schemes and fabrics andare designed to be merchandised and worn together. The Company believesthat the target consumers for its products are women aged 25 to 65.

During fiscal 2005, the suggested retail prices of theCompany's Chaus products ranged between $18.00 and $180.00. TheCompany's jackets ranged in price between $98.00 and $180.00, itsblouses and sweaters ranged in price between $30.00 and $120.00, itsskirts and pants ranged in price between $38.00 and $110.00, and itsknit tops and bottoms ranged in price between $18.00 and $68.00.

During fiscal 2005, the suggested retail prices of theCompany's Cynthia Steffe products ranged between $120.00 and$525.00. The Company's Cynthia Steffe jackets ranged in pricebetween $300.00 and $525.00, its blouses and sweaters ranged in pricebetween $150.00 and $285.00, its skirts and pants ranged in pricebetween $120.00 and $330.00, and its knit tops and bottoms ranged inprice between $150.00 and $200.00.

The following table setsforth a breakdown by percentage of the Company's net revenue byclass for fiscal 2003 through fiscal2005:

|                                         |  |                          |     |         |  |        |     |         |  |        |         |         |  |  |
|-----------------------------------------|--|--------------------------|-----|---------|--|--------|-----|---------|--|--------|---------|---------|--|--|
|                                    |  | FiscalYear Ended June30, |
|                                    |  | 2005                     |     | 2004    |  | 2003   |
| JosephineChaus and Chaus                |  |                     | 49  | %  |  |   | 67  | %  |  |   | 83      | %  |
| PrivateLabels                           |  |                     | 31  |    |  |   | 28  |    |  |   | 17      |    |
| CynthiaSteffe and Cynthia CynthiaSteffe |  |                     | 20  |    |  |   | 5   |    |  |   | — |    |
| Total                                   |  |                     | 100 | %  |  |   | 100 | %  |  |   | 100     | %  |
|                                         |

BusinessSegments

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

Customers

The Company's productsare sold nationwide in an estimated 5,000 stores operated byapproximately 750 department store chains, specialty retailers andother retail outlets. The Company does not have any long-termcommitments or contracts with any of its customers.

ThroughMarch 31, 2004, the Company extended credit to the majority of itscustomers through a factoring agreement with The CIT Group/CommercialServices, Inc. ("CIT"). Under the factoringarrangement, the Company receives payment from CIT as of the earlierof: a) the date that CIT has been paid by the Company'scustomers; b) the date of the customer's longest maturity if thecustomer is in a bankruptcy or insolvency proceeding; or c) the lastday of the third month following the customer's longest maturitydate if the receivable remains unpaid. CIT assumes only the risk of theCompany's customers' insolvency or non-payment. All otherreceivable risks for customer deductions that reduce the customerreceivable balances are retained by the Company, including, but notlimited to, allowable customer markdowns, operational chargebacks,disputes, discounts, and returns. Effective March 31, 2004, theCompany, the Company's SL Danielle subsidiary and CIT agreed toterminate the Factoring Agreements between them. In connection with thetermination of those Factoring Agreements, the Company's whollyowned subsidiary, Cynthia Steffe Acquisition, LLC ("CSAcquisition") and CIT entered into an amendment of theirFactoring Agreement revising only the factoring commission. Receivablesrelated to sales of Cynthia Steffe product lines continue to befactored. Effective April 1, 2004 the Company extends credit to itscustomers, other than customers of CS Acquisition based upon anevaluation of the customer's financial condition and credithistory.

At June 30, 2005 and 2004 approximately 86% and95%, respectively of the Company's accounts receivable wasnon factored. At June 30, 2005 and 2004, approximately 60 % and77 % respectively, of the 

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Company's accounts receivable were duefrom customers owned by three single corporate entities. During fiscal2005, approximately 59% of the Company's net revenue wasfrom three corporate entities – Dillard's Department Stores22%, Sam's Club 20% and TJX Companies 17%.During fiscal 2004 approximately 70% of the Company's netrevenue was from three corporate entities – Dillard'sDepartment Stores 35%, TJX Companies 22% and Sam'sClub 13%. During fiscal 2003 approximately 73% of theCompany's net revenue was from three corporate entities –Dillards Department Stores 40%, TJX Companies 23% and MayDepartment Stores 10%. As a result of the Company'sdependence on its major customers, such customers may have the abilityto influence the Company's business decisions. The loss of orsignificant decrease in business from any of its major customers couldhave a material adverse effect on the Company's financialposition and results of operations. In addition, the Company'sability to achieve growth in revenues is dependent, in part, on itsability to identify new distribution channels.

Sales andMarketing

The Company's selling operation is highlycentralized. Sales to the Company's department and specialtystore customers are made primarily through the Company's New YorkCity showrooms. As of June 30, 2005, the Company had an in-house salesforce of 10, all of whom are located in the New York City showrooms.The Company's Cynthia Steffe division also employs independentsales representatives to market its products to specialty storesthroughout the country.

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

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

Design

The Company'sproducts and certain of the fabrics from which they are made aredesigned by an in-house staff of 28 fashion designers. The Companybelieves that its design staff is well regarded for its distinctivestyling and its ability to contemporize fashion classics. Emphasis isplaced on the coordination of outfits and quality of fabrics toencourage the purchase of more than one garment.

Manufacturingand Distribution

The Company does not own any manufacturingfacilities; all of its products are manufactured in accordance with itsdesign specifications and production schedules through arrangementswith independent manufacturers. The Company believes that outsourcingits manufacturing maximizes its flexibility while avoiding significantcapital expenditures, work-in-process buildup and the costs of a largeworkforce. Approximately 89% of its product is manufactured byindependent suppliers located primarily in China, Hong Kong andelsewhere in the Far East and Guatemala. Approximately 11% ofthe Company's products are manufactured in the United States. Nocontractual obligations exist between the 

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Company and its manufacturers except on anorder-by-order basis. During fiscal 2005, the Company purchasedapproximately 72% of its finished goods from its ten largestmanufacturers, including approximately 15% of its purchases fromits largest manufacturer. Contracting with foreign manufacturersenables the Company to take advantage of prevailing lower labor ratesand to use a skilled labor force to produce high quality products.

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

The Company's technical productionsupport staff, located in New York City, coordinates the production ofpatterns and the production of samples from the patterns by itsproduction staff and by overseas manufacturers. The production staffalso coordinates the marking and the grading of the patterns inanticipation of production by overseas manufacturers. The overseasmanufacturers produce finished garments in accordance with theproduction samples and obtain necessary quota allocations and otherrequisite customs clearances. Branch offices of the Company'ssubsidiaries in Korea and Hong Kong monitor production at eachmanufacturing facility to control quality, compliance with theCompany's specifications and timely delivery of finishedgarments, and arrange for the shipment of finished products to theCompany's New Jersey distribution center or to third partydistributors shipping merchandise on behalf of the Company. During thispast year approximately 70% of the Company's finishedgoods were shipped to the Company's New Jersey distributioncenter with the remaining merchandise shipped to third partydistributors located on California and Florida.

The Companybelieves that the number and geographical diversity of itsmanufacturing sources minimize the risk of adverse consequences thatwould result from termination of its relationship with any of itslarger manufacturers. The Company also believes that it would have theability to develop, over a reasonable period of time, adequatealternate manufacturing sources should any of its existing arrangementsterminate. However, should any substantial number of such manufacturersbecome unable or unwilling to continue to produce apparel for theCompany or to meet their delivery schedules, or if the Company'spresent relationships with such manufacturers were otherwise materiallyadversely affected, there can be no assurance that the Company wouldfind alternate manufacturers of finished goods on satisfactory terms topermit the Company to meet its commitments to its customers on a timelybasis. In such event, the Company's operations could bematerially disrupted, especially over the short-term. The Companybelieves that relationships with its major manufacturers aresatisfactory.

The Company uses a broad range of fabrics in theproduction of its clothing, consisting of synthetic fibers (includingpolyester and acrylic), natural fibers (including cotton and wool), andblends of natural and synthetic fibers. The Company does not have anyformal, long-term arrangements with any fabric or other raw materialsupplier. During fiscal 2005, most all of the fabrics used in theCompany's products manufactured in the Far East were ordered froma limited number of suppliers in the Far East, which are located inChina, Hong Kong and Korea. The Company selects the fabrics to bepurchased for production in accordance with the Company'sspecifications. To date, the Company has not experienced anysignificant difficulty in obtaining fabrics or other raw materials andconsiders its sources of supply to be adequate.

The Companyoperates under substantial time constraints in producing each of itscollections. Orders from the Company's customers generallyproceed the related shipping period by up to four months. In order tomake timely delivery of merchandise which reflects current style trendsand tastes, the Company attempts to schedule a substantial portion ofits fabric and manufacturing commitments relatively late in aproduction cycle. However, in order to secure adequate amounts ofquality raw materials, especially greige (i.e.,"undyed") goods, the Company must make someadvance commitments to suppliers of such goods. Many of these earlycommitments are made subject to changes in colors, assortments and/ordelivery dates.

Imports and Import Restrictions

TheCompany's arrangements with its manufacturers and suppliers aresubject to the risks attendant to doing business abroad, including theavailability of quota and other requisite customs clearances, the

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imposition of export duties, political andsocial instability, currency revaluations, and restrictions on thetransfer of funds. Bilateral agreements between exporting countries,including those from which the Company imports substantially all of itsproducts, and the United States' imposition of quotas, limits theamount of certain categories of merchandise, including substantiallyall categories of merchandise manufactured for the Company, that may beimported into the United States. Furthermore, the majority of suchagreements contain "consultation clauses"which allow the United States to impose at any time restraints on theimportation of categories of merchandise which, under the terms of theagreements, are not subject to specified limits. The bilateralagreements through which quotas are imposed have been negotiated underthe framework established by the Arrangement Regarding InternationalTrade in Textiles, known as the Multifiber Arrangement("MFA") which has been in effect since 1974.The United States has concluded international negotiations known as the"Uruguay Round" in which a variety of tradematters were reviewed and modified. Quotas established under the MFAwere phased out as of December 2004, after which the textile andclothing trade were fully integrated into the General Agreement onTrade and Tariffs ("GATT") and are nowsubject to the same disciplines as other sections. The GATT agreementprovides for expanded trade, improved market access, lower tariffs andimproved safeguard mechanisms.

The United States and thecountries in which the Company's products are manufactured may,from time to time, impose new quotas, duties, tariffs or otherrestrictions, or adversely adjust presently prevailing quotas, duty ortariff levels, with the result that the Company's operations andits ability to continue to import products at current or increasedlevels could be adversely affected. The Company cannot predict thelikelihood or frequency of any such events occurring. The Companymonitors duty, tariff and quota-related developments, and seekscontinually to minimize its potential exposure to quota-related risksthrough, among other measures, geographical diversification of itsmanufacturing sources, allocation of production of merchandisecategories where more quota is available and shifts of production amongcountries and manufacturers. The expansion in the past few years of theCompany's varied manufacturing sources and the variety ofcountries in which it has potential manufacturing arrangements,although not the result of specific import restrictions, have had theresult of reducing the potential adverse effect of any increase in suchrestrictions. In addition, substantially all of the Company'sproducts are subject to United States customs duties. Due to the largeportion of the Company's products, which are produced abroad, anysubstantial disruption of its foreign suppliers could have a materialadverse effect on the Company's operations and financialcondition.

Backlog

As of August 26, 2005 and 2004, theCompany's order book reflected unfilled customer orders forapproximately $58.9 million and $48.3 million of merchandise,respectively. Order book data at any date are materially affected bythe timing of the initial showing of collections to the trade, as wellas by the timing of recording of orders and of shipments. The orderbook represents customer orders prior to discounts. Accordingly, acomparison of unfilled orders from period to period is not necessarilymeaningful and may not be indicative of eventual actual shipments.

Trademarks

CHAUS, CHAUS & CO., CHAUS SPORT, CHAUSWOMAN, MS. CHAUS, JOSEPHINE, JOSEPHINE CHAUS, CYNTHIA STEFFE, CYNTHIACYNTHIA STEFFE and FRANCES & RITA are registered trademarks of theCompany for use on ladies' garments. The Company considers itstrademarks to be strong and highly recognized, and to have significantvalue in the marketing of its products.

The Company has anexclusive license with Kenneth Cole Productions (LIC), Inc. to design,manufacture and distribute wholesale women's sportswear bearingthe mark Kenneth Cole Reaction® for sale onwomen's better sportswear and or better petite sportswear ofapproved department stores and approved specialty retailers. See"Products-Kenneth Cole Reaction".

TheCompany has also registered its CHAUS, CHAUS SPORT, CHAUS WOMAN,JOSEPHINE CHAUS and JOSEPHINE trademarks for women's apparel incertain foreign countries. JOSEPHINE CHAUS for clothing, accessoriesand cosmetics is a registered trademark in the European EconomicCommunity.

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Competition

The women'sapparel industry is highly competitive, both within the United Statesand abroad. The Company competes with many apparel companies, some ofwhich are larger, and have better established brand names and greaterresources than the Company. In some cases the Company also competeswith private-label brands of its department store customers.

TheCompany believes that an ability to effectively anticipate, gauge andrespond to changing consumer demand and taste relatively far inadvance, as well as an ability to operate within substantial productionand delivery constraints (including obtaining necessary quotaallocations), is necessary to compete successfully in the women'sapparel industry. Consumer and customer acceptance and support, whichdepend primarily upon styling, pricing, quality (both in material andproduction), and product identity, are also important aspects ofcompetition in this industry. The Company believes that its successwill depend upon its ability to remain competitive in these areas.

Furthermore, the Company's traditional department storecustomers, which account for a substantial portion of theCompany's business, encounter intense competition from off-priceand discount retailers, mass merchandisers and specialty stores. TheCompany believes that its ability to increase its present levels ofsales will depend on such customers' ability to maintain theircompetitive position and the Company's ability to increase itsmarket share of sales to department stores and other retailers.

Employees

At June 30, 2005, the Company employed 286employees as compared with 282 employees at June 30, 2004. This totalincludes 53 in managerial and administrative positions, approximately96 in design, production and production administration, 19 inmarketing, merchandising and sales and 64 in distribution. Of theCompany's total employees, 54 were located in the Far East. TheCompany was a party to a collective bargaining agreement with theAmalgamated Workers Union, Local 88, covering 71 full-time employees.This agreement expired August 31, 2005 and was not renewed for theunion employees located at the Secaucus distribution facility. Thecompany has arranged for third party contractors that specialize inlogistics to handle the Company's distribution needs after theunion agreement expired on September 1, 2005. The collective bargainingagreement was renegotiated for the remaining 14 union employees locatedat our technical production support facility at 519 Eighth Avenue inNew York City. The new agreement expires on August 31, 2008. TheCompany is also party to an agreement with the New York MetropolitanJoint Board Local 89-22-1 and Local 10 Unite here, AFL-CIO covering 12full-time employees. This agreement expires on September 1, 2007.

The Company considers its relations with its employees to besatisfactory and has not experienced any business interruptions as aresult of labor disagreements with its employees.

ExecutiveOfficers

The executive officers of the Company are:

|                                                                     |  |     |  |                                                    |  |  |  |  |  |  |
|---------------------------------------------------------------------|--|-----|--|----------------------------------------------------|--|--|--|--|--|--|
| Name                                                                |  | Age |  | Position                                           |
| JosephineChaus                                                      |  | 54  |  | Chairwoman of the Board and Chief ExecutiveOfficer |
| David Panitz                                                        |  | 37  |  | ChiefOperating Officer                             |
| BartonHeminover                                                     |  | 51  |  | Chief FinancialOfficer                             |
| Executiveofficers serve at the discretion of the Board ofDirectors. |
|                                                                     |

Josephine Chaus is a co founderof the Company and has held various positions with the Company sinceits inception. She has been a director of the Company since 1977,President from 1980 through February 1993, Chief Executive Officer fromJuly 1991 through September 1994 and again since December 1998,Chairwoman of the Board since 1991 and member of the Office of theChairman since September 1994.

David Panitz was appointedChief Operating Officer in October 2004 . Prior to joining the Companyhe served in numerous executive positions from 2002 to 2004 with MarcEcko Enterprises, an apparel 

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company, initially as its Executive VicePresident, Sales and Operations and last serving as Chief OperatingOfficer. From 1999 to 2002, Mr. Panitz served in various executivepositions with C-bridge/eXcelon Corp., a business and technologysolutions company, initially as its Vice President of Operations andlast serving as President, Strategic Business Unit. From 1994 through1999, he served in various positions in sales and marketing and lastserved as director of Retail Analysis and Planning of Polo Ralph LaurenCorp., an apparel Company.

Barton Heminover was appointedChief Financial Officer in August 2002 and served as Vice President ofFinance from January 2000 through August 2002 and as Vice President– Corporate Controller from July 1996 to January 2000. FromJanuary 1983 to July 1996 he was employed by Petrie Retail, Inc.(formerly Petrie Stores Corporation), a woman's retail apparelchain, serving as Vice President/Treasurer from 1986 to 1994 and asVice President/Financial Controller from 1994 to 1996.

ForwardLooking Statements

Certain statements contained herein areforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Actof 1934 that have been made pursuant to the safe harbor provisions ofthe Private Securities Litigation Reform Act of 1995. Such statementsare indicated by words or phrases such as"anticipate,""estimate,""project,""expect," "believe"and similar words or phrases. Such statements are based on currentexpectations and are subject to certain risks, uncertainties andassumptions, including, but not limited to, the overall level ofconsumer spending on apparel; the financial strength of the retailindustry, generally and the Company's customers in particular;changes in trends in the market segments in which the Company competesand the Company's ability to gauge and respond to changingconsumer demands and fashion trends; the level of demand for theCompany's products; the Company's dependence on its majordepartment store customers; the success of the Kenneth Cole licenseagreement; the highly competitive nature of the fashion industry; theCompany's ability to satisfy its cash flow needs, including thecash requirements under the Kenneth Cole license agreement, by meetingits business plan and satisfying the financial covenants in its creditfacility; the Company's ability to operate within production anddelivery constraints, including the risk of failure of manufacturers todeliver products in a timely manner or to quality standards; theCompany's ability to meet the requirements of the Kenneth Colelicense agreement; the Company's ability to operate effectivelyin the new quota environment, including changes in sourcing patternsresulting from the elimination of quota on apparel products; theCompany's ability to attract and retain qualified personnel; andchanges in economic or political conditions in the markets where theCompany sells or sources its products, including war and terroristactivities and their effects on shopping patterns, as well as otherrisks and uncertainties set forth in the Company's publicly-fileddocuments, including this Annual Report on Form 10-K. Should one ormore of these risks or uncertainties materialize, or should underlyingassumptions prove incorrect, actual results may vary materially fromthose anticipated, estimated or projected. The Company disclaims anyintention or obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events orotherwise.

Item 2.    Properties.

TheCompany's principal executive office is located at 530 SeventhAvenue in New York City where the Company leases approximately 28,000square feet. This lease expires in May 2009. This facility also housesthe Company's Chaus and SL Danielle showrooms and its sales,design, production and merchandising staffs. The Kenneth Cole Reactionshowroom will also be located at this facility. Net base rental expensefor the executive offices aggregated approximately $0.9 million in eachof fiscal 2005, fiscal 2004 and fiscal 2003.

