SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                    FORM 10-Q
               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1999
                           Commission File No. 0-23629


                                 Happy Kids Inc.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


          New York                                     13-3473638
--------------------------------            ------------------------------------
 (State or Other Jurisdiction of            (I.R.S. Employer Identification No.)
  Incorporation or Organization)


100 West 33rd Street, Suite 1100, New York, New York                  10001
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                            (Zip Code)


                                 (212) 695-1151
                         -------------------------------
                         (Registrant's Telephone Number,
                              Including Area Code)


        Indicate by check mark whether the  Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                  Yes:   X                          No:
                      -------                          -------

        Indicate the number of shares  outstanding  of each of the  Registrant's
classes of common stock, as of July 31, 1999:

             Class                                         Number of Shares
             -----                                         ----------------
  Common Stock, $.01 par value                               10,375,693



<PAGE>
                        HAPPY KIDS INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS
                                -----------------

                                                                          Page
                                                                          ----
PART I.  CONDENSED CONSOLIDATED FINANCIAL INFORMATION...................    1

     Item 1.   Condensed Consolidated Financial Statements..............    1

               Condensed Consolidated Balance Sheets as of June 30,
                    1999 (unaudited) and December 31, 1998..............    2

               Condensed Consolidated Statements of Income for the
                    Three and Six Months Ended June 30, 1999 and 1998
                    (unaudited).........................................    3

               Condensed Consolidated Statements of Cash Flows for
                    the Six Months Ended June 30, 1999 and 1998
                    (unaudited).........................................    4

               Notes to Condensed Consolidated Financial Statements
                    (unaudited).........................................    5

     Item 2.   Management's Discussion and Analysis of Financial
                    Condition and Results of Operations.................   12

               Results of Operations....................................   13

               Liquidity and Capital Resources..........................   15

               Backlog..................................................   16

               Variability of Results; Seasonality; Cyclicality.........   16

               Management Information Systems...........................   17

               European Monetary Union..................................   18

               Effect of Recently Issued Accounting Standards...........   18

     Item 3.   Quantitative and Qualitative Disclosures About Market
                    Risk................................................   18

PART II.   OTHER INFORMATION............................................   19

     Item 1.   Legal Proceedings........................................   19

     Item 2.   Changes in Securities and Use of Proceeds................   19

     Item 4.   Submission of Matters to a Vote of Security Holders......   20

     Item 5.   Other Information........................................   20

     Item 6.  Exhibits and Reports on Form 8-K..........................   23

SIGNATURES..............................................................   24



                                      - i -
<PAGE>


              PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
              ----------------------------------------------------

               Item 1. Condensed Consolidated Financial Statements




                                     - 1 -
<PAGE>

                        HAPPY KIDS INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                    (in thousands, except per share amounts)
<TABLE>
<CAPTION>

                                                                    JUNE 30,          DECEMBER 31,
                                                                      1999               1998
                                                               -------------------  ---------------
                            ASSETS                                (unaudited)
<S>                                                                  <C>               <C>
CURRENT ASSETS
    Cash.....................................................        $     101         $     139
    Due from factor..........................................           25,871            20,640
    Accounts receivable - trade, net.........................            1,122               347
    Inventories..............................................           27,549            23,579
    Prepaid royalties........................................            1,256               762
    Deferred income taxes....................................            1,029             1,029
    Other current assets.....................................            2,334             1,496
                                                                  ---------------   ---------------
              Total current assets...........................           59,262            47,992
FIXED ASSETS - NET...........................................            2,359             1,459
OTHER ASSETS.................................................            5,993             1,001
                                                                  ---------------   ---------------
              Total assets...................................        $  67,614         $  50,452
                                                                  ===============   ===============

             LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
    Due to bank..............................................        $  11,995         $   3,753
    Accounts payable and accrued liabilities.................           11,638             7,944
                                                                  ---------------   ---------------
              Total current liabilities......................           23,633            11,697

DEFERRED RENT PAYABLE........................................              465               505
DUE TO STOCKHOLDERS..........................................            5,570             5,719
COMMITMENTS
STOCKHOLDERS' EQUITY:
    Preferred stock - 5,000 shares authorized, $.01 par
        value; no shares issued and outstanding..............               --                --
    Common stock - 30,000 shares authorized, $.01 par
        value; 10,376 and  10,280 shares issued and
        outstanding at June 30, 1999 and December 31, 1998,
        respectively.........................................              104               103
    Additional paid-in capital...............................           24,262            23,263
    Retained earnings........................................           13,580             9,165
                                                                  ---------------   ---------------
               Total stockholders' equity....................           37,946            32,531
                                                                  ---------------   ---------------
               Total liabilities and stockholders' equity....        $  67,614         $  50,452
                                                                  ===============   ===============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                     - 2 -
<PAGE>