The Company'sCynthia Steffe subsidiary is located at 550 Seventh Avenue in New YorkCity where the Company leases approximately 12,000 square feet. Thislease expires in October 2013 and the net base rental expense isapproximately $0.3 million a year.

The Company's technicalproduction support facility (including its sample and patternmakers) islocated at 519 Eighth Avenue in New York City where the Company leasesapproximately 15,000 square 

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feet. This lease expires in August 2009. Netbase rental expense for the technical production support facilitiesaggregated approximately $0.3 million in each of fiscal 2005, fiscal2004, and fiscal 2003.

The Company's distribution centeris located in Secaucus, New Jersey where the Company leasesapproximately 276,000 square feet. This facility also houses theCompany's administrative and finance personnel, and its computeroperations. This space is occupied under a lease expiring December 31,2005 which the Company has determined that it will not renew. TheCompany has arranged for third party contractors that specialize inlogistics to handle the company's distribution needs at the samelocation effective September 1, 2005. The Company will sublease officespace in the facility for its office personnel currently in thefacility effective January 1, 2006. The Company's one retailoutlet store in the center was closed in July 2005. Base rental expensefor the Secaucus facility aggregated approximately $1.2 million in eachof fiscal 2005, fiscal 2004, and fiscal 2003. It is anticipated thatthe Company will realize cost savings from outsourcing its distributionneeds.

Office locations are also leased in Hong Kong and Korea,with annual aggregate rental expense of approximately $0.1 million foreach of fiscal 2005, fiscal 2004, and fiscal 2003.

Item3.    Legal Proceedings.

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

Item 4.    Submission of Matters to a Vote of SecurityHolders.

None.

PART II

Item5.    Market for the Registrant's Equity and RelatedStockholder Matters.

The Company's common stock, parvalue $0.01 per share (the "Common Stock"),is currently traded in the over the counter market and quotations areavailable on the Over the Counter Bulletin Board (OTC BB: CHBD).

The following table sets forth for each of the Company'sfiscal periods indicated the high and low bid prices for the CommonStock as reported on the OTC BB. These prices reflect inter-dealerprices, without retail mark-up, mark-down or commission and may notnecessarily represent actual transactions.

|                 |  |                         |  |        |        |        |  |        |        |        |  |  |  |  |
|-----------------|--|-------------------------|--|--------|--------|--------|--|--------|--------|--------|--|--|--|--|
|            |  |                    |  | High   |        | Low    |
| **Fiscal 2004** |  |                    |  |   |   |   |  |   |   |   |
|            |  | FirstQuarter            |  | $      | 1.65   |   |  | $      | 0.92   |   |
|            |  | SecondQuarter           |  |   | 1.42   |   |  |   | 0.85   |   |
|            |  | ThirdQuarter            |  |   | 1.26   |   |  |   | 0.85   |   |
|            |  | FourthQuarter           |  |   | 0.97   |   |  |   | 0.84   |   |
| **Fiscal2005**  |  |                    |  |   |   |   |  |   |   |   |
|            |  | FirstQuarter            |  | $      | 1.13   |   |  | $      | 0.86   |   |
|            |  | SecondQuarter           |  |   | 1.01   |   |  |   | 0.75   |   |
|            |  | ThirdQuarter            |  |   | .92    |   |  |   | 0.72   |   |
|            |  | FourthQuarter           |  |   | 1.11   |   |  |   | 0.80   |   |
| **Fiscal2006**  |  |                    |  |   |   |   |  |   |   |   |
|            |  | July 01- August 24,2005 |  | $      | 1.33   |   |  | $      | 1.05   |   |
|                 |

As ofAugust 26, 2005, the Company had approximately 436 stockholders ofrecord.

The Company has not declared or paid cash dividends ormade other distributions on the Common Stock since prior to its 1986initial public offering. The payment of dividends, if any, in thefuture is within the discretion of the Board of Directors and willdepend on the Company's earnings, capital requirements

8

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and financial condition. It is the presentintention of the Board of Directors to retain all earnings, if any, foruse in the Company's business operations and, accordingly, theBoard of Directors does not expect to declare or pay any dividends inthe foreseeable future. In addition, the Company's FinancingAgreement prohibits the Company from declaring dividends or makingother distributions on its capital stock, without the consent of thelender. See "Management's Discussion and Analysis ofFinancial Condition and Results of Operations — FinancialCondition, Liquidity and Capital Resources."

Item6.    Selected Financial Data.

The followingfinancial information is qualified by reference to, and should be readin conjunction with, the Consolidated Financial Statements of theCompany and the notes thereto, as well as Management's Discussionand Analysis of Financial Condition and Results of Operations containedelsewhere herein.

**Statement of OperationsData**:

|                                                                                         |  |                                        |         |         |  |        |         |        |  |        |         |        |  |        |         |         |  |        |         |         |  |  |
|-----------------------------------------------------------------------------------------|--|----------------------------------------|---------|---------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                    |  | FiscalYear Ended June30,               |
|                                                                                    |  | 2005                                   |         | 2004    |  | 2003   |         | 2002   |  | 2001   |
|                                                                                    |  | (Inthousands, except per shareamounts) |
|                                                                                    |  |                                   |    |    |  |   |    |   |  |   |    |   |  |   |    |    |  |   |    |    |
| Netrevenue                                                                              |  | $                                      | 143,255 |    |  | $      | 157,107 |   |  | $      | 140,225 |   |  | $      | 145,769 |    |  | $      | 149,499 |    |
| Costof goodssold                                                                        |  |                                   | 103,661 |    |  |   | 117,451 |   |  |   | 104,398 |   |  |   | 116,951 |    |  |   | 122,324 |    |
| Grossprofit                                                                             |  |                                   | 39,594  |    |  |   | 39,656  |   |  |   | 35,827  |   |  |   | 28,818  |    |  |   | 27,175  |    |
| Selling,general and administrativeexpenses                                              |  |                                   | 39,240  |    |  |   | 34,894  |   |  |   | 29,634  |   |  |   | 30,130  |    |  |   | 32,666  |    |
| Otherincome                                                                             |  |                                   | — |    |  |   | — |   |  |   | — |   |  |   | (193    | )  |  |   | — |    |
| Interestexpense,net                                                                     |  |                                   | 1,328   |    |  |   | 1,355   |   |  |   | 1,091   |   |  |   | 2,049   |    |  |   | 2,121   |    |
| Income(loss) before income tax provision(benefit)                                       |  |                                   | (974    | )  |  |   | 3,407   |   |  |   | 5,102   |   |  |   | (3,168  | )  |  |   | (7,612  | )  |
| Incometax provision(benefit)                                                            |  |                                   | 183     |    |  |   | 303     |   |  |   | 425     |   |  |   | (944    | )  |  |   | 11      |    |
| Netincome(loss)                                                                         |  | $                                      | (1,157  | )  |  | $      | 3,104   |   |  | $      | 4,677   |   |  | $      | (2,224  | )  |  | $      | (7,623  | )  |
|                                                                                    |  |                                   |    |    |  |   |    |   |  |   |    |   |  |   |    |    |  |   |    |    |
| Basicearnings (loss) per share(1)                                                       |  | $                                      | (0.04   | )  |  | $      | 0.11    |   |  | $      | 0.17    |   |  | $      | (0.08   | )  |  | $      | (0.28   | )  |
| Dilutedearnings (loss) per share(2)                                                     |  | $                                      | (0.04   | )  |  | $      | 0.10    |   |  | $      | 0.16    |   |  | $      | (0.08   | )  |  | $      | (0.28   | )  |
| Weightedaverage number of common shares outstanding –basic                        |  |                                   | 28,363  |    |  |   | 27,504  |   |  |   | 27,384  |   |  |   | 27,216  |    |  |   | 27,216  |    |
| Weightedaverage number of common and common equivalent shares outstanding–diluted |  |                                   | 28,363  |    |  |   | 30,490  |   |  |   | 29,912  |   |  |   | 27,216  |    |  |   | 27,216  |    |
|                                                                                    |  |                                   |    |    |  |   |    |   |  |   |    |   |  |   |    |    |  |   |    |    |
| **BalanceSheetData**                                                                    |  |                                   |    |    |  |   |    |   |  |   |    |   |  |   |    |    |  |   |    |    |
|                                                                                    |  | Asof June30,                           |
|                                                                                    |  |                                   | 2005    |    |  | 2004   |         | 2003   |  | 2002   |         | 2001   |
| Workingcapital                                                                          |  | $                                      | 21,456  |    |  | $      | 17,191  |   |  | $      | 15,653  |   |  | $      | 12,404  |    |  | $      | 15,185  |    |
| Totalassets                                                                             |  |                                   | 44,298  |    |  |   | 46,376  |   |  |   | 39,847  |   |  |   | 35,691  |    |  |   | 44,795  |    |
| Short-termdebt, including current portion of long- termdebt                             |  |                                   | 1,700   |    |  |   | 10,263  |   |  |   | 1,500   |   |  |   | 4,716   |    |  |   | 6,024   |    |
| Long-termdebt                                                                           |  |                                   | 5,625   |    |  |   | 7,325   |   |  |   | 7,875   |   |  |   | 9,375   |    |  |   | 10,500  |    |
| Stockholders'equity                                                                     |  |                                   | 21,639  |    |  |   | 16,699  |   |  |   | 13,109  |   |  |   | 8,213   |    |  |   | 10,679  |    |
|                                                                                         |

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

|     |                                                                                                                                                                          |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Computed by dividing the applicable net income(loss) by the weighted average number of common shares outstanding andcommon stock equivalents outstanding during theyear. |

9

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

Overview

TheCompany has expanded its product mix over the past few years mainlythrough its acquisition of S.L. Danielle and Cynthia Steffe. InNovember 2002, the Company acquired certain assets of S.L. DanielleInc. S.L. Danielle designs, arranges for the manufacture of, marketsand sells a women's apparel line, principally under private andexclusive labels. In January 2004 the Company purchased certain assetsof the Cynthia Steffe, a division of LF Brands Marketing, Inc.,including inventory and intellectual property. In connection with theacquisition, the Company also acquired Cynthia Steffe trademarks fromCynthia Steffe. The Cynthia Steffe business designs, arranges for themanufacture of, markets and sells an upscale modern women apparel line,under the Cynthia Steffe trademarks. The results of CynthiaSteffe's operations are included in the consolidated financialstatements commencing January 2, 2004. In June 2005 the Company signeda licensing agreement with Kenneth Cole Productions, Inc. tomanufacture and sell women's sportswear under the Kenneth ColeReaction® label. We expect that these products will besold nationwide through major retail department stores and selectspecialty stores starting in spring 2006. These products will offerhigh-quality fabrications and styling at"better" price points.

Results ofOperations

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

|                                            |  |                          |       |         |  |        |       |         |  |        |       |         |  |  |
|--------------------------------------------|--|--------------------------|-------|---------|--|--------|-------|---------|--|--------|-------|---------|--|--|
|                                       |  | FiscalYear Ended June30, |
|                                       |  | 2005                     |       | 2004    |  | 2003   |
| Netrevenue                                 |  |                     | 100.0 | %  |  |   | 100.0 | %  |  |   | 100.0 | %  |
| Grossprofit                                |  |                     | 27.6  |    |  |   | 25.2  |    |  |   | 25.5  |    |
| Selling,general and administrativeexpenses |  |                     | 27.4  |    |  |   | 22.2  |    |  |   | 21.1  |    |
| Interestexpense                            |  |                     | 0.9   |    |  |   | 0.9   |    |  |   | 0.8   |    |
| Netincome(loss)                            |  |                     | (0.8  | )  |  |   | 1.9   |    |  |   | 3.3   |    |
|                                            |

Fiscal2005 Compared to Fiscal 2004

Net revenues for fiscal 2005decreased 8.8% or $13.8 million to $143.3 million as compared to$157.1 million for fiscal 2004. Units sold decreased by 13.9%and the overall price per unit increased by approximately 6%.The decrease in net revenue was primarily due to the decrease in salesassociated with Chaus product lines of approximately $33.5 millionpartially offset by an increase in Cynthia Steffe product lines ofapproximately $20.5 million. The decrease in the Chaus product linesreflected decreased sales to department stores and discounters. Theincrease in Cynthia Steffe net revenues is primarily due to theinclusion of a full twelve months of sales this year compared to sixmonths last year. See table of percentage of net revenue by class onpage 2 for additional information.

Gross profit for fiscal 2005decreased $0.1 million to $39.6 million as compared to $39.7 millionfor fiscal 2004. As a percentage of sales, gross profit increased to27.6% for fiscal 2005 from 25.2% for fiscal 2004. Thedecrease in gross profit dollars was primarily attributable to thedecrease of approximately $9.0 million in gross profit of theCompany's Chaus product lines due to the decrease in net revenuespartially offset by an increase in gross profit of $8.9 millionassociated with the Cynthia Steffe product lines. The increase inCynthia Steffe gross profit dollars was primarily due to the increasein net revenues. The increase in gross profit percentage was primarilydue to the higher gross profit percentage associated with theCompany's Cynthia Steffe product lines which representedapproximately 20% of net revenues this year as compared to5% of net revenues last year.

Selling, general andadministrative ("SG&A") expensesincreased by $4.3 million to $39.2 million for fiscal 2005 as comparedto $34.9 million in fiscal 2004. As a percentage of net revenue,SG&A expenses increased to 27.4% in fiscal 2005 as comparedto 22.2% in fiscal 2004. These increases were primarilyattributable to the inclusion of a full twelve months of expenses ofthe Cynthia Steffe product lines 

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acquired in January 2004 which accounted fora $6.1 million increase in SG&A expenses. This increase waspartially offset by a $1.9 million decrease in SG&A expensesassociated with Chaus products lines and private label. The increase inSG&A expenses was primarily due to SG&A expenses related topayroll and payroll related costs ($3.3 million), design related costs($0.7 million), professional fees ($0.5 million), marketing andadvertising costs ($0.2 million) partially offset by a decrease infactoring fees ($0.4 million). The increase in SG&A expense as apercentage of net revenue was due to the decrease in sales volume ofthe Company's Chaus product lines sold to department stores whichreduced the Company's leverage on SG&A expenses and thehigher SG&A expenses as a percentage of net revenue associated withthe Cynthia Steffe product lines.

Interest expense wasapproximately the same for fiscal 2005 as it was in to fiscal 2004. Theincrease in interest rates was offset by lower bank borrowings.

The Company's income tax provision for fiscal 2005, includesfederal alternative minimum taxes (AMT) resulting from the use of theCompany's net operating loss (NOL) carryforward from prior yearsand provisions for state and local taxes. New Jersey enacted taxlegislation temporarily suspending the use of net operating loss (NOL)carryforwards against income for fiscal 2004 and allowing 50%use of net operating loss (NOL) carryforwards against income for fiscal2005.

The Company periodically reviews its historical andprojected taxable income and considers available information andevidence to determine if it is more likely than not that a portion ofthe deferred tax assets will be realized. A valuation allowance isestablished to reduce the deferred tax assets to the amount that ismore likely than not to be realized. As of June 30, 2005 and 2004,based upon its evaluation of taxable income and the current businessenvironment, the Company recorded a full valuation allowance on itsdeferred tax assets including NOL's. In fiscal 2005, thevaluation allowance was reduced by $1.8 million to $41.0 million atJune 30, 2005 from $42.8 million at June 30, 2004 to primarily reflectthe utilization of NOL's to offset taxes otherwise payable oncurrent taxable income and to reflect changes in deferred tax assets.If the Company determines that a portion of the deferred tax assetswill be realized in the future, a portion of the valuation allowancewill be reduced and the Company will provide for income tax expense(benefit) in its Statement of Operations at its estimated effective taxrate. See discussion below under Critical Accounting Policies andEstimates regarding income taxes and the Company's federal netoperating loss carryforward.

Fiscal 2004 Compared toFiscal 2003

Net revenues for fiscal 2004 increased 12.1%or $16.9 million to $157.1 million as compared to $140.2 million forfiscal 2003. Units sold increased by 11.7% and the overall priceper unit remained relatively the same. The increase in net revenue wasprimarily due to the inclusion of a full twelve months of sales for theCompany's S.L. Danielle division acquired in November 2002 andthe sales of the Company's Cynthia Steffe product lines acquiredin January 2004. These acquisitions contributed $31.0 million to theincrease in fiscal 2004 revenues. This increase was partially offset bya decrease of $14.0 million in sales principally consisting of Chausproduct lines to department stores and discount stores. See table ofpercentage of net revenue by class on page 2 for additionalinformation.

Gross profit for fiscal 2004 increased $3.9 millionto $39.7 million as compared to $35.8 million for fiscal 2003. As apercentage of sales, gross profit decreased to 25.2% for fiscal2004 from 25.5% for fiscal 2003. The increase in gross profitdollars was attributable to the gross profit of the Company'sS.L. Danielle and Cynthia Steffe divisions. The increase in grossprofit dollars of $9.4 million from these divisions more than offset adecrease in gross profit dollars of $5.6 million associated with thedecrease in sales principally consisting of Chaus product lines sold todepartment stores and discount stores. The decrease in gross profitpercentage was primarily due to the lower gross profit percentageassociated with the Company's Chaus product lines.

Selling, general and administrative("SG&A") expenses increased by $5.2million to $34.9 million for fiscal 2004 as compared to $29.6 millionin fiscal 2003. As a percentage of net revenue, SG&A expensesincreased to 22.2% in fiscal 2004 as compared to 21.1% infiscal 2003. These increases were primarily attributable to the CynthiaSteffe product lines acquired in January 2004 and the inclusion of afull twelve months of expenses of the S.L. Danielle product linesacquired in November 2002. The increase in SG&A 

11

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expenses was primarily due to SG&Aexpenses related to payroll and payroll related costs ($1.9 million),design related costs ($0.8 million), and marketing and advertisingcosts ($0.7 million). The increase in SG&A expense as a percentageof net revenue was due to the decrease in sales volume of theCompany's Chaus product lines sold to department stores anddiscount stores which reduced the Company's leverage on SG&Aexpenses in addition to the higher SG&A expenses as a percentage ofnet revenue associated with the Cynthia Steffe product lines.

Interest expense increased by approximately $0.3 million to $1.4million for fiscal 2004 as compared to $1.1 million for fiscal 2003.The increase was due to higher bank borrowings partially offset bylower interest rates.

The provision for income taxes for fiscal2004 reflects a provision for certain federal, state and local taxes.For fiscal 2004, the Company's income tax provision includesfederal alternative minimum taxes (AMT) that are not offset by theCompany's net operating loss (NOL) carryforward from prior years.New Jersey enacted new tax legislation in fiscal 2003 temporarilysuspending the use of net operating loss (NOL) carryforwards againstincome. Accordingly, for fiscal 2004, the Company has made provisionsfor state income taxes, including New Jersey.