                        HAPPY KIDS INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (unaudited)
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                           For the Three Months            For the Six Months
                                              Ended June 30,                 Ended June 30,
                                        ---------------------------    ----------------------------
                                            1999          1998             1999           1998
                                        -------------  ------------    -------------  -------------
<S>                                       <C>            <C>             <C>           <C>
Net sales.............................    $  37,431      $  32,013       $  83,303     $  67,728
Cost of goods sold....................       27,089         23,468          61,181        50,552
                                         -----------    -----------     -----------   -----------
    Gross profit......................       10,342          8,545          22,122        17,176
                                         -----------    -----------     -----------   -----------
Operating expenses:
          Operating expenses..........        6,977          5,512          13,932        10,581
                                         -----------    -----------     -----------   -----------
          Operating earnings..........        3,365          3,033           8,190         6,595
                                         -----------    -----------     -----------   -----------
Interest expense, net.................          224            328             578         1,318
                                         -----------    -----------     -----------   -----------
Income  before income taxes...........        3,141          2,705           7,612         5,277
Provision for income taxes............        1,319            112           3,197           372
                                         -----------    -----------     -----------   -----------
          Net income..................    $   1,822     $    2,593       $   4,415     $   4,905
                                         ===========    ===========     ===========   ===========
Basic income
    per common share..................    $    0.18     $     0.25       $   0.43      $    0.55
                                         ===========    ===========     ===========   ===========
Weighted average common
    shares outstanding-basic..........       10,363         10,188          10,322         8,976
                                         ===========    ===========     ===========   ===========
Diluted income
    per common share..................    $    0.18     $     0.25       $   0.43      $    0.55
                                         ===========    ===========     ===========   ===========
Weighted average common
    shares outstanding-diluted........       10,402         10,221          10,356         8,985
                                         ===========    ===========     ===========   ===========

Pro forma data (unaudited):
    Historical income  before
          provision for income taxes..    $   3,141     $    2,705       $   7,612     $   5,277
    Income taxes......................        1,319          1,136           3,197         2,216
                                         -----------    -----------     -----------   -----------
          Net income..................    $   1,822     $    1,569       $   4,415     $   3,061
                                         ===========    ===========     ===========   ===========
Pro forma basic income per share......    $    0.18     $     0.15       $   0.43      $    0.34
                                         ===========    ===========     ===========   ===========
Pro forma weighted average
    common shares outstanding-basic...       10,363         10,188          10,322         8,976
                                         ===========    ===========     ===========   ===========
Pro forma diluted income per share....    $    0.18     $     0.15       $    0.43     $    0.34
                                         ===========    ===========     ===========   ===========
Pro forma weighted average
    common shares outstanding-diluted.       10,402         10,221          10,356         8,985
                                         ===========    ===========     ===========   ===========
</TABLE>


        The accompanying notes are an integral part of these statements.

                                     - 3 -
<PAGE>

                        HAPPY KIDS INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                    FOR THE SIX MONTHS
                                                                      ENDED JUNE 30,
                                                         ---------------------------------------
                                                              1999                   1998
                                                         ---------------        --------------
<S>                                                         <C>                    <C>
Cash flows from operating activities:
Net income..........................................        $    4,415             $    4,905
Adjustments to reconcile net income to net
 cash (used in) provided by operating activities:
   Depreciation and amortization....................               312                    114
   Deferred taxes...................................                --                 (1,024)
   Provision for losses on accounts receivable......                 3                     --
Changes in operating assets and liabilities, net
 of assets acquired:
   Accounts receivable..............................              (778)                   170
   Due from factor..................................            (5,231)                 4,787
   Inventories......................................            (1,070)                (5,557)
   Prepaid royalties................................              (494)                (2,467)
   Other current assets.............................              (838)                  (617)
   Other assets.....................................               (95)                   (28)
   Accounts payable and accrued expenses............             3,654                  1,599
   Due from shareholders............................                --                    347
                                                         ----------------       ----------------

Net cash (used in) provided by operating activities.              (122)                 2,229
                                                         ----------------       ----------------

Cash flows from investing activities:
   Acquired assets of D.Glasgow.....................            (6,853)                    --
   Acquisition of fixed assets......................            (1,156)                   (11)
                                                         ----------------       ----------------
 Net cash used in investing activities..............            (8,009)                   (11)

Cash flows from financing activities:
   Net borrowings under line of credit..............             8,242                (21,083)
   Payments on capital lease........................                --                    (24)
   Issuance of common stock.........................                --                 22,331
   Payments to stockholders.........................              (149)                    --
   Dividends paid...................................                --                 (3,428)
                                                         ----------------       ----------------

Net cash provided by (used in) financing activities.             8,093                 (2,204)
                                                         ----------------       ----------------

Net (decrease) increase in cash.....................               (38)                    14

Cash at beginning of year...........................               139                    374
                                                         ----------------       ----------------

Cash at end of period...............................        $      101             $      388
                                                         ================       ================
</TABLE>

        The accompanying notes are an integral part of these statements.