The Companyperiodically reviews its historical and projected taxable income andconsiders available information and evidence to determine if it is morelikely than not that a portion of the deferred tax assets will berealized. A valuation allowance is established to reduce the deferredtax assets to the amount that is more likely than not to be realized.As of June 30, 2004 and 2003, based upon its evaluation of taxableincome and the current business environment, the Company recorded afull valuation allowance on its deferred tax assets includingNOL's. In fiscal 2004, the valuation allowance was reduced by$2.5 million to $42.8 million at June 30, 2004 from $45.3 million atJune 30, 2003 to reflect the utilization of NOL's to offset taxesotherwise payable on current taxable income. If the Company determinesthat a portion of the deferred tax assets will be realized in thefuture, a portion of the valuation allowance will be reduced and theCompany will provide for income tax expense (benefit) in its Statementof Operations at its estimated effective tax rate. See discussion belowunder Critical Accounting Policies and Estimates regarding income taxesand the Company's federal net operating loss carryforward.

Financial Condition, Liquidity and Capital Resources

General

Net cash provided by operating activities was $11.8million for fiscal 2005 as compared to net cash used in operatingactivities of $7.1 million for fiscal 2004, and net cash provided byoperating activities of $12.2 million for fiscal 2003. Net cashprovided by operating activities for fiscal 2005 resulted primarilyfrom a decrease in accounts receivable ($11.8 million), an increase inaccounts payable ($1.6 million), partially offset by an increase ininventory ($2.0 million). The decrease in accounts receivable of $11.8million was predominately due to the decrease in sales during thefourth quarter of fiscal 2005 as compared to fiscal 2004. The increasein accounts payable of $1.6 million was attributable to the increase ininventory of $2.0 million offset by an increase of $0.4 million in thetiming of payment for inventory. The change in the mix of suppliers andthe Company's purchase of higher levels of raw materials than inprior periods has required an earlier payment schedule. The Companydoes not currently anticipate that these changes in accounts receivableor accounts payable will adversely affect its cash flows for fiscal2006.

Net cash used in operating activities for fiscal 2004resulted primarily from, an increase in accounts receivable andaccounts receivable due from factor ($9.0 million), a decrease inaccounts payable ($4.8 million), partially offset by a decrease ininventory ($2.6 million), and net income ($3.1million). The increase inthe Company's accounts receivable and accounts receivable duefrom factor of $9.0 million was primarily due to a change in the mix ofcustomers, relative to the prior year, to a mix consisting of customerswith typically longer payment terms, such as discounters. To a lesserextent, the increase also resulted from an increase in sales of $6.4million during the fourth quarter of fiscal 2004 as compared to thesame quarter in fiscal 2003. The decrease in accounts payable of $4.8million was primarily attributable to lower inventories in fiscal 2004as compared to fiscal 2003 and the timing of payment for purchases ofinventory. The decrease was also due to a change in the mix ofsuppliers, with the Company purchasing higher levels of raw materialsthan in prior periods, which required earlier payments.

12

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Cash used in investing activities was $0.3million in fiscal 2005 compared to $3.9 million in fiscal 2004 and $5.0million in fiscal 2003. The investing activities in fiscal 2005consisted of $0.3 million for the purchases of fixed assets. Theinvesting activities in fiscal 2004 consisted of $3.0 million primarilyfor the acquisition of Cynthia Steffe product lines and $1.0 millionfor the purchase of fixed assets. In fiscal 2003 investing activitiesconsisted of $4.7 million for the acquisition of the S.L. Danielleproduct lines and $0.3 million for the purchase of fixed assets. Thepurchases of fixed assets for all years presented consisted primarilyof purchases of computer hardware and software systems. In fiscal 2006,the Company anticipates capital expenditures of approximately $1.3million, primarily for the Kenneth Cole showroom ($0.6 million),Kenneth Cole store fixtures ($0.3 million), and Management InformationSystem upgrades ($0.2 million).

Cash used in financingactivities for fiscal 2005 resulted from net payments of $8.6 millionfor short-term bank borrowings and principal payments of $1.7 millionon the term loan partially offset by net proceeds of $6.4 million fromthe issuance of common stock. The net proceeds from the issuance ofcommon stock consisted of (i) a $6.0 million equity investment less$0.4 million of transaction fees from the issuance of six millionshares of the Company's common stock to Kenneth Cole Productions,Inc in June 2005; and (ii) net proceeds of $0.8 million from theexercise of stock options. Cash used in financing activities for fiscal2004 resulted from net borrowing of $8.6 million for short-term bankborrowings and $0.3 million from net proceeds from the issuance ofstock offset by net principal payments of $0.4 million on the termloan. Cash used in financing activities for fiscal 2003 resulted fromnet repayments of $3.6 million for short-term bank borrowings andprincipal payments of $1.0 million on the term loan.

KennethCole License Agreement

The Company entered into a licenseagreement with Kenneth Cole Productions (LIC) in June 2005. Under thelicense agreement the Company is required to achieve certain minimumsales levels, to pay certain minimum royalties and to maintain aminimum net worth. The Company is also obligated to pay specifiedpercentages of net sales to support advertising and to expend a totalof $4 million in the period ending December 31, 2007 to support theinitial launch of the licensed products.

ContractualObligations and Commercial Commitments

The following tablesummarizes as of June 30, 2005, the Company's contractualobligations and commercial commitments by futureperiod:

|                                                        |  |                       |        |                 |  |           |         |           |  |              |         |        |  |        |         |        |  |        |         |        |  |  |
|--------------------------------------------------------|--|-----------------------|--------|-----------------|--|-----------|---------|-----------|--|--------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                                   |  | Paymentsdue by Period |
|                                                   |  | (inthousands)         |
| Contractualobligations (inthousands)                   |  | Total                 |        | Less than 1year |  | 2-3 years |         | 4-5 years |  | After 5years |
| Operatingleases                                        |  | $                     | 8,203  |            |  | $         | 2,390   |      |  | $            | 3,029   |   |  | $      | 1,746   |   |  | $      | 1,038   |   |
| KennethCole licenseagreement                           |  |                  | 17,470 |            |  |      | 1,605   |      |  |         | 6,955   |   |  |   | 6,990   |   |  |   | 1,920   |   |
| Lettersof Creditcommitments                            |  |                  | 6,245  |            |  |      | 6,245   |      |  |         | — |   |  |   | — |   |  |   | — |   |
| Inventorypurchasecommitments                           |  |                  | 3,905  |            |  |      | 3,905   |      |  |         | — |   |  |   | — |   |  |   | — |   |
| Currentportion of termloan                             |  |                  | 1,700  |            |  |      | 1,700   |      |  |         | — |   |  |   | — |   |  |   | — |   |
| Long-termborrowings                                    |  |                  | 5,625  |            |  |      | — |      |  |         | 5,625   |   |  |   | — |   |  |   | — |   |
| Totalcontractual obligations and commercialcommitments |  | $                     | 43,148 |            |  | $         | 15,845  |      |  | $            | 15,609  |   |  | $      | 8,736   |   |  | $      | 2,958   |   |
|                                                        |

FinancingAgreement

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

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At the option of the Company, theRevolving Facility and the Term Loan each may bear interest either atthe JP Morgan Chase Bank Rate ("Prime Rate")or the London Interbank Offered Rate("LIBOR"). If the Company chooses the PrimeRate, the interest (i) on the Revolving Facility accrues at a rate of1⁄2 of 1% above the Prime Rate (ii) on the Term Loanaccrues at a rate of 1% above the Prime Rate. If the Companychooses LIBOR, the interest (i) on the Revolving Facility accrues at arate of 31⁄4% above LIBOR (2.75% above LIBOR fromand after November 2004) (ii) on the Term Loan accrues at a rate of33⁄4% above LIBOR. From the inception of the financingagreement through June 30, 2005, the Company has elected the Prime Rateoption. Pursuant to the November 2004 amendment to the FinancingAgreement described below, each of the foregoing interest rates issubject to an annual upward or downward adjustment by 1⁄4 of1%, commencing with the  month following delivery of theCompany's consolidated financial statements to CIT forfiscal  2005,  fiscal 2006 and fiscal 2007 based upon theCompany's borrowing availability, fixed charge coverage ratio andleverage ratio as in effect at each such adjustment period. Theinterest rate as of June 30, 2005 on the Revolving Facility was6.50% and on the Term Loan was 7.0%.

On September27, 2002, the Company borrowed $18.3 million under the RevolvingFacility and $10.5 million under the Term Loan. These borrowings wereused to pay off the balances under the former financing agreement of$18.3 million and the former term loan of $10.5 million and for workingcapital purposes. Commencing October 1, 2002, amortization payments inthe amount of $375,000 (increased to $425,000 by the January 2004amendment to the Financing Agreement described below) are payablequarterly in arrears in connection with the Term Loan. A balloonpayment of $1.8 million is due on October 1, 2008 under the Term Loan.The Company's obligations under the Financing Agreement aresecured by a first priority lien on substantially all of theCompany's assets, including the Company's accountsreceivable, inventory, intangibles, equipment, and trademarks, and apledge of the Company's equity interest in its subsidiaries.

The Financing Agreement contains numerous financial and operationalcovenants, including limitations on additional indebtedness, liens,dividends, stock repurchases and capital expenditures. In addition, theCompany is required to maintain (i) specified levels of tangible networth, (ii) minimum EBITDA (earnings before interest, taxes,depreciation and amortization), (iii) certain fixed charge coverageratios, (iv) certain leverage ratios, and (v) specified levels ofminimum borrowing availability under the Revolving Facility. At June30, 2005, the Company was in compliance with all of its covenants. Inthe event of the early termination by the Company of the FinancingAgreement, the Company will be liable for termination fees of $150,000if termination occurs prior to November 11, 2007. The Company mayprepay at any time, in whole or in part, the Term Loan without penalty.A fee of $125,000 was paid in connection with the original FinancingAgreement. The expiration of the Financing Agreement was initially setfor September 27, 2005 and was extended to October 1, 2008 by anamendment dated November 11, 2004.

On November 27, 2002, theCompany and CIT agreed to an amendment to the Financing Agreement inorder to facilitate the S.L. Danielle acquisition. The Company and CITagreed to add the Company's newly formed wholly-owned subsidiary,S.L. Danielle Acquisition, LLC (the "AdditionalBorrower"), as a co-borrower under the Financing Agreementand related Factoring Agreement. Accordingly, the Company and CIT (i)amended the Financing Agreement pursuant to a joinder agreement, whichalso constitutes Amendment No. 1 to the Financing Agreement (the"Amended Financing Agreement") and (ii)entered into a new factoring agreement with the Additional Borrower, toadd the Additional Borrower as a co-borrower. The Company's andthe Additional Borrower's obligations under the Amended FinancingAgreement are secured by a first priority lien on substantially all ofthe Company's and the Additional Borrower's assets,including the Company's and the Additional Borrower'saccounts receivable, inventory, intangibles, equipment, and trademarksand a pledge of the Company's stock interest and membershipinterest in the Company's subsidiaries, including the AdditionalBorrower.

On January 30, 2004, the Company and CIT agreed to anamendment to the Financing Agreement in order to facilitate the CynthiaSteffe acquisition discussed below. The Company and CIT agreed to addthe Company's wholly-owned subsidiary, Cynthia SteffeAcquisition, LLC ("CS Acquisition") as aco-borrower under the Financing Agreement and related FactoringAgreement. Accordingly, the Company and CIT (i) amended the FinancingAgreement pursuant to a joinder agreement, which also 

14

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constitutes Amendment No. 2 to the FinancingAgreement (the "Second Amended FinancingAgreement") and (ii) entered into a new factoringagreement with CS Acquisition, to add CS Acquisition as a co-borrower.The obligations of the Company, S.L. Danielle and CS Acquisition underthe Second Amended Financing Agreement are secured by a first prioritylien on substantially all of the assets of the Company, S.L. Danielleand CS Acquisition, including their respective accounts receivables,inventory, intangibles, equipment, and trademarks and a pledge of theCompany's stock interest and membership interest in theCompany's subsidiaries. The Second Amended Financing Agreementalso provided, among other things for (i) an increase in the amount ofthe Term Loan by $1.2 million to cover a portion of the purchase priceof the Cynthia Steffe assets which had initially been paid for throughrevolving credit borrowings under the Revolving Facility; (ii) anincrease in the quarterly amortization payments on the Term Loan from$375,000 to $425,000; and (iii) the amendment of certain financialcovenants for fiscal 2004 (including the fixed charge coverage ratioand the minimum borrowing availability covenants) to provide for theCynthia Steffe operations and to be consistent with the Company'slatest business plan for fiscal 2004.

On September 15, 2004 theCompany and CIT agreed to further amend the Financing Agreement tomodify the financial covenants to be consistent with theCompany's then latest business plan for fiscal 2005.

OnNovember 11, 2004 the Company and CIT agreed to further amend theFinancing Agreement to extend the term of the agreement to October 1,2008.   In conjunction with this amendment, the Company and CIT1) revised interest rates as described above; 2) revised the borrowingavailability calculation under the agreement; and 3) revised certainfinancial covenants for fiscal 2005 and established financial covenantsfor fiscal 2006.   A facility fee of $100,000 was paid inconnection with the amendment.

On May 12, 2005, the Company andCIT agreed to further amend the Financing Agreement to reset certainfinancial covenants regarding tangible net worth, fixed charge coverageratio and minimum borrowing availability for the fourth quarter offiscal 2005.

On September 15, 2005, the Company and CIT agreedto further amend the Financing Agreement to reset or establish certainfinancial covenants regarding tangible net worth, EBITDA and minimumborrowing availability to be consistent with the Company's latestbusiness plan for fiscal 2006.

On June 30, 2005, the Company had$6.2 million of outstanding letters of credit under the RevolvingFacility, total availability of approximately $20.9 million under theAmended Financing Agreement, a balance of $7.3 million on the Term Loanand no revolving credit borrowings. At June 30, 2004, the Company had$8.0 million of outstanding letters of credit, total availability ofapproximately $11.6 million, a balance of $9.0 million on the Term Loanand $8.6 in revolving credit borrowings.

FactoringAgreement

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

Effective March 31, 2004, the Company, S.L.Danielle and CIT agreed to terminate the Factoring Agreements betweenthem. Pursuant to the terms of the original agreement, the Company isnow obligated to pay to CIT a collateral management fee of $5,000 amonth. Receivables related to sales of Cynthia Steffe product linescontinue to be factored. In connection with the termination of thoseFactoring Agreements, CS Acquisition and CIT entered into an amendmentof their Factoring Agreement which provides for a factoring commissionequal to 6/10 of 1% of the gross face amount of all accountsfactored by CIT up to $10 million ratably declining to a commissionbetween .55% and .45% of the gross amount of thereceivables in excess of $10 million. The Factoring Agreement betweenCS Acquisition and CIT, as most recently amended in November 2004, hasa term ending on March 31, 2006.

15

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Future Financing Requirements

AtJune 30, 2005, the Company had working capital of $21.6 million ascompared with working capital of $17.2 million at June 30, 2004. OnJune 13, 2005, the Company and Kenneth Cole Productions, Inc.("Purchaser") entered into a Stock PurchaseAgreement, pursuant to which the Purchaser purchased from the Companysix million (6,000,000) shares of common stock of the Company for anaggregate purchase price of six million dollars ($6,000,000). TheCompany's business plan requires the availability of sufficientcash flow and borrowing capacity to finance its product lines and tomeet its cash needs for the launch and support of the Kenneth Coleproduct lines. The Company expects to satisfy such requirements throughcash on hand, cash flow from operations and borrowings under itsfinancing agreements. The Company believes that it has adequateresources to meet its needs for the foreseeable future assuming that itmeets its business plan and satisfies the covenants set forth in theFinancing Agreement.

The foregoing discussion containsforward-looking statements which are based upon current expectationsand involve a number of uncertainties, including the Company'sability to maintain its borrowing capabilities under the FinancingAgreement, retail market conditions, and consumer acceptance of theCompany's products.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements exceptfor inventory purchase orders and letters of credit under the FinancingAgreement. See "Financing Agreement".

Inflation

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

Seasonality of Business andFashion Risk

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

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

Foreign Operations

TheCompany's foreign sourcing operations are subject to variousrisks of doing business abroad and any substantial disruption of itsrelationships with its foreign suppliers could adversely affect theCompany's operations. Any material increase in duty levels,material decrease in quota levels or material decrease in availablequota allocation could adversely affect the Company's operations.Approximately 89% of the products sold by the Company in fiscal2005 were manufactured in Asia and Central America.

CriticalAccounting Policies and Estimates

The Company'ssignificant accounting policies are more fully described in Note 2 tothe consolidated financial statements. Certain of the Company'saccounting policies require the application of significant

16

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judgment by management in selecting theappropriate assumptions for calculating financial estimates. By theirnature, these judgments are subject to an inherent degree ofuncertainty. These judgments are based on historical experience,observation of trends in the industry, information provided bycustomers and information available from other outside sources, asappropriate. Significant accounting policies include: 

RevenueRecognition – The Company recognizes sales upon shipment ofproducts to customers since title and risk of loss passes uponshipment. Provisions for estimated uncollectible accounts, discountsand returns and allowances are provided when sales are recorded basedupon historical experience and current trends. While such amounts havebeen within expectations and the provisions established, the Companycannot guarantee that it will continue to experience the same rates asin the past. Design revenue, which is less than 1% of totalrevenue, is recognized when designs are manufactured and shipped.

Accounts Receivable – Accounts Receivable are net ofallowances and anticipated discounts. An allowance for doubtfulaccounts is determined through analysis of the aging of accountsreceivable at the date of the financial statements, assessments ofcollectibility based on historical trends and an evaluation of theimpact of economic conditions. This amount is not significant primarilydue to the Company's history of minimal bad debts. An allowancefor discounts is based on those discounts relating to open invoiceswhere trade discounts have been extended to customers. Costs associatedwith potential returns of products as well as allowable customermarkdowns and operational charge backs, net of expected recoveries, areincluded as a reduction to net revenue and are part of the provisionfor allowances included in Accounts Receivable. These provisions resultfrom seasonal negotiations as well as historic deduction trends, netexpected recoveries and the evaluation of current market conditions. Asof June 30, 2005 and June 30, 2004, Account Receivable was net ofallowances of $1.8 million, and $1.2 million, respectively.

Inventories – Inventories are stated at the lower of cost ormarket, cost being determined on the first-in, first-out method. Themajority of the Company's inventory purchases are shipped FOBshipping point from the Company's suppliers. The Company takestitle and assumes the risk of loss when the merchandise is received atthe boat or airplane overseas. The Company records inventory at thepoint of such receipt at the boat or airplane overseas. Reserves forslow moving and aged merchandise are provided to adjust inventory costsbased on historical experience and current product demand. Inventoryreserves were $1.5 million at June 30, 2005, and $0.8 million at June30, 2004. Inventory reserves are based upon the level of excess andaged inventory and the Company's estimated recoveries on the saleof the inventory. While markdowns have been within expectations and theprovisions established, the Company cannot guarantee that it willcontinue to experience the same level of markdowns as in the past.

Valuation of Long-Lived Assets, Trademarks and Goodwill – TheCompany periodically reviews the carrying value of its long-livedassets for continued appropriateness. This review is based uponprojections of anticipated future undiscounted cash flows. While theCompany believes that its estimates of future cash flows arereasonable, different assumptions regarding such cash flows couldmaterially affect evaluations. The Company evaluates goodwill wheneverevents and changes in circumstances suggest that the carrying amountmay not be recoverable from its estimated future cash flows. To theextent these future projections or the Company's strategieschange, the conclusion regarding impairment may differ from the currentestimates.