                                     - 4 -
<PAGE>
                                 HAPPY KIDS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Note 1 -- Basis of Presentation:

     The  information  presented as of June 30, 1999 and for the three-month and
six-month  periods ended June 30, 1999 and June 30, 1998 is  unaudited,  but, in
the  opinion  of  the  Happy  Kids  Inc.'s  (the  "Company")   management,   the
accompanying  unaudited condensed  consolidated financial statements contain all
adjustments  (consisting only of normal recurring adjustments) which the Company
considers  necessary  for  the  fair  presentation  of the  Company's  financial
position  as of  June  30,  1999  and  the  results  of its  operations  for the
three-month  and six-month  periods  ended June 30, 1999 and 1998,  and its cash
flows for the  six-month  periods  ended June 30, 1999 and 1998.  The  financial
statements  included  herein have been  prepared in  accordance  with  generally
accepted accounting  principles and the instructions to Form 10-Q and Rule 10-01
of Regulation S-X.  Accordingly,  certain  information and footnote  disclosures
normally included in financial  statements prepared in accordance with generally
accepted accounting  principles have been condensed or omitted.  These financial
statements  should be read in conjunction with the Company's  audited  financial
statements for the year ended December 31, 1998,  which were included as part of
the  Company's  Annual  Report on Form 10-K,  as filed with the  Securities  and
Exchange Commission (the "SEC") on March 30, 1999.

     Results for the interim  period are not  necessarily  indicative of results
that may be expected for the entire year.

     The Company was  incorporated in 1988 in New York under the name O'Boy Inc.
and  changed its name to Happy Kids Inc. in  December  1997.  Historically,  the
Company operated as separate business entities,  with the first of such entities
commencing  operations in 1979, all under the common  ownership of the Company's
then-current  shareholders.  Immediately  prior  to  the  effectiveness  of  the
Company's initial public offering (the "Initial Public Offering"),  as described
in Note 2, all of such separate entities became wholly-owned subsidiaries of the
Company (the  "Reorganization").  The Company issued 4,262,500 additional shares
of  common  stock,  to its  then-current  shareholders,  in  exchange  for their
ownership in these separate business  entities.  All share and per share amounts
throughout  this Form  10-Q have been  restated  to  retroactively  reflect  the
Reorganization.

     The accompanying  condensed  consolidated  financial statements include the
consolidated  accounts  of the  Company  and its wholly  owned  subsidiaries  to
reflect  the  Reorganization  as  stated  above.  All  significant  intercompany
accounts and transactions have been eliminated in consolidation.





                                     - 5 -
<PAGE>

                                 HAPPY KIDS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Note 2 -- Initial Public Offering:

     On April 2, 1998, the Company  consummated  its Initial Public  Offering of
2,200,000  shares of its Common  Stock at a price of $10.00  per  share,  all of
which shares were issued and sold by the Company. On April 23, 1998, the Company
consummated the exercise of the underwriters'  over-allotment  option granted by
the Company to the  underwriters in connection with the Initial Public Offering.
As a result,  the Company  issued and sold an additional  330,000  shares of the
Company's Common Stock at the Initial Public Offering price of $10.00 per share.
The net  proceeds  to the  Company  from such  sales  were  approximately  $22.3
million.

     Of the total net proceeds  received by the Company upon the consummation of
its Initial Public Offering and the exercise of the over-allotment  option, $2.0
million was  distributed  to certain  shareholders  of the Company in connection
with the  payment of a portion  of the S  Corporation  distribution  made by the
Company in connection with the Reorganization (the "S Corporation Distribution")
and the remaining  amount was utilized to pay down a portion of the  outstanding
balance under the  Company's  bank credit  facility (the "Line of Credit").  See
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."


Note 3 -- Income Taxes:

     Prior to the  completion of the Initial  Public  Offering,  the Company had
elected to be treated  as an S  Corporation  for  Federal  income tax  reporting
purposes. An S Corporation is generally treated like a partnership and is exempt
from Federal income taxes,  with certain  exceptions,  and  shareholders  report
their pro rata share of corporate taxable income or loss on their individual tax
returns.  A  provision  for state  income  taxes was made for those  states  not
recognizing  the  Company's S  Corporation  status.  The Company's S Corporation
status terminated on the day prior to the effectiveness of the Company's Initial
Public Offering described in Note 2.

     Subsequent to the  termination of the Company's S Corporation  status,  the
Company  used the  liability  method  for both  Federal  and  state  income  tax
purposes.  The effect of such change was  reflected in net income for the second
quarter of 1998 when such  termination  occurred  and resulted in an increase in
deferred tax assets and net earnings of approximately $1.0 million.

     The pro  forma  provision  for  income  taxes  represents  the  income  tax
provision  that would have been reported had the Company been subject to Federal
and additional  state and local income taxes as a C Corporation  for all periods
presented.

     Deferred  income taxes are determined  based on the difference  between the
tax basis of an asset or  liability  and its  reported  amount in the  financial
statements  using  enacted tax rates for the year in which the  differences  are
expected to reverse.

                                     - 6 -
<PAGE>
                                 HAPPY KIDS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     The principal  types of  differences  between  assets and  liabilities  for
financial statement and tax return purposes giving rise to deferred income taxes
are accrued  expenses,  accumulated  depreciation,  certain costs capitalized to
inventory  and allowance  for doubtful  accounts.  A deferred tax asset has been
recorded for these differences.

Note 4 -- Due to Stockholders:

     In connection with the  termination of the Company's S Corporation  status,
the Company  agreed to  distribute an aggregate of $7.6 million to the Company's
pre-Initial  Public  Offering   shareholders,   such  amounts  representing  the
Company's total undistributed equity resulting from the S Corporation or limited
liability  corporation  ("LLC")  status of the Company and its related  entities
prior to the Reorganization, of which $2.0 million was paid from the proceeds of
the Initial Public Offering. The balance is due pursuant to four-year 5.7% notes
payable to such shareholders.  Such notes provide for the timely distribution of
amounts   necessary  to  pay  the  remaining   personal  income  taxes  of  such
shareholders or members due on amounts earned by such S Corporations or LLCs for
the period  January 1, 1998  through the  termination  of S  Corporation  or LLC
status.  In addition,  existing  amounts due to shareholders of $1.4 million are
subject to the same terms as the above promissory notes.


Note 5 -- Pro forma Information:

     a.   Pro Forma Results of Income and Pro Forma Income Taxes:

     Pro Forma adjustments in the statement of income for the three-month and
six-month periods ended June 30, 1998 reflect  provisions for income taxes based
upon pro forma  pretax  income as if the Company had been subject to Federal and
additional state and local income taxes.

     As disclosed  in Note 3, the Company has, in the past,  elected for certain
of its affiliates to be taxed as S Corporations pursuant to the Internal Revenue
Code. In connection  with the Company's  Initial  Public  Offering,  the Company
terminated such S elections and partnership status and became subject to Federal
and additional  state and local income taxes. The pro forma provision for income
taxes represents the income tax provisions that would have been reported had the
Company been subject to Federal and additional state and local income taxes. The
effective pro forma tax rate of the Company differs from the Federal rate of 34%
primarily due to the effects of state and local income taxes.



                                     - 7 -
<PAGE>
                                 HAPPY KIDS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


     b.   Pro Forma Net Income

     Pro forma net income represents the historical  amounts after the pro forma
adjustments discussed above.


Note 6 -- Earnings Per Share:

     A  reconciliation  between  basic  and  diluted  earnings  per  share  from
operations is as follows:

<TABLE>
<CAPTION>
                                          Three Months Ended             Six Months Ended
                                                June 30,                      June 30,
                                     -------------------------     -------------------
                                         1999           1998            1999           1998
                                         ----           ----            ----           ----
                                              (in thousands, except per share amounts)

<S>                                    <C>            <C>            <C>             <C>
Net Income........................     $    1,822     $    2,593     $    4,415      $    4,905
Basic EPS:
     Basic common shares..........         10,363         10,188         10,322           8,976
                                       ==========     ==========     ==========      ==========
     Basic EPS....................     $     0.18     $     0.25     $     0.43      $     0.55
                                       ==========     ==========     ==========      ==========
Diluted EPS:
     Basic common shares..........         10,363         10,188         10,322           8,976
     Diluted common shares........             39             33             34               9
                                       ----------     ----------     ----------      ----------
     Total diluted shares.........         10,402         10,221         10,356           8,985
                                       ==========     ==========     ==========      ==========
     Diluted EPS.................      $     0.18     $     0.25     $     0.43      $     0.55
                                       ==========     ==========     ==========      ==========
</TABLE>


Note 7 -- Accounts Receivable:

     Accounts Receivable consist of the following:

                                                June 30,          December 31,
                                                  1999                1998
                                             -----------          ------------
                                                       (in thousands)

     Accounts Receivable..............       $     1,444          $       860
     Allowances.......................              (322)                (513)
                                             -----------          -----------
                                             $     1,122          $       347
                                             ===========          ===========



                                     - 8 -
<PAGE>
                                 HAPPY KIDS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Note 8 -- Inventories:

     Inventories consist of the following finished goods:

                                                 June 30,          December 31,
                                                   1999                1998
                                               -----------        ------------
                                                       (in thousands)

      Warehouse...............................  $   20,180          $   16,531
      In-transit, overseas and Raw Materials..       7,598               7,277
        LIFO valuation allowance.............         (229)               (229)
                                                ----------          ----------
                                                $   27,549          $   23,579
                                                ==========          ==========

     There was no  liquidation  of LIFO  inventories in 1999. For the six months
ended June 30, 1998, the liquidation of LIFO  inventories  decreased the cost of
sales and,  therefore,  increased  income before taxes by $53,000.  There was no
liquidation of LIFO inventories for the three months ended June 30, 1998.