Income Taxes – The Company's results ofoperations have generated a federal tax net operating loss("NOL") carryforward of approximately $96.0million as of June 30, 2005. Generally accepted accounting principlesrequire that the Company record a valuation allowance against thedeferred tax asset associated with this NOL if it is "morelikely than not" that the Company will not be able toutilize it to offset future taxes. As of June 30, 2005, based upon itsevaluation of the Company's historical and projected results ofoperations, the current business environment and the magnitude of theNOL, the Company recorded a full valuation allowance on its deferredtax assets including NOL's. The provision for income taxesprimarily relates to federal alternative minimum taxes (AMT) and stateand local taxes. It is possible, however, that the Company could beprofitable in the future at levels which cause management to concludethat it is more likely than not that the Company will realize all or aportion of the NOL carryforward. Upon reaching such a conclusion, theCompany would record the estimated net realizable value of the deferredtax asset at that time and would then provide for income taxes at arate equal to its 

17

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combined federal and state effective rates.Subsequent revisions to the estimated net realizable value of thedeferred tax asset could cause the Company's provision for incometaxes to vary from period to period, although its cash tax paymentswould remain unaffected until the benefit of the NOL is utilized.

Item 7A.    Quantitative and Qualitative Disclosures AboutMarket Risk.

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

At June 30, 2005 and 2004, the carrying amounts ofthe Company's revolving credit borrowings and term loanapproximated fair value. As of June 30, 2005, the Company'srevolving credit interest rate was 6.5% and the term loan boreinterest at 7.0%. As of June 30, 2005, a hypothetical immediate10% adverse change in prime interest rates relating to theCompany's revolving credit borrowings and term loan would have a$0.1 million unfavorable impact on its earnings and cash flows over aone-year period.

Item 8.    Financial Statements andSupplementary Data.

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

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

None.

Item9A.    Controls and Procedures.

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

Eachfiscal quarter the Company carries out an evaluation, under thesupervision and with the participation of the Company'smanagement, including Company's Chairwoman and Chief ExecutiveOfficer along with the Company's Chief Financial Officer, of theeffectiveness of the design and operation of the Company'sdisclosure controls and procedures pursuant to Exchange Act Rule13a-15. Based upon the foregoing, the Company's Chairwoman andChief Executive Officer along with the Company's Chief FinancialOfficer, concluded that, as of June 30, 2005, the Company'sdisclosure controls and procedures are effective in timely alertingthem to material information relating to the Company (including itsconsolidated subsidiaries) required to be included in theCompany's Exchange Act reports.

During the fiscal yearended June 30, 2005, there has been no change in the Company'sinternal control over financial reporting that has materially affected,or is reasonably likely to materially affect, the Company'sinternal control over financial reporting.

Item9B.    Other Information

None

18

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PART III

Item10.    Directors and Executive Officers of theRegistrant.

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

Information with respect to the directors of theCompany is incorporated by reference to the information to be set forthunder the heading "Election of Directors" inthe Company's definitive proxy statement relating to its 2005Annual Meeting of Shareholders to be filed pursuant to Regulation 14A(the "2005 Proxy Statement").

Item11.    Executive Compensation.

Information calledfor by Item 11 is incorporated by reference to the information to beset forth under the heading "ExecutiveCompensation" in the Company's 2005 ProxyStatement.

Item 12.    Security Ownership of CertainBeneficial Owners and Management and Related Stockholdersmatters.

Information called for by Item 12 is incorporatedby reference to the information to be set forth under the heading"Security Ownership of Certain Beneficial Owners andManagement" in the Company's 2005 ProxyStatement.

Information with respect to securities authorized forissuance under equity compensation plans is incorporated by referenceto the information to be set forth under the heading"Compensation Program Components" in theCompany's 2005 Proxy Statement.

Item 13.    CertainRelationships and Related Transactions.

Information calledfor by Item 13 is incorporated by reference to the information to beset forth under the headings "ExecutiveCompensation" and "CertainTransactions" in the Company's 2005 ProxyStatement.

Item 14.    Principal Accounting Fees andServices.

Information called for by Item 14 isincorporated by reference to the information to be set forth under theheadings "Report of the Audit Committee" and"Auditors" in the Company's 2005 ProxyStatement.

PART IV

Item 15.    Exhibits,Financial StatementSchedule

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

|           |          |
|-----------|----------|
| (b)  | Exhibits |

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

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

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

19

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|           |                                                                                                                                                                                          |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.4  | Amendmentdated December 9, 1998 to the Restated Certificate (incorporated byreference to Exhibit 3.13 of the Company's Form 10-K for the yearended June 30, 1998 (the "1998 Form10-K")). |

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

|           |                                                                                                                                                                   |
|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.6  | Amendment dated September 13,1994 to the By-Laws (incorporated by reference to Exhibit 10.105 of theCompany's Form 10-Q for the quarter ended September 30,1994). |

|                     |                                                                                                                                                                                                                                                 |
|---------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †10.77  | 1998 Stock OptionPlan, as amended by Amendment No.1 thereto including form of relatedstock option agreement (incorporated by reference to Exhibit A andExhibit B of the Company's Proxy Statement filed with theCommission on October 17,2000). |

|             |                                                                                                                                                                                                                                                            |
|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.81  | Collective BargainingAgreement between the Company and Amalgamated Workers Union, Local 88effective as of September 24, 1999 (incorporated by reference toExhibit 10.81 of the Company's Form 10-K for the year ended June30, 1999 (the "1999 Form10-K")). |

|             |                                                                                                                                                                                                                                         |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.82  | Leasebetween the Company and Adler Realty Company, dated June 1, 1999 withrespect to the Company's executive offices and showroom at 530Seventh Avenue, New York City (incorporated by reference to Exhibit10.82 of the 1999 Form10-K). |

|             |                                                                                                                                                                                                                                                                                                               |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.83  | Lease between the Companyand Kaufman Eighth Avenue Associates, dated September 11, 1999 withrespect to the Company's technical support facilities at 519Eighth Avenue, New York City (incorporated by reference to Exhibit ofthe Company's Form 10-K for the year ended June 30, 2000 (the"2000 Form 10-K")). |

|                     |                                                                                                                                                                                                    |
|---------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †10.87  | Employment Agreement datedJanuary 10, 2001 between the Company and Nicholas DiPaolo (incorporatedby reference to Exhibit 10.87 of the Company's Form 10-Q for thequarter ended December 31, 2000). |

|             |                                                                                                                                                                                                                                                                                                                           |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.90  | Lease modification agreement between the Company andHartz Mountain Industries, Inc., dated August 30, 1999 with respect tothe Company's distribution and office facilities in Secaucus, NJ.(incorporated by reference to Exhibit 10.90 of the Company's Form10-K for the year ended June 30, 2001 (the"2001 Form 10-K")). |

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

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

|              |                                                                                                                                                                                                                                                                                          |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.102  | Joinder and Amendment No.1 to Financing Agreement by and among the Company, S.L. Danielle andThe CIT Group/Commercial Services, Inc., as agent, dated November 27,2002. (incorporated by reference to Exhibit 10.102 of theCompany's Form 10-Q for the quarter ended December 31, 2002). |

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

|              |                                                                                                                                                                                                                               |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.104  | Factoring Agreementbetween S.L. Danielle and The CIT Group/Commercial Services, Inc.,dated November 27, 2002. (incorporated by reference to Exhibit 10.104of the Company's Form 10-Q for the quarter ended December 31,2002). |

|              |                                                                                                                                                                                                                 |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.105  | Asset Purchase Agreementbetween S.L. Danielle and S.L. Danielle, Inc., dated November 27, 2002.(incorporated by reference to Exhibit 10.105 of the Company'sForm 10-Q for the quarter ended December 31, 2002). |

|               |                                                                                                                                                                                                                                                                                                                         |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.106   | Joinder and Amendment No. 2 toFinancing Agreement by and among the Company, S.L. Danielle, CynthiaSteffe Acquisition, LLC and The CIT Group/Commercial Services, Inc., asagent, dated January 30, 2004. (incorporated by reference to Exhibit10.106 of the Company's Form 10-Q for the quarter ended December31, 2003). |

20

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|              |                                                                                                                                                                                                                                               |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.107  | AmendmentNo. 2 to Factoring Agreement between the Company and The CITGroup/Commercial Services, Inc., dated January 30, 2004. (incorporatedby reference to Exhibit 10.107 of the Company's Form 10-Q for thequarter ended December 31, 2003). |

|              |                                                                                                                                                                                                                                                  |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.108  | Amendment No. 1 to Factoring Agreement between S.L.Danielle and The CIT Group/Commercial Services, Inc., dated January 30,2004. (incorporated by reference to Exhibit 10.108 of theCompany's Form 10-Q for the quarter ended December 31, 2003). |

|               |                                                                                                                                                                                                                                                |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.109   | Factoring Agreement between CynthiaSteffe Acquisition, LLC and The CIT Group/Commercial Services, Inc.,dated January 15, 2004. (incorporated by reference to Exhibit 10.109 ofthe Company's Form 10-Q for the quarter ended December 31,2003). |

|               |                                                                                                                                                                                                                                   |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.111   | Amendment to EmploymentAgreement between Nicholas DiPaolo and Bernard Chaus, Inc., effectiveas of December  1, 2003. (incorporated by reference to Exhibit10.111 of the Company's Form 10-Q for the quarter ended March 31,2004). |

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

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

|               |                                                                                                                                                                                                                                                          |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.114   | Amendment No.3 to Financing Agreement among the Company, S.L. Danielle, CynthiaSteffe Acquisition, LLC and the CIT Group/Commercial Services, Inc. asagent, dated September 15, 2004 (incorporated by reference to Exhibit10.114 of the 2004 Form 10-K). |

|                      |                                                                                                                                                                                                               |
|----------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †10.115  | Amendment to Employment Agreement dated October 18,2004 between the Company and Nicholas DiPaolo. (incorporated byreference to Exhibit 10.115 of the Company's form 10-Q thequarter ended December 31, 2004). |

|                      |                                                                                                                                                                                              |
|----------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| †10.116  | Employment Agreement dated October 18, 2004 betweenthe Company and David Panitz. (incorporated by reference to Exhibit10.116 of the Company's form 10-Q the quarter ended December 31,2004). |

|               |                                                                                                                                                                                                                                                                                                  |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.117   | Amendment No. 4 toFinancing Agreement among the Company, S.L. Danielle, Cynthia SteffeAcquisition, LLC and the CIT Group/Commercial Services, Inc. as agent,dated November 11, 2004. (incorporated by reference to Exhibit 10.117of the Company's form 10-Q the quarter ended December 31,2004). |

|               |                                                                                                                                                                                                                                                                |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.118   | Amendment No.  2to Factoring Agreement between Cynthia Steffe Acquisition LLC and theCIT Group/Commercial Services, Inc., dated November 11, 2004.(incorporated by reference to Exhibit 10.118 of the Company'sform 10-Q the quarter ended December 31, 2004). |

|               |                                                                                                                                                                       |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.119  | Amendment No.5 to Financing Agreement among theCompany, S.L. Danielle, Cynthia Steffe Acquisition, LLC and the CITGroup/Commercial Services, Inc. dated May 12, 2005. |

|                |                                                                                                            |
|----------------|------------------------------------------------------------------------------------------------------------|
| *10.120   | Stock Purchase Agreement betweenBernard Chaus, Inc. and Kenneth Cole Productions, Inc. dated June 13,2005. |

|                |                                                                                                                                                                                                                                 |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.121   | License Agreementbetween Kenneth Cole Productions (LIC), Inc. and Bernard Chaus, Inc.dated June 13, 2005 (filed in redacted form since confidentialtreatment was requested pursuant to Rule 246-2 for certain portionsthereof). |

|                |                                                                                                                                                                            |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.122   | Amendment No.6 toFinancing Agreement among the Company, S.L. Danielle, Cynthia SteffeAcquisition, LLC and the CIT Group/Commercial Services, Inc. datedSeptember 15, 2005. |

|            |                                     |
|------------|-------------------------------------|
| *21   | List ofSubsidiaries of the Company. |

|             |                                                                                                 |
|-------------|-------------------------------------------------------------------------------------------------|
| *23.1  | Consent of Mahoney Cohen & Company, CPA,P.C.,Independent Registered Public Accounting Firm. |

|             |                                                                                      |
|-------------|--------------------------------------------------------------------------------------|
| *23.2  | Consent of Deloitte & Touche LLP., IndependentRegistered Public Accounting Firm. |

21

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

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

|             |                                                                                                                                           |
|-------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| *32.1  | Certification Pursuant to 18 U.S.C. Section 1350, asAdopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 forJosephine Chaus. |

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

|  |
|--|
|  |  |
|  |

|          |                                                                                             |
|----------|---------------------------------------------------------------------------------------------|
| † | Management agreement or compensatory planor arrangement required to be filed as an exhibit. |

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

22

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SIGNATURES

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

|        |  |                         |  |                                                                 |  |  |  |  |  |  |
|--------|--|-------------------------|--|-----------------------------------------------------------------|--|--|--|--|--|--|
|   |  | BERNARDCHAUS, INC.      |
|   |  | By:                     |  | /s/JosephineChaus                                               |
|   |  |                    |  | JosephineChausChairwoman of the Board andChief ExecutiveOfficer |
|   |  | Date: September 20,2005 |
|        |

Pursuant to the requirements of theSecurities Exchange Act of 1934, this Report has been signed below bythe following persons on behalf of the registrant and in the capacitiesand on the dates indicated. 

|                      |  |                                                    |  |                    |
|----------------------|--|----------------------------------------------------|--|--------------------|
| SIGNATURE            |  | TITLE                                              |  | DATE               |
|                      |
| /s/Josephine Chaus   |  | Chairwoman of the Board and Chief ExecutiveOfficer |  | September 20, 2005 |
|                      |
| JosephineChaus       |
|                      |
| /s/David Panitz      |  | ChiefOperating Officer                             |  | September 20, 2005 |
|                      |
| David Panitz         |
|                      |
| /s/ Barton Heminover |  | Chief FinancialOfficer                             |  | September 20, 2005 |
|                      |
| BartonHeminover      |
|                      |
| /s/Philip G. Barach  |  | Director                                           |  | September 20,2005  |
|                      |
| Philip G.Barach      |
|                      |
| /s/ S. Lee Kling     |  | Director                                           |  | September 20,2005  |
|                      |
| S. LeeKling          |
|                      |
| /s/ Harvey M.Krueger |  | Director                                           |  | September 20,2005  |
|                      |
| Harvey M.Krueger     |
|                      |

23

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BERNARDCHAUS, INC. AND SUBSIDIARIES

INDEX TO FINANCIALSTATEMENTS AND FINANCIAL STATEMENT SCHEDULE

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

|                                                                                                                               |  |        |     |        |  |  |
|-------------------------------------------------------------------------------------------------------------------------------|--|--------|-----|--------|--|--|
| Reportsof Independent Registered Public AccountingFirms                                                                       |  |   | F-2 |   |
| Consolidated Balance Sheets— June 30, 2005 and 2004                                                                     |  |   | F-4 |   |
| Consolidated Statements of Operations — Years Ended June30, 2005, 2004 and 2003                                         |  |   | F-5 |   |
| ConsolidatedStatements of Stockholders' Equity and Comprehensive Income(Loss) — Years Ended June 30, 2005, 2004 and2003 |  |   | F-6 |   |
| Consolidated Statements of CashFlows — Years Ended June 30, 2005, 2004 and2003                                          |  |   | F-7 |   |
| Notes to Consolidated FinancialStatements                                                                                     |  |   | F-8 |   |
|                                                                                                                               |

The followingconsolidated financial statement schedule of Bernard Chaus, Inc. andsubsidiaries is included in Item 15:

|                                                      |  |        |     |        |  |  |
|------------------------------------------------------|--|--------|-----|--------|--|--|
| Schedule II — Valuation and QualifyingAccounts |  |   | S-1 |   |
|                                                      |

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

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

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

We have audited theaccompanying consolidated balance sheet of Bernard Chaus, Inc. andsubsidiaries as of June 30, 2005 and the related consolidatedstatements of operations, stockholders' equity and comprehensiveincome (loss) and cash flows for the year then ended. Our audit alsoincluded the financial statement schedule listed in the Index at item15 for the year ended June 30, 2005. These financial statements andfinancial statement schedule are the responsibility of theCompany's management. Our responsibility is to express an opinionon these financial statements and financial statement schedule based onour audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements arefree of material misstatement. The Company has determined that it isnot required to have, nor were we engaged to perform, an audit of itsinternal control over financial reporting. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as wellas evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

Inour opinion, such consolidated financial statements present fairly, inall material respects, the financial position of Bernard Chaus, Inc.and subsidiaries at June 30, 2005, and the results of their operationsand their cash flows for the year then ended in conformity withaccounting principles generally accepted in the United States ofAmerica. Also, in our opinion, such financial statement schedule, whenconsidered in relation to the basic consolidated financial statementstaken as a whole, presents fairly in all material respects theinformation set forth therein.

/s/ Mahoney Cohen &Company, CPA, P.C.

New York, New York August 31,2005

F-2

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REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheetof Bernard Chaus, Inc. and subsidiaries as of June 30, 2004 and therelated consolidated statements of operations, stockholders'equity and cash flows for each of the two years in the period endedJune 30, 2004. Our audits also included the financial statementschedule listed in the Index at item 15 for the two years in the periodended June 30, 2004. These financial statements and financial statementschedule are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statementsand financial statement schedule based on our audits.

Weconducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, suchconsolidated financial statements present fairly, in all materialrespects, the financial position of Bernard Chaus, Inc. andsubsidiaries at June 30, 2004, and the results of their operations andtheir cash flows for each of the two years in the period ended June 30,2004 in conformity with accounting principles generally accepted in theUnited States of America. Also, in our opinion, such financialstatement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

/s/ Deloitte & Touche LLP

Parsippany, NewJersey September 28, 2004

F-3

----

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

|                                                                                                                                                  |  |             |          |              |  |        |          |         |  |  |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------|----------|--------------|--|--------|----------|---------|--|--|
| Assets                                                                                                                                           |  | June30,2005 |          | June 30,2004 |
| CurrentAssets                                                                                                                                    |  |        |     |         |  |   |     |    |
| Cash and cashequivalents                                                                                                                         |  | $           | 7,732    |         |  | $      | 137      |    |
| Accountsreceivable –net                                                                                                                    |  |        | 16,331   |         |  |   | 28,108   |    |
| Accountsreceivable – due fromfactor                                                                                                        |  |        | 1,689    |         |  |   | 695      |    |
| Inventories–net                                                                                                                            |  |        | 10,667   |         |  |   | 8,673    |    |
| Prepaidexpenses and other currentassets                                                                                                          |  |        | 898      |         |  |   | 952      |    |
| Totalcurrent assets                                                                                                                              |  |        | 37,317   |         |  |   | 38,565   |    |
| Fixedassets – net                                                                                                                          |  |        | 3,353    |         |  |   | 4,212    |    |
| Otherassets –net                                                                                                                           |  |        | 371      |         |  |   | 342      |    |
| Trademarks                                                                                                                                       |  |        | 1,000    |         |  |   | 1,000    |    |
| Goodwill                                                                                                                                         |  |        | 2,257    |         |  |   | 2,257    |    |
| Totalassets                                                                                                                                      |  | $           | 44,298   |         |  | $      | 46,376   |    |
| **Liabilitiesand Stockholders'Equity**                                                                                                           |  |        |     |         |  |   |     |    |
| CurrentLiabilities                                                                                                                               |  |        |     |         |  |   |     |    |
| Revolvingcredit borrowings                                                                                                                       |  | $           | —  |         |  | $      | 8,563    |    |
| Accountspayable                                                                                                                                  |  |        | 9,479    |         |  |   | 7,913    |    |
| Accruedexpenses                                                                                                                                  |  |        | 4,682    |         |  |   | 3,198    |    |
| Termloan –current                                                                                                                          |  |        | 1,700    |         |  |   | 1,700    |    |
| Totalcurrentliabilities                                                                                                                          |  |        | 15,861   |         |  |   | 21,374   |    |
| Termloan                                                                                                                                         |  |        | 5,625    |         |  |   | 7,325    |    |
| Long termliabilities                                                                                                                             |  |        | 994      |         |  |   | 897      |    |
| Deferred incometaxes                                                                                                                             |  |        | 179      |         |  |   | 81       |    |
| Totalliabilities                                                                                                                                 |  |        | 22,659   |         |  |   | 29,677   |    |
| Commitmentsand Contingencies (Notes 6, 9, and12)                                                                                                 |  |        |     |         |  |   |     |    |
| **Stockholders'Equity**                                                                                                                          |  |        |     |         |  |   |     |    |
| Preferred stock, $.01par value, authorized shares – 1,000,000; issued and outstandingshares –none                                    |  |        | —  |         |  |   | —  |    |
| Common stock,$.01 par value, authorized shares – 50,000,000; issued shares– 36,004,359 at June 30,2005 and 27,979,359 at June30,2004 |  |        | 360      |         |  |   | 280      |    |
| Additional paid-incapital                                                                                                                        |  |        | 132,621  |         |  |   | 126,234  |    |
| Deficit                                                                                                                                          |  |        | (109,187 | )       |  |   | (108,030 | )  |
| Accumulatedother comprehensiveloss                                                                                                               |  |        | (675     | )       |  |   | (305     | )  |
| Less: Treasurystock at cost – 62,270 shares at June 30, 2005 and2004                                                                       |  |        | (1,480   | )       |  |   | (1,480   | )  |
| Totalstockholders'equity                                                                                                                         |  |        | 21,639   |         |  |   | 16,699   |    |
| Totalliabilities and stockholders'equity                                                                                                         |  | $           | 44,298   |         |  | $      | 46,376   |    |
|                                                                                                                                             |  |        |     |         |  |   |     |    |
|                                                                                                                                                  |

Seeaccompanying notes to consolidated financial statements.

F-4

----

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

|                                                                                         |  |                          |            |         |  |        |            |        |  |        |            |        |  |  |
|-----------------------------------------------------------------------------------------|--|--------------------------|------------|---------|--|--------|------------|--------|--|--------|------------|--------|--|--|
|                                                                                    |  | FiscalYear Ended June30, |
|                                                                                    |  | 2005                     |            | 2004    |  | 2003   |
| Netrevenue                                                                              |  | $                        | 143,255    |    |  | $      | 157,107    |   |  | $      | 140,225    |   |
| Costof goodssold                                                                        |  |                     | 103,661    |    |  |   | 117,451    |   |  |   | 104,398    |   |
| Grossprofit                                                                             |  |                     | 39,594     |    |  |   | 39,656     |   |  |   | 35,827     |   |
| Selling,general and administrativeexpenses                                              |  |                     | 39,240     |    |  |   | 34,894     |   |  |   | 29,634     |   |
| Incomefromoperations                                                                    |  |                     | 354        |    |  |   | 4,762      |   |  |   | 6,193      |   |
| Interestexpense,net                                                                     |  |                     | 1,328      |    |  |   | 1,355      |   |  |   | 1,091      |   |
| Income(loss) before income taxprovision                                                 |  |                     | (974       | )  |  |   | 3,407      |   |  |   | 5,102      |   |
| Incometaxprovision                                                                      |  |                     | 183        |    |  |   | 303        |   |  |   | 425        |   |
| Netincome(loss)                                                                         |  | $                        | (1,157     | )  |  | $      | 3,104      |   |  | $      | 4,677      |   |
| Basicearnings (loss) pershare                                                           |  | $                        | (0.04      | )  |  | $      | 0.11       |   |  | $      | 0.17       |   |
| Dilutedearnings (loss) pershare                                                         |  | $                        | (0.04      | )  |  | $      | 0.10       |   |  | $      | 0.16       |   |
| Weightedaverage number of common shares outstanding –basic                        |  |                     | 28,363,000 |    |  |   | 27,504,000 |   |  |   | 27,384,000 |   |
| Weightedaverage number of common and common equivalent shares outstanding–diluted |  |                     | 28,363,000 |    |  |   | 30,490,000 |   |  |   | 29,912,000 |   |
|                                                                                         |

Seeaccompanying notes to consolidated financial statements.

F-5

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BERNARD CHAUS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ANDCOMPREHENSIVE INCOME (LOSS)(In thousands, except number ofshares)

|                                                       |  |                |            |        |  |                          |         |               |  |                |         |        |  |                                   |           |         |  |        |         |        |  |        |         |         |  |        |         |         |  |        |        |         |  |  |
|-------------------------------------------------------|--|----------------|------------|--------|--|--------------------------|---------|---------------|--|----------------|---------|--------|--|-----------------------------------|-----------|---------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--------|--------|---------|--|--|
|                                                  |  | CommonStock    |            |   |  |                     |         | TreasuryStock |  |           |
|                                                  |  | NumberofShares |            | Amount |  | AdditionalPaid-inCapital |         | (Deficit)     |  | NumberofShares |         | Amount |  | AccumulatedOtherComprehensiveLoss |           | Total   |
| Balance at July1,2002                                 |  |           | 27,278,258 |   |  | $                        | 273     |          |  | $              | 125,473 |   |  |                              | ($115,811 | )  |  |   | 62,270  |   |  |   | ($1,480 | )  |  |   | ($242   | )  |  | $      | 8,213  |    |
| Issuanceof common stock upon exercise of stockoptions |  |           | 6,100      |   |  |                     | — |          |  |           | 3       |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | — |    |  |   | 3      |    |
| Commonstock and stock options issued foracquisition   |  |           | 100,000    |   |  |                     | 1       |          |  |           | 467     |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | — |    |  |   | 468    |    |
| Minimumpension liabilityadjustment                    |  |           | —    |   |  |                     | — |          |  |           | — |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | (252    | )  |  |   | (252   | )  |
| Netincome                                             |  |           | —    |   |  |                     | — |          |  |           | — |   |  |                              | 4,677     |    |  |   | — |   |  |   | — |    |  |   | — |    |  |   | 4,677  |    |
| Comprehensiveincome                                   |  |           |       |   |  |                     |    |          |  |           |    |   |  |                              |      |    |  |   |    |   |  |   |    |    |  |   |    |    |  |   | 4,425  |    |
| Balanceat June 30,2003                                |  |           | 27,384,358 |   |  |                     | 274     |          |  |           | 125,943 |   |  |                              | (111,134  | )  |  |   | 62,270  |   |  |   | (1,480  | )  |  |   | (494    | )  |  |   | 13,109 |    |
| Issuanceof common stock upon exercise of stockoptions |  |           | 595,001    |   |  |                     | 6       |          |  |           | 291     |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | — |    |  |   | 297    |    |
| Minimumpension liabilityadjustment                    |  |           | —    |   |  |                     | — |          |  |           | — |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | 189     |    |  |   | 189    |    |
| Netincome                                             |  |           | —    |   |  |                     | — |          |  |           | — |   |  |                              | 3,104     |    |  |   | — |   |  |   | — |    |  |   | — |    |  |   | 3,104  |    |
| Comprehensiveincome                                   |  |           |       |   |  |                     |    |          |  |           |    |   |  |                              |      |    |  |   |    |   |  |   |    |    |  |   |    |    |  |   | 3,293  |    |
| Balanceat June 30,2004                                |  |           | 27,979,359 |   |  |                     | 280     |          |  |           | 126,234 |   |  |                              | (108,030  | )  |  |   | 62,270  |   |  |   | (1,480  | )  |  |   | (305    | )  |  |   | 16,699 |    |
| Issuanceof common stock, net ofexpenses               |  |           | 6,000,000  |   |  |                     | 60      |          |  |           | 5,578   |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | — |    |  |   | 5,638  |    |
| Issuanceof common stock upon exercise of stockoptions |  |           | 2,025,000  |   |  |                     | 20      |          |  |           | 757     |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | — |    |  |   | 777    |    |
| Taxbenefit from exercise of stockoptions              |  |           | —    |   |  |                     | — |          |  |           | 52      |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | — |    |  |   | 52     |    |
| Minimumpension liabilityadjustment                    |  |           | —    |   |  |                     | — |          |  |           | — |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | (370    | )  |  |   | (370   | )  |
| Netloss                                               |  |           | —    |   |  |                     | — |          |  |           | — |   |  |                              | (1,157    | )  |  |   | — |   |  |   | — |    |  |   | — |    |  |   | (1,157 | )  |
| Comprehensiveloss                                     |  |           | —    |   |  |                     | — |          |  |           | — |   |  |                              | —   |    |  |   | — |   |  |   | — |    |  |   | — |    |  |   | (1,527 | )  |
| Balance atJune 30,2005                                |  |           | 36,004,359 |   |  | $                        | 360     |          |  | $              | 132,621 |   |  |                              | ($109,187 | )  |  |   | 62,270  |   |  |   | ($1,480 | )  |  |   | ($675   | )  |  | $      | 21,639 |    |
|                                                       |

Seeaccompanying notes to consolidated financial statements

F-6

----

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

|                                                                                                 |  |                   |         |         |  |        |         |         |  |        |         |         |  |  |
|-------------------------------------------------------------------------------------------------|--|-------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                            |  | YearEnded June30, |
|                                                                                            |  | 2005              |         | 2004    |  | 2003   |
| **OperatingActivities**                                                                         |  |              |    |    |  |   |    |    |  |   |    |    |
| Net income(loss)                                                                                |  | $                 | (1,157  | )  |  | $      | 3,104   |    |  | $      | 4,677   |    |
| Adjustmentsto reconcile net income (loss)to net cash provided by (used in)operating activities: |  |              |    |    |  |   |    |    |  |   |    |    |
| Depreciation andamortization                                                                    |  |              | 1,257   |    |  |   | 1,273   |    |  |   | 1,580   |    |
| Losson disposal of otherassets                                                                  |  |              | — |    |  |   | — |    |  |   | 244     |    |
| Deferredincometaxes                                                                             |  |              | 98      |    |  |   | — |    |  |   | — |    |
| Provisionfor losses on accountsreceivable                                                       |  |              | — |    |  |   | 180     |    |  |   | (260    | )  |
| Changesin operating assets and liabilities:                                                     |  |              |    |    |  |   |    |    |  |   |    |    |
| Accountsreceivable                                                                              |  |              | 11,777  |    |  |   | (27,811 | )  |  |   | 21,787  |    |
| Accountsreceivable due fromfactor                                                               |  |              | (994    | )  |  |   | 18,824  |    |  |   | (19,519 | )  |
| Inventories                                                                                     |  |              | (1,994  | )  |  |   | 2,601   |    |  |   | (455    | )  |
| Prepaidexpenses and other currentassets                                                         |  |              | (7      | )  |  |   | (176    | )  |  |   | 405     |    |
| Accountspayable                                                                                 |  |              | 1,566   |    |  |   | (4,834  | )  |  |   | 2,998   |    |
| Accruedexpenses and long termliabilities                                                        |  |              | 1,211   |    |  |   | (251    | )  |  |   | 726     |    |
| NetCash Provided By (Used In) OperatingActivities                                               |  |              | 11,757  |    |  |   | (7,090  | )  |  |   | 12,183  |    |
| **InvestingActivities**                                                                         |  |              |    |    |  |   |    |    |  |   |    |    |
| Acquisition ofbusiness                                                                          |  |              | — |    |  |   | (2,960  | )  |  |   | (4,662  | )  |
| Purchasesof fixedassets                                                                         |  |              | (314    | )  |  |   | (973    | )  |  |   | (308    | )  |
| NetCash Used In InvestingActivities                                                             |  |              | (314    | )  |  |   | (3,933  | )  |  |   | (4,970  | )  |
| **FinancingActivities**                                                                         |  |              |    |    |  |   |    |    |  |   |    |    |
| Net (repayments) borrowings ofshort-term bankborrowings                                         |  |              | (8,563  | )  |  |   | 8,563   |    |  |   | (3,591  | )  |
| Principalpayments on termloans                                                                  |  |              | (1,700  | )  |  |   | (1,550  | )  |  |   | (11,625 | )  |
| Borrowingson termloans                                                                          |  |              | — |    |  |   | 1,200   |    |  |   | 10,500  |    |
| Netproceeds from issuance ofstock                                                               |  |              | 6,415   |    |  |   | 297     |    |  |   | 3       |    |
| NetCash Provided By (Used In) FinancingActivities                                               |  |              | (3,848  | )  |  |   | 8,510   |    |  |   | (4,713  | )  |
| Increase(Decrease) in Cash and CashEquivalents                                                  |  |              | 7,595   |    |  |   | (2,513  | )  |  |   | 2,500   |    |
| Cashand Cash Equivalents, Beginning ofYear                                                      |  |              | 137     |    |  |   | 2,650   |    |  |   | 150     |    |
| Cashand Cash Equivalents, End ofYear                                                            |  | $                 | 7,732   |    |  | $      | 137     |    |  | $      | 2,650   |    |
| SupplementalDisclosure of Cash Flow Information:                                                |  |              |    |    |  |   |    |    |  |   |    |    |
| Cash paidfor:                                                                                   |  |              |    |    |  |   |    |    |  |   |    |    |
| Taxes                                                                                           |  | $                 | 136     |    |  | $      | 283     |    |  | $      | 313     |    |
| Interest                                                                                        |  | $                 | 1,137   |    |  | $      | 1,222   |    |  | $      | 964     |    |
| SupplementalDisclosure of Non-Cash Financing Activities:                                        |  |              |    |    |  |   |    |    |  |   |    |    |
| Taxbenefit from exercise of employee stockoptions                                               |  | $                 | 52      |    |  | $      | — |    |  | $      | — |    |
|                                                                                                 |

See accompanying notes toconsolidated financialstatements.

F-7

----

BERNARDCHAUS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS YEARS ENDED JUNE 30, 2005, 2004 AND 2003

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

Bernard Chaus, Inc. (the"Company" or"Chaus") designs, arranges for themanufacture of and markets an extensive range of women's careerand casual sportswear principally under the JOSEPHINECHAUS® COLLECTION, JOSEPHINE CHAUS®SPORT, CHAUS®, CYNTHIA STEFFE®, CYNTHIACYNTHIA STEFFE®, and FRANCES & RITA®trademarks and under private label brand names. The Company'sproducts are sold nationwide through department store chains, specialtyretailers and other retail outlets. The Company has positioned itsJOSEPHINE CHAUS product line into the opening price points of the"better" category. In November 2002, theCompany acquired certain assets of S.L. Danielle, Inc.("SL Danielle"). SL Danielle designs,arranges for the manufacture of and markets women's moderatelypriced clothing primarily under private labels. In January 2004, theCompany acquired certain assets of the Cynthia Steffe division of LFBrands Marketing, Inc., including inventory and showroom fixtures. Inconnection with such acquisition, the Company also acquired the CynthiaSteffe trademarks from Cynthia Steffe. The Cynthia Steffe businessdesigns, arranges for the manufacture of, markets and sells an upscalemodern women's apparel line, under the Cynthia Steffe trademarks.In June 2005 the Company signed a licensing agreement with Kenneth ColeProductions, Inc. to manufacture and sell women's sportswearunder the Kenneth Cole Reaction label. The Company expects that theseproducts will be sold nationwide through major retail department storesand select specialty stores starting in spring 2006. These productswill offer high-quality fabrications and styling at"better" price points. As used herein, fiscal2005 refers to the fiscal year ended June 30, 2005, fiscal 2004 refersto the fiscal year ended June 30, 2004 and fiscal 2003 refers to thefiscal year ended June 30, 2003.

|          |                                           |
|----------|-------------------------------------------|
| 2.  | Summary ofSignificant Accounting Policies |

Principles ofConsolidation:

The consolidated financial statements includethe accounts of the Company and its subsidiaries. Intercompany accountsand transactions have been eliminated.

Use of Estimates:

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States ofAmerica requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

Revenue Recognition:

The Company recognizes sales uponshipment of products to customers since title and risk of loss passesupon shipment. Provisions for estimated uncollectible accounts,discounts and returns and allowances are provided when sales arerecorded based upon historical experience and current trends. Whilesuch amounts have been within expectations and the provisionsestablished, the Company cannot guarantee that it will continue toexperience the same rates as in the past. Design revenue, which is lessthan 1% of total revenue, is recognized when designs aremanufactured and shipped.

Shipping and Handling:

Shipping and handling costs charged to customers is recorded as acomponent of net revenue. For all periods presented shipping andhandling costs charged to customers was less than $0.1 million.Shipping and handling costs are included as a component of selling,general and administrative expenses in the consolidated statements ofoperations. In fiscal year 2005, 2004 and 2003 shipping and handlingcosts approximated $0.6 million, $0.7 million and $0.4 million,respectively.

F-8

----

Cooperative Advertising:

Cooperative advertising allowances are recorded in selling, generaland administrative expenses in the period in which the costs areincurred. In fiscal years ended June 30, 2005, June 2004 and June 2003cooperative advertising expenses were approximately $0.5 million, $0.3million, and $0.3 million respectively.

Credit Terms:

Through March 31, 2004, the Company extended credit to the majorityof its customers through a factoring agreement with The CITGroup/Commercial Services, Inc. ("CIT").Under the factoring arrangement, the Company receives payment from CITas of the earlier of: a) the date that CIT has been paid by theCompany's customers; b) the date of the customer's longestmaturity if the customer is in a bankruptcy or insolvency proceeding;or c) the last day of the third month following the customer'slongest maturity date if the receivable remains unpaid. CIT assumesonly the risk of the Company's customers' insolvency ornon-payment. All other receivable risks for customer deductions thatreduce the customer receivable balances are retained by the Company,including, but not limited to, allowable customer markdowns,operational chargebacks, disputes, discounts, and returns. EffectiveMarch 31, 2004, the Company, the Company's SL Danielle subsidiaryand CIT agreed to terminate the Factoring Agreements between them. Inconnection with the termination of those Factoring Agreements, theCompany's wholly owned subsidiary, Cynthia Steffe Acquisition,LLC ("CS Acquisition") and CIT entered intoan amendment of their Factoring Agreement revising only the factoringcommission. Receivables related to sales of Cynthia Steffe productlines continue to be factored. Effective April 1, 2004 the Companyextends credit to its customers, other than customers of CS Acquisitionbased upon an evaluation of the customer's financial conditionand credit history.