Note 9 -- Acquisition:

     On April 13, 1999,  the Company  entered into an asset  purchase  agreement
(the "Purchase  Agreement")  with D. Glasgow & Sons Inc., a New York corporation
(the  "Seller")  and Mr.  Andrew D. Glasgow,  its sole  shareholder,  to acquire
certain  of  the  assets  (the  "Assets")  of the  Seller.  The  Assets  include
intellectual  property rights under license agreements to design and manufacture
children's  apparel  bearing  logos,  trademarks  and tradenames of the National
Football League, the National Basketball Association,  Major League Baseball and
the National  Hockey  League,  as well as certain Warner  Brothers'  properties,
including  Looney Tunes,  and Saban's Power Rangers,  among other licenses.  The
Company also  acquired  certain  machinery and  equipment  from the Seller.  The
purchase price for the Assets included a cash  consideration of $3.7 million and
the  issuance  of 95,693  shares of Common  Stock of the  Company  having a fair
market value of $1.0 million. Such shares of Common Stock are restricted shares,
and the Company has granted certain piggy-back registration rights to the holder
of such restricted  stock. The Purchase  Agreement also provided for the Company
to purchase the Seller's  apparel  inventory for an  additional  cash payment of
approximately $2.9 million.

     In connection  with the execution of the Purchase  Agreement,  Mr. Glasgow,
formerly the  President of the Seller,  was elected as a Director of the Company
in April 1999.  In addition,  Mr.  Glasgow was appointed  Vice  President of the
Company and will serve as  President  of the  Company's  Glasgow  Division.  Mr.
Glasgow also  executed a five (5) year  Employment  Agreement  with the Company.
Under the terms of such  Employment  Agreement,  Mr.  Glasgow is  entitled to an
annual base salary of $250,000  and bonuses  commensurate  with other  executive
officers of the Company, which amounts and payments are within the discretion of
the



                                     - 9 -
<PAGE>
                                 HAPPY KIDS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Compensation  Committee of the Board of Directors.  In addition,  Mr. Glasgow is
also entitled to receive, in quarterly payments, subject to annual adjustment, a
percentage of certain divisional profits and certain import sales profits of the
Company's  Glasgow Division.  Mr. Glasgow's  Employment  Agreement  requires Mr.
Glasgow to maintain the confidentiality of Company information and requires that
during the term of his  employment  with the Company and thereafter for a period
of two years,  he will not compete with the Company in any state or territory of
the United States where the Company does business by engaging in any capacity in
a business which is competitive with the business of the Company.  Mr. Glasgow's
Employment Agreement also provides that, for a period of two years following the
termination  of his  employment  with the  Company,  he shall  not  solicit  the
Company's licensors, customers or employees.

Note 10 -- Subsequent Events:

     On July 12, 1999, the Company's  Board of Directors (the "Board")  received
for  consideration a proposal (the  "Proposal") from H.I.G.  Capital,  L.L.C., a
private  investment  firm  (the  "Buyer"),  to  recapitalize  the  Company  in a
leveraged going-private transaction (the "Proposed Transaction").  Certain terms
and conditions of the Proposed  Transaction are set forth in a certain Letter of
Intent dated July 9, 1999 (the  "Letter of  Intent"),  entered into by and among
the Buyer and each of the Company's majority shareholders, consisting of Messrs.
Jack M. Benun, Mark J. Benun and Isaac M. Levy (the "Majority Shareholders"). As
contemplated  under the  Letter of  Intent,  an entity to be formed by the Buyer
("Newco")  would  be  merged  with and into the  Company  (the  "Merger").  Upon
consummation  of the  Merger,  the  separate  existence  of Newco shall cease to
exist,  and the Company shall be the surviving  corporation  and shall  continue
under the name "Happy  Kids  Inc.".  In  addition,  each share of the  Company's
Common  Stock then held by the public  (other than  shares held by the  Majority
Shareholders)  would be  converted  into the  right to  receive  $11.50  payable
entirely in cash, without any interest thereon. The Majority  Shareholders,  who
presently  beneficially  own  74.69%  of  the  Company's  Common  Stock  in  the
aggregate,  would  continue to own 23.61% of the  Company's  Common Stock in the
aggregate upon  consummation of the Merger and would receive,  in the aggregate,
approximately  $49.25  million  in  connection  with their sale of shares of the
Company's Common Stock. Each outstanding option to purchase the Company's Common
Stock, whether or not then exercisable,  would be cancelled upon consummation of
the Merger and the holders thereof would be compensated accordingly.  The Merger
is conditioned upon, among other things,  the approval of the Company's Board of
Directors,  the approval of  two-thirds  of all of the  Company's  shareholders,
negotiation and execution of a definitive acquisition agreement,  the receipt of
financing on acceptable  terms in amounts  sufficient to effect the Merger,  and
other customary conditions. The Board has formed a special committee, consisting
of its two independent directors,  Messrs. Marvin Azrak and Stephen I. Kahn (the
"Special  Committee")  to  evaluate  the  Proposed  Transaction.   The  Proposed
Transaction is subject to the recommendation of the Special  Committee,  and, if
so  recommended,  will be  submitted  to the  Company's  shareholders  for their
approval.  The Special  Committee has engaged  independent  legal counsel and an
independent  investment banking firm to assist in its evaluation of the fairness
of  the  Proposed  Transaction  to  the  Company's  public  shareholders  from a
financial  point of view.  It is  expected



                                     - 10 -
<PAGE>
                                 HAPPY KIDS INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

that, in the event the Merger is consummated,  the registration of the Company's
Common Stock pursuant to Section 12 of the  Securities  Exchange Act of 1934, as
amended,  would be  terminated  and the Common Stock would cease to be listed on
the Nasdaq National Market.

     Approximately  $79.7  million  would  be  required  to  pay  the  aggregate
consideration  due  to all  shareholders  and  option  holders  of  the  Company
(including each Majority Shareholder) upon consummation of the Merger.

     The Buyer has indicated that it will make an equity  investment and arrange
to borrow sufficient funds from banks and other financial institutions and/or to
obtain  additional  funds  through the issuance and sale of debt  securities  of
Newco to effect the Merger and to pay the requisite  consideration in connection
therewith.  It is  expected  that in  connection  with the  consummation  of the
Merger,  the Company  would  assume,  guarantee or otherwise  become liable for,
contractually or by operation of law, Newco's  obligations  under any borrowings
of Newco or debt  securities  sold by Newco.  Following the  consummation of the
Merger,  the Company's  available cash resources will be utilized to pay certain
of the costs of the Merger or retire or amortize certain obligations incurred to
effect the Merger.

     As of the date hereof,  the Company's  Board of Directors has not responded
to the Proposal. Although the Majority Shareholders have indicated in the Letter
of Intent  that  they  have  agreed to  support  the  Proposal,  there can be no
assurance  that the Board of  Directors  of the Company will accept the Proposal
or, if accepted,  that the conditions set forth in such Proposal,  including the
obtaining of requisite financing,  will be satisfied, that a mutually acceptable
definitive  acquisition  agreement  will be entered  into,  or that the Proposed
Transaction will be consummated.


                                     - 11 -
<PAGE>

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

GENERAL

     Happy Kids Inc., a New York corporation ("Happy Kids" or the "Company"), is
a designer and  marketer of  custom-designed,  licensed  and branded  children's
apparel.  The  Company  produces  high-quality,  coordinated  apparel  programs,
including knit tops, bottoms, overalls,  shortalls,  coveralls and swimwear, for
newborns,  infants,  toddlers,  boys and girls (collectively,  "playwear").  The
Company's  major  licenses  include  Nickelodeon's  Rugrats,  AND 1  and  B.U.M.
Equipment.  The Company also designs and delivers private label branded playwear
programs for leading  retailers,  such as Sesame Street for Kmart. The Company's
strategy is to work closely with its customers to design and market  coordinated
playwear  programs  resulting  in gross  margins  that the Company  believes are
higher than those typically  generated from sales of non-licensed or non-private
label branded playwear.

     Prior to and  including  much of 1995,  the  Company's  operating  strategy
primarily focused on developing and marketing its own house brands.  The Company
manufactured  products  for  inventory  under  the  Company's  brands  and often
concentrated  on enhancing sales volume rather than focusing on a combination of
sales volume and gross margins.  The Company  believes that the loss it incurred
in 1995 was primarily  attributable  to these factors.  In 1995, to leverage its
strong customer relationships,  the Company initiated its current sales strategy
under which the  Company's  customers  order  specific  quantities of goods on a
fixed-price  basis  three to nine  months in advance of a selling  season.  As a
result,  substantially all of the Company's playwear is produced upon receipt of
customer orders.  Also in 1995, the Company elected to concentrate on developing
a diversified  portfolio of popular,  established and  well-recognized  licensed
properties and private label  relationships  and  de-emphasized  its reliance on
house brands,  which have been a declining  component of the Company's net sales
in each year since 1995.  Since that time,  the  Company's  strategy has been to
work closely with its  customers to design and market  high-quality  coordinated
apparel programs resulting in gross margins that the Company believes are higher
than those typically  generated from sales of non-licensed or non-private  label
branded playwear.

     Statements  contained or  incorporated  by reference in this Form 10-Q that
are not based on historical facts are  "forward-looking  statements"  within the
meaning of Section  21E of the  Securities  Exchange  Act of 1934,  as  amended,
including,   without  limitation,   statements  regarding  the  Company's  sales
strategy,  concentration  on  the  development  of a  diversified  portfolio  of
licensed   properties  and  private  label   relationships  and  gross  margins.
Forward-looking  statements also may be identified by the use of forward-looking
terminology  such  as  "may",  "will",   "expect",   "estimate",   "anticipate",
"continue",  or similar terms, variations of such terms or the negative of those
terms. This Form 10-Q contains forward-looking statements that involve risks and
uncertainties,  including,  but not  limited to,  those  related to: (i) general
economic  conditions;  (ii)  a  dependence  on  license  arrangements;  (iii)  a
dependence  on  private  label  relationships;  (iv) a  dependence  on  contract
manufacturers;  (v) a reliance on key customers;  (vi) a dependence on access to
credit facilities;  (vii) the risks associated with significant  growth;  (viii)
competition;  (ix)  seasonality  of sales;  (x)  cyclicality  and  trends in the
apparel industry; (xi) import restrictions and



                                     - 12 -
<PAGE>

other risks associated with international business;  (xii) the Company's ability
to successfully integrate the licenses recently acquired from D. Glasgow & Sons,
Inc.  into its current  operations;  and (xiii) risks  relating to the Company's
Year 2000  compliance  and the Year 2000  compliance of the  Company's  contract
manufacturers,  suppliers,  distributors,  marketing  partners and certain other
parties.  The Company's  actual results may differ  materially  from the results
discussed in the forward-looking statements contained herein.