At June 30, 2005 and 2004, approximately86% and 95% respectively, of the Company's accountsreceivable was non factored. At June 30, 2005 and 2004, approximately60 % and 77 % respectively, of the Company'saccounts receivable were due from customers owned by three singlecorporate entities. During fiscal 2005, approximately 59% of theCompany's net revenue was from three corporate entities –Dillard's Department Stores 22%, Sam's Club20% and TJX Companies 17%. During fiscal 2004approximately 70% of the Company's net revenue was fromthree corporate entities – Dillard's Department Stores35%, TJX Companies 22% and Sam's Club 13%.During fiscal 2003 approximately 73% of the Company's netrevenue was from three corporate entities – Dillards DepartmentStores 40%, TJX Companies 23% and May Department Stores10%. As a result of the Company's dependence on its majorcustomers, such customers may have the ability to influence theCompany's business decisions. The loss of or significant decreasein business from any of its major customers could have a materialadverse effect on the Company's financial position and results ofoperations.

Accounts Receivable:

Accounts Receivableare net of allowances and anticipated discounts. An allowance fordoubtful accounts is determined through analysis of the aging ofaccounts receivable at the date of the financial statements,assessments of collectibility based on historical trends and anevaluation of the impact of economic conditions. This amount is notsignificant primarily due to the Company's history of minimal baddebts. An allowance for discounts is based on those discounts relatingto open invoices where trade discounts have been extended to customers.Costs associated with potential returns of products as well asallowable customer markdowns and operational charge backs, net ofexpected recoveries, are included as a reduction to net revenue and arepart of the provision for allowances included in Accounts Receivable.These provisions result from seasonal negotiations as well as historicdeduction trends, net expected recoveries and the evaluation of currentmarket conditions. As of June 30, 2005 and June 30, 2004, AccountReceivable was net of allowances of $1.8 million, and $1.2 million,respectively.

Inventories:

Inventories are stated atthe lower of cost or market, cost being determined on the first-in,first-out method. The majority of the Company's inventorypurchases are shipped FOB shipping point from the 

F-9

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Company's suppliers. The Company takestitle and assumes the risk of loss when the merchandise is received atthe boat or airplane overseas. The Company records inventory at thepoint of such receipt at the boat or airplane overseas. Reserves forslow moving and aged merchandise are provided to writedown inventorycosts to net realizable value based on historical experience andcurrent product demand. Inventory reserves were $1.5 million at June30, 2005, and $0.8 million at June 30, 2004. Inventory reserves arebased upon the level of excess and aged inventory and theCompany's estimated recoveries on the sale of the inventory.While markdowns have been within expectations and the provisionsestablished, the Company cannot guarantee that it will continue toexperience the same level of markdowns as in the past. 

Cost ofgoods sold:

Cost of goods sold includes the costs incurred toacquire and produce inventory for sale, including product costs,freight-in, duty costs, commission cost and provisions for inventorylosses. During fiscal 2005, the Company purchased approximately72% of its finished goods from its ten largest manufacturers,including approximately 15% of its purchases from its largestmanufacturer. The Company believes that the number and geographicaldiversity of its manufacturing sources minimize the risk of adverseconsequences that would result from termination of its relationshipwith any of its larger manufacturers. The Company also believes that itwould have the ability to develop, over a reasonable period of time,adequate alternate manufacturing sources should any of its existingarrangements terminate. However, should any substantial number of suchmanufacturers become unable or unwilling to continue to produce apparelfor the Company or to meet their delivery schedules, or if theCompany's present relationships with such manufacturers wereotherwise materially adversely affected, there can be no assurance thatthe Company would find alternate manufacturers of finished goods onsatisfactory terms to permit the Company to meet its commitments to itscustomers on a timely basis. In such event, the Company'soperations could be materially disrupted, especially over theshort-term.

Cash and Cash Equivalents:

All highlyliquid investments with an original maturity of three months or less atthe date of purchase are classified as cash equivalents.

Goodwill and Trademarks

Goodwill represents the excess ofpurchase price over the fair value of net assets acquired in businesscombinations accounted for under the purchase method of accounting.Trademarks relate to the Cynthia Steffe trademarks and were determinedto have an indefinite life. Pursuant to the provisions of SFASNo.  142, "Goodwill and Other IntangibleAssets" the Company does not amortize assets withindefinite lives and conducts impairment testing annually in the fourthquarter of each fiscal year, or sooner if events and changes incircumstances suggest that the carrying amount may not be recoverablefrom its estimated future cash flows. No amortization expense orimpairment charges related to goodwill and trademarks have beenrecorded for the fiscal years ended June 30, 2005, 2004, and 2003.

Long-Lived Assets

The Company reviews certain long-livedassets for impairment whenever events or changes in circumstancesindicate that the carrying amount may not be recoverable. In thatregard, the Company assesses the recoverability of such assets basedupon estimated undiscounted cash flow forecasts. While the Companybelieves that its estimates of future cash flows are reasonable,different assumptions regarding such cash flows could materially affectevaluations. To the extent these future projections or theCompany's strategies change, the conclusion regarding impairmentmay differ from the current estimates. As of June 30, 2005, noimpairments of long-lived assets have been recognized.

IncomeTaxes:

The Company accounts for income taxes under the assetand liability method in accordance with Statement of FinancialAccounting Standards ("SFAS") No. 109,Accounting for Income Taxes. Deferred 

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income taxes reflect the future taxconsequences of differences between the tax bases of assets andliabilities and their financial reporting amounts at year-end. TheCompany periodically reviews its historical and projected taxableincome and considers available information and evidence to determine ifit is more likely than not that a portion of the deferred tax assetswill be realized. A valuation allowance is established to reduce thedeferred tax assets to the amount that is more likely than not to berealized. As of June 30, 2005 and 2004, based upon its evaluation, theCompany recorded a full valuation allowance on its deferred tax assets.See Note 5. If the Company determines that a portion of the deferredtax assets will be realized in the future, a portion of the valuationallowance will be reduced and the Company will provide for income taxexpense (benefit) in its Statement of Operations at its estimatedeffective tax rate.

Stock-based Compensation:

TheCompany has a Stock Option Plan and accounts for the plan under therecognition and measurement principles of APB 25,"Accounting for Stock Issued to Employees",and related interpretations. Under this method, compensation cost isthe excess, if any, of the quoted market price of the stock at thegrant date or other measurement date over the amount an employee mustpay to acquire the stock. No stock-based employee compensation cost isreflected in the Statement of Operations, as options granted under theplan had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. Had compensation costs for theCompany's stock option grants been determined based on the fairvalue at the grant dates for awards under these plans in accordancewith SFAS No. 123, the Company's net income (loss) and earnings(loss) per share would have been reduced to the pro forma amounts asfollows (Dollars in thousands, except sharedata):

|                                                                                                                  |  |                   |        |              |  |             |        |         |  |        |        |         |  |  |
|------------------------------------------------------------------------------------------------------------------|--|-------------------|--------|--------------|--|-------------|--------|---------|--|--------|--------|---------|--|--|
|                                                                                                             |  | Forthe Year Ended |
|                                                                                                             |  | June30,2005       |        | June 30,2004 |  | June30,2003 |
| Net income(loss), asreported                                                                                     |  | $                 | (1,157 | )       |  | $           | 3,104  |    |  | $      | 4,677  |    |
| Deduct:Total stock-based employee compensation expense determined under fairvalue based method,net of taxeffects |  |              | (255   | )       |  |        | (300   | )  |  |   | (549   | )  |
| Proformanet income(loss)                                                                                         |  | $                 | (1,412 | )       |  | $           | 2,804  |    |  | $      | 4,128  |    |
| Earnings(Loss) pershare:                                                                                         |  |              |   |         |  |        |   |    |  |   |   |    |
| Basic-asreported                                                                                                 |  | $                 | (0.04  | )       |  | $           | 0.11   |    |  | $      | 0.17   |    |
| Basic-proforma                                                                                                   |  | $                 | (0.05  | )       |  | $           | 0.10   |    |  | $      | 0.15   |    |
| Diluted-asreported                                                                                               |  | $                 | (0.04  | )       |  | $           | 0.10   |    |  | $      | 0.16   |    |
| Diluted-proforma                                                                                                 |  | $                 | (0.05  | )       |  | $           | 0.09   |    |  | $      | 0.14   |    |
|                                                                                                                  |

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The following assumptions were usedin the Black Scholes option pricing model that was utilized todetermine stock-based employee compensation expense under the fairvalue based method:

|                                                    |  |                   |      |              |  |             |      |         |  |        |      |         |  |  |
|----------------------------------------------------|--|-------------------|------|--------------|--|-------------|------|---------|--|--------|------|---------|--|--|
|                                               |  | Forthe Year Ended |
|                                               |  | June30,2005       |      | June 30,2004 |  | June30,2003 |
| Weighted average fair value of stockoptionsgranted |  | $                 | 0.74 |         |  | $           | 0.84 |    |  | $      | 0.74 |    |
| Risk-freeinterestrate                              |  |              | 4.17 | %       |  |        | 4.24 | %  |  |   | 3.92 | %  |
| Expecteddividendyield                              |  |              | 0    | %       |  |        | 0    | %  |  |   | 0    | %  |
| Expectedlife ofoptions                             |  | 10.0years         |      | 10.0 years   |  | 5.5 years   |
| Expectedvolatility                                 |  |              | 86   | %       |  |        | 87   | %  |  |   | 188  | %  |
|                                                    |

EarningsPer Share:

Basic earnings (loss) per share has been computed bydividing the applicable net income (loss) by the weighted averagenumber of common shares outstanding. Diluted earnings per share hasbeen computed by dividing the applicable net income by the weightedaverage number of common shares outstanding and common shareequivalents. Potentially dilutive shares of 1,384,994 were not includedin the calculation of diluted loss per share for the year ended June30, 2005, as their inclusion would have been antidilutive.

|                                                                                   |  |                  |         |              |  |             |      |        |  |        |      |        |  |  |
|-----------------------------------------------------------------------------------|--|------------------|---------|--------------|--|-------------|------|--------|--|--------|------|--------|--|--|
|                                                                              |  | Forthe YearEnded |
| Denominatorfor earnings (loss) per share (inmillions):                            |  | June30,2005      |         | June 30,2004 |  | June30,2003 |
| Denominator for basic earnings (loss)per share weighted-average sharesoutstanding |  |             | 28.4    |         |  |        | 27.5 |   |  |   | 27.4 |   |
| Assumedexercise of potential commonshares                                         |  |             | — |         |  |        | 3.0  |   |  |   | 2.5  |   |
| Denominatorfor diluted earnings (loss) pershare                                   |  |             | 28.4    |         |  |        | 30.5 |   |  |   | 29.9 |   |
|                                                                                   |

AdvertisingExpense:

Advertising costs are expensed when incurred.Advertising expenses including coop advertising of $0.6 million, $0.4million and $0.3 million, were included in selling, general andadministrative expenses for the years ended June 30, 2005, 2004 and2003 respectively.

Fixed Assets:

Furniture andequipment are depreciated principally using the straight-line methodover eight years. Leasehold improvements are amortized using thestraight-line method over either the term of the lease or the estimateduseful life of the improvement, whichever period is shorter. Computerhardware and software is depreciated using the straight-line methodover three to five years.

Other Assets:

Other assetsprimarily consist of security deposits for real estate leases anddeferred financing costs, which are being amortized over the remaininglife of the finance agreement.

Foreign CurrencyTransactions:

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

Fair Value of Financial Instruments:

For financialinstruments, including accounts receivable, accounts payable, revolvingcredit borrowings and term loans, the carrying amounts approximatedfair value due to their short-term maturity or variable interestrate.

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Deferred Rent Obligations:

TheCompany accounts for rent expense under noncancelable operating leaseswith scheduled rent increases on a straight-line basis over the leaseterm. The excess of straight-line rent expense over scheduled paymentamounts is recorded as a deferred liability included in long-termliabilities. Deferred rent obligations amounted to $0.5 million at June30, 2005 and 2004.

Other Comprehensive Income (Loss):

Other comprehensive income (loss) is reflected in the consolidatedstatements of stockholders' equity. Other comprehensive income(loss) reflects adjustments for minimum pension liability.

Reclassifications:

Certain reclassifications related toaccounts receivable have been made to conform to the current periodpresentation.

Segment Reporting:

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

New Accounting Pronouncements:

In November 2004, the FASBissued SFAS No. 151, "Inventory Costs, an amendment of ARBNo. 43, Chapter 4". SFAS No. 151 retains the generalprinciple of ARB 43, Chapter 4, "Inventory Pricing (ACSection I78)", that inventories are presumed to be statedat cost; however, it amends ARB 43 to clarify that abnormal amounts ofidle facility expense, freight, handling costs, and wasted materials(spoilage) should be recognized as current-period charges and requirethe allocation of fixed production overheads to inventories based onthe normal capacity of the production facilities. The guidance iseffective for inventory costs incurred during fiscal years beginningafter June 15, 2005. Earlier application is permitted for inventorycosts incurred during fiscal years beginning after November 23, 2004.The Company does not anticipate that SFAS No. 151 will have asignificant impact on the Company's overall results of operationsor financial position.

In December 2004, the FASB issued SFASNo. 123 (revised 2004), "Share-BasedPayment". SFAS 123(R) requires that the compensation costrelating to share-based payment transactions be recognized in financialstatements. The amount of compensation cost will be measured based onthe grant-date fair value of the equity or liability instrumentsissued. SFAS 123(R) covers a wide range of share-based compensationarrangements including share options, restricted share plans,performance-based awards, share appreciation rights, and employee sharepurchase plans. SFAS 123(R) replaces SFAS No. 123,"Accounting for Stock-Based Compensation" andsupersedes APB Opinion No. 25, "Accounting for StockIssued to Employees". This statement is effective as ofthe first interim or annual reporting period that begins after June 15,2005. The Company is required to implement this new standard in thequarter ending September 30, 2005. The impact of this new standard, ifit had been in effect, on the net earnings and related per shareamounts of our fiscal years ended in June 2005, 2004 and 2003 isdisclosed above in Note 2, Summary of Significant Accounting Policies,Stock-Based Compensation. The impact of this new standard on theCompany's net earnings for fiscal 2006 is estimated to beapproximately $0.2 million before the grant of any new options.

In May 2005, the FASB issued SFAS No. 154,"Accounting for Changes and Error Corrections - areplacement of APB Opinion No. 20 and FASB Statement No.3" ("SFAS No. 154"). SFAS No.154 

F-13

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replaces APB Opinion No. 20, AccountingChanges, and FASB Statement No. 3, Reporting Accounting Changes inInterim Financial Statements, and changes the requirements for theaccounting for and reporting of a change in accounting principle. ThisStatement applies to all voluntary changes in accounting principle. Italso applies to changes required by an accounting pronouncement in theunusual instance that the pronouncement does not include specifictransition provisions. When a pronouncement includes specifictransition provisions, those provisions should be followed. SFAS No.154 becomes effective for accounting changes and corrections of errorsmade in fiscal years beginning after December  15, 2005.

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

|                 |  |               |        |             |  |        |       |        |  |  |
|-----------------|--|---------------|--------|-------------|--|--------|-------|--------|--|--|
|            |  | June30,2005   |        | June30,2004 |
|            |  | (Inthousands) |
| Rawmaterials    |  | $             | 1,119  |        |  | $      | 1,105 |   |
| Work-in-process |  |          | 299    |        |  |   | 283   |   |
| Finishedgoods   |  |          | 9,249  |        |  |   | 7,285 |   |
| Total           |  | $             | 10,667 |        |  | $      | 8,673 |   |
|                 |

Inventoriesare stated at the lower of cost, using the first-in first-out (FIFO)method, or market. Included in inventories is merchandise in transit ofapproximately $5.1 million at June 30, 2005 and $5.2  million atJune 30, 2004.

|           |             |
|-----------|-------------|
| 4.   | FixedAssets |

|                                               |  |               |        |             |  |        |        |        |  |  |
|-----------------------------------------------|--|---------------|--------|-------------|--|--------|--------|--------|--|--|
|                                          |  | June30,2005   |        | June30,2004 |
|                                          |  | (Inthousands) |
| Computer hardware andsoftware                 |  | $             | 4,420  |        |  | $      | 4,126  |   |
| Furniture andequipment                        |  |          | 10,244 |        |  |   | 10,224 |   |
| Leaseholdimprovements                         |  |          | 10,494 |        |  |   | 10,494 |   |
|                                          |  |          | 25,158 |        |  |   | 24,844 |   |
| Less:accumulated depreciation andamortization |  |          | 21,805 |        |  |   | 20,632 |   |
|                                          |  | $             | 3,353  |        |  | $      | 4,212  |   |
|                                               |

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

The following are the major components ofthe provision for income taxes (In thousands):

|           |  |                          |        |        |  |        |        |        |  |        |         |        |  |  |
|-----------|--|--------------------------|--------|--------|--|--------|--------|--------|--|--------|---------|--------|--|--|
|      |  | FiscalYear Ended June30, |
|      |  | 2005                     |        | 2004   |  | 2003   |
| Current:  |  |                     |   |   |  |   |   |   |  |   |    |   |
| Federal   |  | $                        | 16     |   |  | $      | 72     |   |  | $      | 88      |   |
| State     |  |                     | 69     |   |  |   | 150    |   |  |   | 337     |   |
|      |  | $                        | 85     |   |  | $      | 222    |   |  | $      | 425     |   |
| Deferred: |  |                     |   |   |  |   |   |   |  |   |    |   |
| Federal   |  | $                        | 76     |   |  | $      | 63     |   |  | $      | — |   |
| State     |  |                     | 22     |   |  |   | 18     |   |  |   | — |   |
|      |  | $                        | 98     |   |  | $      | 81     |   |  | $      | — |   |
| Total     |  | $                        | 183    |   |  | $      | 303    |   |  | $      | 425     |   |
|           |

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Significant components of theCompany's net deferred tax assets and deferred tax liabilitiesare asfollows:

|                                                         |  |               |         |              |  |        |         |         |  |  |
|---------------------------------------------------------|--|---------------|---------|--------------|--|--------|---------|---------|--|--|
|                                                    |  | June30, 2005  |         | June 30,2004 |
|                                                    |  | (Inthousands) |
| Deferred taxassets:                                     |  |          |    |         |  |   |    |    |
| Netfederal, state and local operating losscarryforwards |  | $             | 37,400  |         |  | $      | 38,300  |    |
| Costscapitalized to inventory for taxpurposes           |  |          | 800     |         |  |   | 400     |    |
| Inventoryvaluation                                      |  |          | 600     |         |  |   | 400     |    |
| Excess of bookover taxdepreciation                      |  |          | 1,300   |         |  |   | 2,200   |    |
| Salesallowances not currentlydeductible                 |  |          | 600     |         |  |   | 700     |    |
| Reserves andother items not currentlydeductible         |  |          | 300     |         |  |   | 800     |    |
|                                                    |  |          | 41,000  |         |  |   | 42,800  |    |
| Less:valuation allowance for deferred taxassets         |  |          | (41,000 | )       |  |   | (42,800 | )  |
| Netdeferred tax asset                                   |  | $             | — |         |  | $      | — |    |
|                                                         |

|                                                              |  |               |        |             |  |        |        |         |  |  |
|--------------------------------------------------------------|--|---------------|--------|-------------|--|--------|--------|---------|--|--|
|                                                         |  | June30,2005   |        | June30,2004 |
|                                                         |  | (Inthousands) |
| Deferred taxliability:                                       |  |          |   |        |  |   |   |    |
| Deferred tax liabilityrelated to indefinite livedintangibles |  | $             | (179   | )      |  | $      | (81    | )  |
|                                                              |

TheCompany accounts for income taxes under the asset and liability methodin accordance with SFAS No. 109, Accounting for Income Taxes. Deferredincome taxes reflect the future tax consequences of differences betweenthe tax bases of assets and liabilities and their financial reportingamounts at year-end. The Company periodically reviews its historicaland projected taxable income and considers available information andevidence to determine if it is more likely than not that a portion ofthe deferred tax assets will be realized. A valuation allowance isestablished to reduce the deferred tax assets to the amount that ismore likely than not to be realized. As of June 30, 2005 and 2004,based upon its evaluation of historical and projected results ofoperation and the current business environment, the Company recorded afull valuation allowance on its deferred tax assets. In fiscal 2005,the valuation allowance was reduced by $1.8 million to $41.0 million atJune 30, 2005 from $42.8 million at June 30, 2004 to primarily reflectthe utilization of NOL's to offset taxes otherwise payable oncurrent taxable income and to reflect changes in deferred tax assets.If the Company determines that it is more likely than not that aportion of the deferred tax assets will be realized in the future, thatportion of the valuation allowance will be reduced with a correspondingdecrease in income tax expense. At such time that the valuationallowance is eliminated and the Company has operating income, theCompany will provide for income tax expense in its Statement ofOperations at its effective tax rate.

The Company has provided adeferred tax liability in the amount of $179,000 on the temporarydifferences associated with its indefinite-lived intangibles. The Company's indefinite lived intangibles are notamortized for book purposes.   As the Company continues toamortize these intangible assets for tax purposes, it will provide adeferred tax liability on the temporary difference. The temporarydifference will not reverse until such time as the assets are impairedor sold therefore the likelihood of being offset by the Company'snet operating loss carryforward is uncertain. There were no sales orimpairments during the years ended June 30, 2005 and 2004.

AtJune 30, 2005, the Company has a federal net operating losscarryforward for income tax purposes of approximately $96.0 million,which will expire between fiscal 2010 and 2023. None of the operatingloss carryforwards relate to the exercise of nonqualified stockoptions.

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|                                                                         |  |                          |      |         |  |        |        |         |  |        |        |         |  |  |
|-------------------------------------------------------------------------|--|--------------------------|------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                                                    |  | FiscalYear Ended June30, |
|                                                                    |  | 2005                     |      | 2004    |  | 2003   |
|                                                                    |  | (Inthousands)            |
| (Benefit) expense for federal incometaxes at the statutory rate of35.0% |  | $                        | (306 | )  |  | $      | 1,193  |    |  | $      | 1,786  |    |
| Stateand local taxes, net of federalbenefit                             |  |                     | 51   |    |  |   | 207    |    |  |   | 219    |    |
| Other                                                                   |  |                     | 73   |    |  |   | 116    |    |  |   | 40     |    |
| Effectsof tax losscarryforwards                                         |  |                     | 365  |    |  |   | (1,213 | )  |  |   | (1,620 | )  |
| Provisionfor incometaxes                                                |  | $                        | 183  |    |  | $      | 303    |    |  | $      | 425    |    |
|                                                                         |

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

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

At the option of the Company, the Revolving Facility and the TermLoan each may bear interest either at the JP Morgan Chase Bank Rate("Prime Rate") or the London InterbankOffered Rate ("LIBOR"). If the Companychooses the Prime Rate, the interest (i) on the Revolving Facilityaccrues at a rate of 1⁄2 of 1% above the Prime Rate (ii) onthe Term Loan accrues at a rate of 1% above the Prime Rate. Ifthe Company chooses LIBOR, the interest (i) on the Revolving Facilityaccrues at a rate of 31⁄4% above LIBOR (2.75% aboveLIBOR from and after November 2004) (ii) on the Term Loan accrues at arate of 33⁄4% above LIBOR. From the inception of thefinancing agreement through June 30, 2005, the Company has elected thePrime Rate option. Pursuant to the November 2004 amendment to theFinancing Agreement described below, each of the foregoing interestrates is subject to an annual upward or downward adjustment by 1⁄4of 1%, commencing with the  month following delivery ofthe Company's consolidated financial statements to CIT forfiscal  2005**,**  fiscal 2006 and fiscal 2007 basedupon the Company's borrowing availability, fixed charge coverageratio and leverage ratio as in effect at each such adjustment period.The interest rate as of June 30, 2005 on the Revolving Facility was6.5% and on the Term Loan was 7.0%.

On September27, 2002, the Company borrowed $18.3 million under the RevolvingFacility and $10.5 million under the Term Loan. These borrowings wereused to pay off the balances under the former financing agreement of$18.3 million and the former term loan of $10.5 million and for workingcapital purposes. Commencing October 1, 2002, amortization payments inthe amount of $375,000 (increased to $425,000 by the January 2004amendment to the Financing Agreement described below) are payablequarterly in arrears in connection with the Term Loan. A balloonpayment of $1.8 million is due on October 1, 2008 under the Term Loan.The Company's obligations under the Financing Agreement aresecured by a first priority lien on substantially all of theCompany's assets, including the Company's accountsreceivable, inventory, intangibles, equipment, and trademarks, and apledge of the Company's equity interest in its subsidiaries.

The Financing Agreement contains numerous financial and operationalcovenants, including limitations on additional indebtedness, liens,dividends, stock repurchases and capital expenditures. In addition, theCompany is required to maintain (i) specified levels of tangible networth, (ii) minimum EBITDA (earnings before interest , taxes,depreciation and amortization),certain fixed charge coverage ratios,(iii) certain leverage ratios, and (iv) specified levels of minimumborrowing availability under the Revolving Facility. At June 30, 2005,the Company was in compliance with all of its covenants. In the eventof the early termination by the Company of the Financing Agreement, theCompany will be liable for termination fees of $150,000 if terminationoccurs prior to November 11, 2007. The Company may prepay at any time,in whole or in part, the Term Loan without penalty. A fee of $125,000was paid in 

F-16

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connection with the original FinancingAgreement. The expiration of the Financing Agreement was initially setfor September 27, 2005 and was extended to October 1, 2008 by anamendment dated November 11, 2004.

On November 27, 2002, theCompany and CIT agreed to an amendment to the Financing Agreement inorder to facilitate the S.L. Danielle acquisition. The Company and CITagreed to add the Company's newly formed wholly-owned subsidiary,S.L. Danielle Acquisition, LLC (the "AdditionalBorrower"), as a co-borrower under the Financing Agreementand related Factoring Agreement. Accordingly, the Company and CIT (i)amended the Financing Agreement pursuant to a joinder agreement, whichalso constitutes Amendment No. 1 to the Financing Agreement (the"Amended Financing Agreement") and (ii)entered into a new factoring agreement with the Additional Borrower, toadd the Additional Borrower as a co-borrower. The Company's andthe Additional Borrower's obligations under the Amended FinancingAgreement are secured by a first priority lien on substantially all ofthe Company's and the Additional Borrower's assets,including the Company's and the Additional Borrower'saccounts receivable, inventory, intangibles, equipment, and trademarksand a pledge of the Company's stock interest and membershipinterest in the Company's subsidiaries, including the AdditionalBorrower.

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

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

On November 11, 2004 the Company and CIT agreed tofurther amend the Financing Agreement to extend the term of theagreement to October 1, 2008.   In conjunction with thisamendment, the Company and CIT 1) revised interest rates as describedabove; 2) revised the borrowing availability calculation under theagreement; and 3) revised certain financial covenants for fiscal 2005and established financial covenants for fiscal 2006.   A facilityfee of $100,000 was paid in connection with the amendment.

OnMay 12, 2005, the Company and CIT agreed to further amend the FinancingAgreement to reset certain financial covenants regarding tangible networth, fixed charge coverage ratio and minimum borrowing availabilityfor the fourth quarter of fiscal 2005.

On September 15, 2005,the Company and CIT agreed to further amend the Financing Agreement toreset or establish certain financial covenants regarding tangible networth, EBITDA and minimum borrowing availability to be consistent withthe Company's latest business plan for fiscal 2006.

OnJune 30, 2005, the Company had $6.2 million of outstanding letters ofcredit under the Revolving Facility, total availability ofapproximately $20.9 million under the Amended Financing Agreement, abalance of $7.3 million on the Term Loan and no revolving creditborrowings. At June 30, 2004, the Company had $8.0 million ofoutstanding letters of credit, total availability of approximately$11.6 million, a balance of $9.0 million on the Term Loan and $8.6 inrevolving credit borrowings.

F-17

----

Factoring Agreement

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

Effective March 31,2004, the Company, S.L. Danielle and CIT agreed to terminate theFactoring Agreements between them. Pursuant to the terms of theoriginal agreement, the Company is now obligated to pay to CIT acollateral management fee of $5,000 a month. Receivables related tosales of Cynthia Steffe product lines continue to be factored. Inconnection with the termination of those Factoring Agreements, CSAcquisition and CIT entered into an amendment of their FactoringAgreement which provides for a factoring commission equal to 6/10 of1% of the gross face amount of all accounts factored by CIT upto $10 million ratably declining to a commission between .55%and .45% of the gross amount of the receivables in excess of $10million. The Factoring Agreement between CS Acquisition and CIT, asmost recently amended in November 2004, has a term ending on March 31,2006.

Prior Financing Agreement

Until September 27,2002, the Company had a financing agreement with BNY FinancialCorporation, a wholly owned subsidiary of General Motors AcceptanceCorp. ("GMAC") (the "FormerFinancing Agreement"). The Former Financing Agreementconsisted of two facilities: (i) the Former Revolving Facility whichwas a $45.5 million five-year revolving credit line (subject to anasset based borrowing formula) with a $34.0 million sublimit forletters of credit, and (ii) the Former Term Loan which was a $14.5million term loan facility. Each facility had been amended to extendthe maturity date until April  1, 2003.

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

Future Financing Requirements

At June 30, 2005, the Companyhad working capital of $21.6 million as compared with working capitalof $17.2 million at June 30, 2004. On June 13, 2005, the Company andKenneth Cole Productions, Inc. ("Purchaser")entered into a Stock Purchase Agreement, pursuant to which thePurchaser purchased from the Company six million (6,000,000) shares ofcommon stock of the Company for an aggregate purchase price of sixmillion dollars ($6,000,000). The Company's business planrequires the availability of sufficient cash flow and borrowingcapacity to finance its product lines and to meet its cash needs forthe launch and support of the Kenneth Cole product lines. The Companyexpects to satisfy such requirements through cash on hand, cash flowfrom operations and borrowings under its financing agreements. TheCompany believes that it has adequate resources to meet its needs forthe foreseeable future assuming that it meets its business plan andsatisfies the covenants set forth in the Financing Agreement.

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

A.    S.L. DanielleAcquisition

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

F-18

----

The aggregate purchase price wasapproximately $5.1 million, including cash of $4.4 million, 100,000shares of common stock of the Company ("CommonStock") valued at $84,000 and stock options to purchase500,000 shares of Common Stock valued at $384,000 and transaction costsof approximately $250,000. The acquisition was funded by CIT throughrevolving credit borrowings of $4.6 million. The value of the 100,000shares of Common Stock was determined based on the average market priceof the Common Stock over the 3-day period before and after the date ofthe acquisition. The 500,000 stock options were granted at the fairmarket value on the date of the acquisition and were valued using theBlack Scholes option pricing model. The following table summarizes thefair values of the assets acquired at the date of acquisition.

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

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

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

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

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

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

F-19

----

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

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

F-20

----

8.    TrademarksAnd Goodwill

Intangible assets were as follows:

|                                    |  |               |        |              |  |        |        |        |  |  |
|------------------------------------|--|---------------|--------|--------------|--|--------|--------|--------|--|--|
|                               |  | June 30, 2005 |        | June30, 2004 |
| Indefinite lived intangibleassets: |  |          |   |         |  |   |   |   |
| Trademarks                         |  | $             | 1,000  |         |  | $      | 1,000  |   |
|                                    |

TheCompany owns the Cynthia Steffe and related trademarks, therefore theyare classified as indefinite lived intangibles at June 30, 2005 and2004 and not amortized.

The following table summarizestrademarks and goodwill:

|                                                                                        |  |            |         |          |  |        |         |        |  |  |
|----------------------------------------------------------------------------------------|--|------------|---------|----------|--|--------|---------|--------|--|--|
|                                                                                   |  | Trademarks |         | Goodwill |
| Balanceat July 1, 2002                                                                 |  | $          | — |     |  | $      | — |   |
| Acquisition of SLDanielle                                                              |  |       | — |     |  |   | 1,395   |   |
| Balanceat June 30,2003                                                                 |  |       | — |     |  |   | 1,395   |   |
| Adjustment ofpreviously allocated purchase price related to acquisition of S LDanielle |  |       | — |     |  |   | 42      |   |
| Acquisition ofCynthiaSteffe                                                            |  |       | 1,000   |     |  |   | 820     |   |
| Balanceat June 30, 2004 and2005                                                        |  | $          | 1,000   |     |  | $      | 2,257   |   |
|                                                                                        |

9.    EmployeeBenefit Plans

Pension Plan:

Pursuant to a collectivebargaining agreement, the Company's union employees are eligibleto participate in the Company's defined benefit pension planafter completion of one year of eligible service. Pension benefits arebased on the number of years of service times a predetermined factor.The Company uses June 30, 2005 as its measurement date for the pensionplan.

Pension expense amounted to approximately $102,000,$123,000, and $81,000 in fiscal 2005, 2004, and 2003,respectively.

F-21

----

Obligations and Funded Status

The reconciliation of the benefit obligation and funded statusof the pension plan as of June 30, 2005 and 2004 is as follows:

|                                                                     |  |               |        |         |  |        |        |         |  |  |
|---------------------------------------------------------------------|--|---------------|--------|---------|--|--------|--------|---------|--|--|
|                                                                |  | 2005          |        | 2004    |
|                                                                |  | (inthousands) |
| **Change in benefitobligation**                                     |  |          |   |    |  |   |   |    |
| Benefit obligationat beginning ofyear                               |  | $             | 1,348  |    |  | $      | 1,375  |    |
| Servicecost                                                         |  |          | 71     |    |  |   | 71     |    |
| Interestcost                                                        |  |          | 87     |    |  |   | 78     |    |
| Change in assumption(discount rate)                                 |  |          | 277    |    |  |   | (146   | )  |
| Actuarialloss                                                       |  |          | 75     |    |  |   | 9      |    |
| Benefitspaid                                                        |  |          | (37    | )  |  |   | (39    | )  |
| Benefitobligation at end ofyear                                     |  | $             | 1,821  |    |  | $      | 1,348  |    |
| **Changein plan assets**                                            |  |          |   |    |  |   |   |    |
| Fair value ofplan assets at beginning ofyear                        |  | $             | 855    |    |  | $      | 774    |    |
| Actual return on planassets                                         |  |          | 45     |    |  |   | 82     |    |
| Employercontributions                                               |  |          | 142    |    |  |   | 41     |    |
| Benefitspaid                                                        |  |          | (37    | )  |  |   | (39    | )  |
| Expensespaid                                                        |  |          | (9     | )  |  |   | (3     | )  |
| Fairvalue of plan assets at end ofyear                              |  | $             | 996    |    |  | $      | 855    |    |
| Fundedstatus                                                        |  | $             | (825   | )  |  | $      | (493   | )  |
| Unrecognizednet actuarialloss                                       |  |          | 675    |    |  |   | 305    |    |
| Netamountrecognized                                                 |  | $             | (150   | )  |  | $      | (188   | )  |
| Amountsrecognized in the statement of financial position consistof: |  |          |   |    |  |   |   |    |
| Accrued benefitcost                                                 |  | $             | (825   | )  |  | $      | (493   | )  |
| Accumulated othercomprehensiveloss                                  |  |          | 675    |    |  |   | 305    |    |
| Netamountrecognized                                                 |  | $             | (150   | )  |  | $      | (188   | )  |
|                                                                     |

Theaccumulated benefit obligation for the pension plan was $1,821,000 and$1,348,000 at June 30, 2005 and 2004,respectively.

|                              |  |               |       |              |  |   |       |        |  |  |
|------------------------------|--|---------------|-------|--------------|--|---|-------|--------|--|--|
| (Inthousands)                |  | June 30, 2005 |       | June 30,2004 |
| Projected benefitobligation  |  | $             | 1,821 |         |  | $ | 1,348 |   |
| Accumulatedbenefitobligation |  | $             | 1,821 |         |  | $ | 1,348 |   |
| Fair valueof planassets      |  | $             | 996   |         |  | $ | 855   |   |
|                              |

|                                                 |  |            |        |         |  |        |        |         |  |        |        |         |  |  |
|-------------------------------------------------|--|------------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
|                                            |  | FiscalYear |
| (Inthousands)                                   |  | 2005       |        | 2004    |  | 2003   |
| Componentsof Net Periodic Benefit Cost:         |  |       |   |    |  |   |   |    |  |   |   |    |
| Servicecost                                     |  | $          | 71     |    |  | $      | 71     |    |  | $      | 58     |    |
| Interestcost                                    |  |       | 87     |    |  |   | 78     |    |  |   | 72     |    |
| Expectedreturn on planassets                    |  |       | (75    | )  |  |   | (67    | )  |  |   | (64    | )  |
| Amortizationof accumulated unrecognized netloss |  |       | 19     |    |  |   | 41     |    |  |   | 15     |    |
| Netperiodic benefitcost                         |  | $          | 102    |    |  | $      | 123    |    |  | $      | 81     |    |
|                                                 |

F-22

----

Additional Information

Increase(decrease) in minimum liability included in other comprehensive(income) loss was $370,000, ($189,000), and $252,000 for the yearsended June 30, 2005, 2004 and 2003, respectively.

Assumptions

|                                                                                                     |  |        |      |         |  |        |      |         |  |        |      |         |  |  |
|-----------------------------------------------------------------------------------------------------|--|--------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--|
| Weightedaverage assumptions used to determine: Net periodic benefit cost forthe years ended June30, |  | 2005   |      | 2004    |  | 2003   |
| DiscountRate                                                                                        |  |   | 6.50 | %  |  |   | 6.50 | %  |  |   | 5.75 | %  |
| ExpectedLong Term Rate of Return on planassets                                                      |  |   | 8.50 | %  |  |   | 8.50 | %  |  |   | 8.50 | %  |
|                                                                                                     |

|                                                |  |        |      |         |  |        |      |         |  |        |        |        |  |  |
|------------------------------------------------|--|--------|------|---------|--|--------|------|---------|--|--------|--------|--------|--|--|
| BenefitObligation at June30,                   |  | 2005   |      | 2004    |  |   |
| DiscountRate                                   |  |   | 5.25 | %  |  |   | 6.50 | %  |  |   |   |   |
| ExpectedLong Term Rate of Return on planassets |  |   | 8.50 | %  |  |   | 8.50 | %  |  |   |   |   |
|                                                |

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

PlanAssets

The Company's pension plan weighted-average assetallocations at June 30, 2005 and 2004, by asset category are asfollows:

|                  |  |                          |     |                          |  |        |     |         |  |  |
|------------------|--|--------------------------|-----|--------------------------|--|--------|-----|---------|--|--|
| AssetCategory    |  | Plan Assetsat June302005 |     | Plan Assetsat June302004 |
| Equitysecurities |  |                     | 64  | %                   |  |   | 60  | %  |
| Debtsecurities   |  |                     | 33  | %                   |  |   | 32  | %  |
| Other            |  |                     | 3   | %                   |  |   | 8   | %  |
| Total            |  |                     | 100 | %                   |  |   | 100 | %  |
|                  |

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

The parametersmaintained by the portfolio manager are asfollows:

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

Cash Flows

Contributions

The Company expects to contribute $311,000 to the pension plan infiscal 2006.