RESULTS OF OPERATIONS

Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998

     Net Sales. Net sales increased $5.4 million,  or 16.9%, to $37.4 million in
the second quarter of 1999 from $32.0 million in the second quarter of 1998. The
increase in net sales is  attributable  primarily to increased sales of playwear
of both licensed products and private label programs.

     Gross Profit.  Gross profit  increased by $1.8 million,  or 21.0%, to $10.3
million in the first quarter of 1999 from $8.5 million in the second  quarter of
1998.  Such  increase  was due, in part,  to increased  sales in certain  higher
margin licensed products as well as efficiencies in transportation  and handling
costs.

     Operating Expenses. Operating expenses increased by $1.5 million, or 26.6%,
to $7.0  million in the second  quarter of 1999 from $5.5  million in the second
quarter of 1998.  Operating  expenses  consist  entirely of selling,  design and
shipping expenses, and general and administrative expenses.

          Selling,  Design  and  Shipping  Expenses.  Selling,  design  and
     shipping expenses increased by $1.5 million, or 48.6%, to $4.5 million
     in the second  quarter of 1999 from $3.0 million in the second quarter
     of 1998.  This  increase is  attributable  primarily  to higher  sales
     compensation,  shipping and freight costs  associated  with  increased
     sales volumes, travel expense and licensing fees. In addition,  design
     and production  salaries and sampling  costs  increased as a result of
     the Company's  expanded  product lines.  As a percentage of net sales,
     selling, design and shipping expenses increased to 12.1% in the second
     quarter of 1999 from 9.5% in the second quarter of 1998.

          General and Administrative  Expenses.  General and administrative
     expenses were $2.5 million in the second  quarter of 1999 and 1998. As
     a  percentage  of  net  sales,  general  and  administrative  expenses
     decreased  to 6.6% in the  second  quarter  of 1999  from  7.7% in the
     second quarter of 1998 due to the operating  leverage  associated with
     the higher sales.

     Interest Expense,  net. Interest expense, net decreased $104,000, or 31.7%,
to $224,000 in the second quarter of 1999 from $328,000 in the second quarter of
1998. As a percentage of net sales,  interest expense  decreased to 0.6% for the
second quarter of 1999 compared to 1.0% in the second quarter of 1998.

                                     - 13 -
<PAGE>

     Income Before Income Taxes.  Income before income taxes increased $436,000,
or 16.1%, to $3.1 million in the second quarter of 1999 from $2.7 million in the
second quarter of 1998 due to the reasons  described  above.  As a percentage of
net sales,  income  before  income taxes was 8.4% for both  quarters of 1999 and
1998.

Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998

     Net Sales.  Net sales increased  $15.6 million,  or 23.0%, to $83.3 million
for the first six months of 1999 from $67.7  million for the first six months of
1998. The increase in net sales is attributable  primarily to increased sales of
playwear of both licensed products and private label programs.

     Gross Profit.  Gross profit  increased by $4.9 million,  or 28.8%, to $22.1
million  for the first six months of 1999 from $17.2  million  for the first six
months of 1998.  Such increase was due, in part,  to increased  sales in certain
higher margin licensed  products as well as efficiencies in  transportation  and
handling costs.

     Operating Expenses. Operating expenses increased by $3.3 million, or 31.7%,
to $13.9  million  for the first six months of 1999 from $10.6  million  for the
first six months of 1998. Operating expenses consist entirely of selling, design
and shipping expenses, and general and administrative expenses.

          Selling,  Design  and  Shipping  Expenses.  Selling,  design  and
     shipping expenses increased by $2.8 million, or 47.1%, to $8.8 million
     for the first six months of 1999 from $6.0  million  for the first six
     months of 1998.  This  increase is  attributable  primarily  to higher
     sales  compensation,   advertising  and  shipping  and  freight  costs
     associated  with increased  sales volumes travel expense and licensing
     fees. In addition,  design and production  salaries and sampling costs
     increased as a result of the Company's  expanded  product lines.  As a
     percentage  of  net  sales,  selling,  design  and  shipping  expenses
     increased to 10.6% in 1999 from 8.9% in 1998.

          General and Administrative  Expenses.  General and administrative
     expenses  increased  by  $524,000,  or 11.4%,  to $5.1 million for the
     first six months of 1999 from $4.6 million for the first six months of
     1998  . As a  percentage  of net  sales,  general  and  administrative
     expenses  decreased  to  6.1%  in 1999  from  6.8% in 1998  due to the
     operating leverage associated with the higher sales.