F-23

----

Estimated Future Benefit Payments

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

|            |  |                 |     |        |  |  |
|------------|--|-----------------|-----|--------|--|--|
| FiscalYear |  | PensionBenefits |
| 2006       |  | $               | 58  |   |
| 2007       |  |            | 67  |   |
| 2008       |  |            | 74  |   |
| 2009       |  |            | 83  |   |
| 2010       |  |            | 95  |   |
| 2011-2015  |  |            | 641 |   |
|            |

SavingsPlan:

The Company has a savings plan (the"Savings Plan") under which eligibleemployees may contribute a percentage of their compensation and theCompany (subject to certain limitations) as of January 2003 contributes10% of the employee's contribution. From February 2002 toJanuary 2003 there was no employer matching contribution. Prior toFebruary 2002 the Company matched 50% of the employee'scontribution. The Company contributions are invested in investmentfunds selected by the participants and are subject to vestingprovisions of the Savings Plan. Expense under the Savings Plan wasapproximately $72,000 in fiscal 2005, $68,000 in fiscal 2004 and$15,000 in fiscal 2003.

10.    Stock Based Compensation:

The Company has a Stock Option Plan (the "OptionPlan"). Pursuant to the Option Plan, the Company may grantto eligible individuals incentive stock options, as defined in theInternal Revenue Code of 1986, and non-incentive stock options.Generally, vesting periods range from two to five years with a maximumterm of ten years. Under the Option Plan, 6,750,000 shares of CommonStock are reserved for issuance. The maximum number of Shares that anyone Eligible Individual may be granted in respect of options may notexceed 4,000,000 shares of Common Stock. No stock options may begranted subsequent to October 29, 2007. The exercise price may not beless than 100% of the fair market value on the date of grant forincentive stock options.

On January 10, 2001, the Companyentered into an employment agreement (the"Agreement") with Nicholas DiPaolo, who hasbeen serving as the Company's Vice Chairman and Chief OperatingOfficer since November 1, 2000, the effective date of the Agreement.The Agreement had an initial term ending November 30, 2003, which wassubsequently extended by an amendment to the agreement until June 30,2005. Mr. DiPaolo retired in June 2005. Under the Agreement on November1, 2000, Mr. DiPaolo was granted 300,000 fully vested options topurchase Common Stock at the fair market value on the date of grant.Under the Agreement on January 10, 2001, Mr. DiPaolo was granted3,000,000 options to purchase Common Stock of the Company at the fairmarket value on the date of the grant (the "PutOptions"). The exercise price of the Put Options is$0.375. Under certain circumstances Mr. DiPaolo would have beenentitled to require the Company to purchase his Put Options for theaggregate exercise price thereof. These circumstances did not occur.All of his remaining options were fully vested at the time of Mr.DiPaolo's retirement and are exercisable until November 1,2005.

During February 2001, employee and director options for anaggregate of 1,400,401 shares of the Company's common stock weresurrendered under a stock option replacement program offered by theCompany.   Under the program, employees had the right tosurrender their outstanding, out-of-the- money options in exchange fora commitment by the Company to grant new options to them for the samenumber of shares on a date, which is in excess of six months (183 days)after the surrender date. To be eligible to receive the new options,which have an exercise price equal to the fair market value on thefuture grant date (August 8, 2001), employees (or directors as the casemay be) must have been employed by the Company (or to serve asdirectors) on such  grant date. On August 8, 2001, 1,400,401options were granted to employees and directors under this program. Thenew options vested in increments of 50% on August 8, 2002 and50% on August 8, 2003.

F-24

----

Information regarding the Company'sstock options is summarizedbelow:

|                             |  |                |            |                     |  |                                     |  |   |      |        |  |  |  |  |
|-----------------------------|--|----------------|------------|---------------------|--|-------------------------------------|--|---|------|--------|--|--|--|--|
|                        |  | StockOptions   |
|                        |  | NumberofShares |            | ExercisePrice Range |  | WeightedAverageExercise Price       |
| Outstanding at June30,2002  |  |           | 5,230,984  |                |  | $  .38 - $3.50            |  | $ | .44  |   |
| Optionsgranted              |  |           | 910,000    |                |  | $  .75 - $  .84 |  | $ | ..80 |   |
| Optionsexercised            |  |           | (6,100     | )              |  | $  .50 - $  .50 |  | $ | ..50 |   |
| Optionscanceled             |  |           | (15,290    | )              |  | $  .50 -$  .50  |  | $ | ..75 |   |
| Outstanding at June 30,2003 |  |           | 6,119,594  |                |  | $  .38 - $3.50            |  | $ | ..49 |   |
| Optionsgranted              |  |           | 690,000    |                |  | $  .94 - $1.12            |  | $ | ..97 |   |
| Optionsexercised            |  |           | (595,001   | )              |  | $  .86 - $1.42            |  | $ | ..50 |   |
| Optionscanceled             |  |           | (227,766   | )              |  | $  .50 -$  .84  |  | $ | ..58 |   |
| Outstanding at June 30,2004 |  |           | 5,986,827  |                |  | $  .38 - $3.50            |  | $ | ..55 |   |
| Optionsgranted              |  |           | 330,000    |                |  | $  .85 - $  .95 |  | $ | ..86 |   |
| Options exercised           |  |           | (2,025,000 | )              |  | $..38 - $  .69            |  | $ | .38  |   |
| Optionscanceled             |  |           | (120,300   | )              |  | $ .50 -$1.12                        |  | $ | ..98 |   |
| Outstanding at June 30,2005 |  |           | 4,171,527  |                |  | $ .38 -$3.50                        |  | $ | .64  |   |
|                             |

The following table summarizesinformation about the Company's outstanding and exercisable stockoptions at June 30,2005:

|                        |  |             |           |                                                |  |                               |      |        |  |                               |      |        |  |        |           |        |  |   |      |        |  |  |
|------------------------|--|-------------|-----------|------------------------------------------------|--|-------------------------------|------|--------|--|-------------------------------|------|--------|--|--------|-----------|--------|--|---|------|--------|--|--|
|                   |  | Outstanding |           | Exercisable                                    |
| Range of ExercisePrice |  | Shares      |           | Weighted-AverageRemainingContractualLife(Yrs.) |  | Weighted-AverageExercisePrice |      | Shares |  | Weighted-AverageExercisePrice |
| $0.38                  |  |        | 1,100,000 |                                           |  |                          | .34  |   |  | $                             | 0.38 |   |  |   | 1,100,000 |   |  | $ | 0.38 |   |
| $0.50                  |  |        | 1,301,527 |                                           |  |                          | 4.78 |   |  | $                             | 0.50 |   |  |   | 1,296,527 |   |  | $ | 0.50 |   |
| $0.69                  |  |        | 5,000     |                                           |  |                          | 5.00 |   |  | $                             | 0.69 |   |  |   | 5,000     |   |  | $ | 0.69 |   |
| $0.75                  |  |        | 295,000   |                                           |  |                          | 7.16 |   |  | $                             | 0.75 |   |  |   | 150,000   |   |  | $ | 0.75 |   |
| $0.84                  |  |        | 500,000   |                                           |  |                          | 2.41 |   |  | $                             | 0.84 |   |  |   | 500,000   |   |  | $ | 0.84 |   |
| $0.85                  |  |        | 300,000   |                                           |  |                          | 9.36 |   |  | $                             | 0.85 |   |  |   | 0         |   |  | $ | 0.00 |   |
| $0.94                  |  |        | 560,000   |                                           |  |                          | 8.51 |   |  | $                             | 0.94 |   |  |   | 218,750   |   |  | $ | 0.94 |   |
| $0.95                  |  |        | 30,000    |                                           |  |                          | 9.00 |   |  | $                             | 0.95 |   |  |   | 0         |   |  | $ | 0.00 |   |
| $0.98                  |  |        | 30,000    |                                           |  |                          | 8.00 |   |  | $                             | 0.98 |   |  |   | 7,500     |   |  | $ | 0.98 |   |
| $1.12                  |  |        | 25,000    |                                           |  |                          | 8.39 |   |  | $                             | 1.12 |   |  |   | 25,000    |   |  | $ | 1.12 |   |
| $3.00                  |  |        | 10,000    |                                           |  |                          | 4.00 |   |  | $                             | 3.00 |   |  |   | 10,000    |   |  | $ | 3.00 |   |
| $3.11                  |  |        | 10,000    |                                           |  |                          | 2.65 |   |  | $                             | 3.11 |   |  |   | 10,000    |   |  | $ | 3.11 |   |
| $3.50                  |  |        | 5,000     |                                           |  |                          | 3.00 |   |  | $                             | 3.50 |   |  |   | 5,000     |   |  | $ | 3.50 |   |
|                   |  |        | 4,171,527 |                                           |  |                          | 4.39 |   |  | $                             | 0.64 |   |  |   | 3,327,777 |   |  | $ | 0.58 |   |
|                        |

Allstock options are granted at fair market value of the Common Stock atgrant date. The outstanding stock options have a weighted averagecontractual life of 4.39 years, 3.94 years and 4.75 years in 2005, 2004and 2003, respectively. The number of stock options exercisable at June30, 2005, 2004 and 2003 were 3,327,777, 4,884,327 and 3,180,916respectively.

F-25

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11.    Commitments, Contingencies andOther Matters

Lease Obligations:

The Company leasesshowroom, distribution and office facilities, and equipment undervarious noncancellable operating lease agreements which expire through2014. Rental expense for the years ended June 30, 2005, 2004 and 2003was approximately $2.9 million, $2.7 million and $2.6 million,respectively.

The minimum aggregate rental commitments at June30, 2005 are as follows (in thousands):

|                   |  |        |       |        |  |  |
|-------------------|--|--------|-------|--------|--|--|
| Fiscalyearending: |  |   |
| 2006              |  | $      | 2,390 |   |
| 2007              |  |   | 1,546 |   |
| 2008              |  |   | 1,483 |   |
| 2009              |  |   | 1,392 |   |
| 2010              |  |   | 354   |   |
| Subsequentto 2011 |  |   | 1,038 |   |
|              |  | $      | 8,203 |   |
|                   |

Lettersof Credit:

The Company was contingently liable under letters ofcredit issued by banks to cover primarily contractual commitments formerchandise purchases of approximately $6.2 million and $7.8 million atJune 30, 2005 and June 30, 2004, respectively.

Inventorypurchase commitments:

The Company was contingently liable forcontractual commitments for merchandise purchases of approximately$10.2 million and $10.7 million at June 30, 2005 and June 30, 2004,respectively.

Kenneth Cole License Agreement:

TheCompany entered into a license agreement with Kenneth Cole Productions(LIC) in June 2005. Under the license agreement the Company is requiredto achieve certain minimum sales levels, to pay certain minimumroyalties and to maintain a minimum net worth. The Company is alsoobligated to pay specified percentages of net sales to supportadvertising and to expend a total of $4 million in the period endingDecember 31, 2007 to support the initial launch of the licensedproducts.

The following table summarizes as of June 30, 2005,the Company's Kenneth Cole License Agreement Commitments byfuture period:

|                                                              |  |       |        |                 |  |           |       |           |  |              |       |        |  |   |       |        |  |   |       |        |  |  |
|--------------------------------------------------------------|--|-------|--------|-----------------|--|-----------|-------|-----------|--|--------------|-------|--------|--|---|-------|--------|--|---|-------|--------|--|--|
| Paymentsdue by Period(In thousands, except per shareamounts) |
| Contractualobligations (inthousands)                         |  | Total |        | Less than 1year |  | 2-3 years |       | 4-5 years |  | After 5years |
| Kenneth Cole License Agreement Contractualobligations        |  | $     | 17,470 |            |  | $         | 1,605 |      |  | $            | 6,955 |   |  | $ | 6,990 |   |  | $ | 1,920 |   |
|                                                              |

Litigation:

The Company is involved in legal proceedings from time to timearising out of the ordinary conduct of its business. The Companybelieves that the outcome of these proceedings will not have a materialadverse effect on the Company's financial condition or results ofoperations.

F-26

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12.    Unaudited Quarterly Results ofOperations

Unaudited quarterly financial information for fiscal2005 and fiscal 2004 is set forth in the tablebelow:

|                                        |  |              |        |               |  |              |        |               |  |        |        |        |  |        |        |         |  |  |
|----------------------------------------|--|--------------|--------|---------------|--|--------------|--------|---------------|--|--------|--------|--------|--|--------|--------|---------|--|--|
| (Inthousands, except per shareamounts) |
|                                   |  | FirstQuarter |        | SecondQuarter |  | ThirdQuarter |        | FourthQuarter |
| **Fiscal2005**                         |  |         |   |          |  |         |   |          |  |   |   |   |  |   |   |    |
| Netrevenue                             |  | $            | 34,434 |          |  | $            | 38,569 |          |  | $      | 41,553 |   |  | $      | 28,699 |    |
| Grossprofit                            |  |         | 10,195 |          |  |         | 10,638 |          |  |   | 12,239 |   |  |   | 6,522  |    |
| Netincome(loss)                        |  |         | 721    |          |  |         | 372    |          |  |   | 1,024  |   |  |   | (3,274 | )  |
| Basicearnings (loss) pershare          |  |         | 0.03   |          |  |         | 0.01   |          |  |   | 0.04   |   |  |   | (0.11  | )  |
| Dilutedearnings (loss) pershare        |  |         | 0.02   |          |  |         | 0.01   |          |  |   | 0.03   |   |  |   | (0.11  | )  |
| **Fiscal2004**                         |  |         |   |          |  |         |   |          |  |   |   |   |  |   |   |    |
| Netrevenue                             |  | $            | 38,805 |          |  | $            | 34,566 |          |  | $      | 43,713 |   |  | $      | 40,023 |    |
| Grossprofit                            |  |         | 9,210  |          |  |         | 8,017  |          |  |   | 11,691 |   |  |   | 10,738 |    |
| Netincome(loss)                        |  |         | 1,010  |          |  |         | (191   | )        |  |   | 1,804  |   |  |   | 481    |    |
| Basicearnings (loss) pershare          |  |         | 0.04   |          |  |         | (0.01  | )        |  |   | 0.07   |   |  |   | 0.02   |    |
| Dilutedearnings (loss) pershare        |  |         | 0.03   |          |  |         | (0.01  | )        |  |   | 0.06   |   |  |   | 0.02   |    |
|                                        |

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

F-27

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SCHEDULEII

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

|                                              |  |                             |        |                                        |  |            |        |                       |  |        |        |         |  |        |        |        |  |  |
|----------------------------------------------|--|-----------------------------|--------|----------------------------------------|--|------------|--------|-----------------------|--|--------|--------|---------|--|--------|--------|--------|--|--|
| Description                                  |  | Balanceat Beginning of Year |        | Additions Charged to Costsand Expenses |  | Deductions |        | Balance at End ofYear |
| Year ended June 30,2005                      |  |                        |   |                                   |  |       |   |                  |  |   |   |    |  |   |   |   |
| Allowancefor doubtfulaccounts                |  | $                           | 193    |                                   |  | $          | 0      |                  |  | $      | 43     | 1  |  | $      | 150    |   |
| Reservefor customer allowances anddeductions |  | $                           | 972    |                                   |  | $          | 5,967  |                  |  | $      | 5,264  | 2  |  | $      | 1,675  |   |
| Yearended June 30,2004                       |  |                        |   |                                   |  |       |   |                  |  |   |   |    |  |   |   |   |
| Allowancefor doubtfulaccounts                |  | $                           | 80     |                                   |  | $          | 180    |                  |  | $      | 67     | 1  |  | $      | 193    |   |
| Reservefor customer allowances anddeductions |  | $                           | 835    |                                   |  | $          | 5,539  |                  |  | $      | 5,402  | 2  |  | $      | 972    |   |
| Yearended June 30,2003                       |  |                        |   |                                   |  |       |   |                  |  |   |   |    |  |   |   |   |
| Allowancefor doubtful accounts               |  | $                           | 340    |                                   |  | $          | (260   | )                |  | $      | 0      | 1  |  | $      | 80     |   |
| Reservefor customer allowances anddeductions |  | $                           | 1,093  |                                   |  | $          | 9,352  |                  |  | $      | 9,610  | 2  |  | $      | 835    |   |
|                                              |

|  |
|--|
|  |  |
|  |

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

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

S-1

----

INDEX TOEXHIBITS

|               |  |                                                                                                                                                                                                                                 |  |  |  |  |
|---------------|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNumber |  | ExhibitTitle                                                                                                                                                                                                                    |
| 10.119        |  | AmendmentNo.5 to Financing Agreement among the Company, S.L. Danielle, CynthiaSteffe Acquisition, LLC and the CIT Group/Commercial Services, Inc.dated May 12, 2005.                                                            |
| 10.120        |  | StockPurchase Agreement between Bernard Chaus, Inc. and Kenneth ColeProductions, Inc. dated June 13,2005.                                                                                                                       |
| 10.121        |  | License Agreement betweenKenneth Cole Productions (LIC), Inc. and Bernard Chaus, Inc. dated June13, 2005 (filed in redacted form since confidential treatment wasrequested pursuant to Rule 246-2 for certain portionsthereof). |
| 10.122        |  | Amendment No.6 toFinancing Agreement among the Company, S.L. Danielle, Cynthia SteffeAcquisition, LLC and the CIT Group/Commercial Services, Inc. datedSeptember 15,2005.                                                       |
|          |  |                                                                                                                                                                                                                            |
| 21            |  | Listof Subsidiaries of theCompany.                                                                                                                                                                                              |
|          |  |                                                                                                                                                                                                                            |
| 23.1          |  | Consentof Mahoney Cohen & Company, CPA,P.C., Independent Registered PublicAccountingFirm.                                                                                                                                   |
|          |  |                                                                                                                                                                                                                            |
| 23.2          |  | Consentof Deloitte & Touche LLP., Independent Registered Public AccountingFirm.                                                                                                                                             |
|          |  |                                                                                                                                                                                                                            |
| 31.1          |  | CertificationPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for JosephineChaus.                                                                                                                                      |
|          |  |                                                                                                                                                                                                                            |
| 31.2          |  | CertificationPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for BartonHeminover.                                                                                                                                     |
|          |  |                                                                                                                                                                                                                            |
| 32.1          |  | CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002 for JosephineChaus.                                                                                        |
|          |  |                                                                                                                                                                                                                            |
| 32.2          |  | CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002 for BartonHeminover.                                                                                       |
|          |  |                                                                                                                                                                                                                            |
|               |

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