     Interest Expense,  net. Interest expense, net decreased $740,000, or 56.2%,
to $578,000 in 1999 from $1.3  million in 1998.  As a  percentage  of net sales,
interest  expense  decreased  to 0.7% for 1999  compared  to 1.9% in 1998.  This
decrease is a result of the application of a substantial portion of the proceeds
from the  Company's  Initial  Public  Offering to the repayment of the Company's
bank debt in the second quarter of 1998.



                                     - 14 -
<PAGE>

     Income  Before Income Taxes.  Income  before  income taxes  increased  $2.3
million,  or 44.3%, to $7.6 million in 1999 from $5.3 million in 1998 due to the
reasons  described  above.  As a percentage  of net sales,  income before income
taxes was 9.1% in 1999 compared to 7.8% in 1998.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has financed its cash requirements primarily through operations
and  borrowings  under  its bank line of  credit.  Historically,  the  Company's
borrowing  requirements  have been  seasonal,  with peak working  capital  needs
arising during the first and third quarters.

     On April 2, 1998,  the  Company  consummated  its initial  public  offering
("IPO") of 2,200,000  shares of its common  stock,  $0.01 par value (the "Common
Stock"),  at a price of $10.00 per share,  all of which  shares  were issued and
sold by the Company.  On April 23, 1998, the Company consummated the exercise of
the  underwriters'   over-allotment   option  granted  by  the  Company  to  the
underwriters  in connection  with the IPO. As a result,  the Company  issued and
sold an additional 330,000 shares of the Company's Common Stock at the IPO price
of $10.00  per  share.  The net  proceeds  to the  Company  from such sales were
approximately $22.3 million.

     Of the total net proceeds  received by the Company upon the consummation of
its IPO  and  the  exercise  of the  over-allotment  option,  $2.0  million  was
distributed  to  certain  shareholders  of the  Company in  connection  with the
payment of a portion of the S Corporation  distribution and the remaining amount
was  utilized  to pay  down a  portion  of the  outstanding  balance  under  the
Company's credit line.

     On March 31, 1999, the Company executed an amendment of its existing credit
line  whereby  the   Company's   credit  line  was  amended  to  provide  for  a
discretionary  one year revolving  line of credit,  to expire on March 31, 2000,
renewable annually,  providing for advances and letter of credit  accommodations
up to the lesser of (a) $50.0  million from April 1, 1999 to March 31, 2000,  or
(b) at all times the sum of (i) up to eighty-five  percent of eligible  accounts
receivables,  plus (ii) up to fifty percent of finished  goods  inventory,  plus
(iii)  overadvances  approved by the lender.  The  maximum  amount of  revolving
credit  advances  outstanding  at any time cannot  exceed $40.0  million and the
maximum amount of letters of credit outstanding at any time may not exceed $35.0
million.  The  interest  rate  on  amounts  borrowed  will  be the  bank's  then
prevailing  prime rate (7.75% at June 30, 1999) less 0.5% or at LIBOR plus 2.0%,
at the option of the Company. The credit line is collateralized by substantially
all of the assets of the  Company.  As of June 30,  1999,  the Company had $12.0
million  of  outstanding  direct  borrowings  and $18.1  million  of  contingent
liabilities under open letters of credit.

     In addition,  the Company's  lender has sole discretion to make or withhold
advances  under the credit line.  There can be no assurance that the lender will
continue to lend under the credit line. If the lender  exercises its  discretion
to withhold advances,  there would be a material adverse effect on the Company's
business, financial condition and results of operations.



                                     - 15 -
<PAGE>

     As of June 30, 1999,  the Company's  other  principal  sources of liquidity
included  cash of  $101,000,  amounts due from  factor of $25.9  million and net
accounts  receivable of $1.1 million.  The Company had working  capital of $35.6
million and long-term debt of $5.6 million as of June 30, 1999.

     For the six months ended June 30, 1999,  operating  activities used cash of
$122,000 primarily as a result of an increase in amounts due from factor of $5.2
million,  an increase in inventory of $1.1 million, an increase in other current
assets  and  royalties  of $1.3  million,  offset in part by net  income of $4.4
million,  and an  increase in  accounts  payable  and  accrued  expenses of $3.7
million.  Net cash used in investing  activities was $8.0 million,  primarily in
connection  with the  acquisition of certain of the assets of D. Glasgow & Sons,
Inc. and the acquisition of fixed assets. Net cash used in financing  activities
resulted from borrowings under the line of credit.

     Historically,  the Company's business has not required  significant capital
expenditures.  The Company's  capital  expenditures  for the first six months of
1999 and 1998, were $1.2 million and $4,000,  respectively.  The Company expects
to incur total capital  expenditures in 1999 of $1.5 million for the purchase of
new computers,  software and telecommunications  equipment. The Company believes
that  cash  flow  expected  to  be  generated  from  operations,  together  with
borrowings  under its  existing  credit  line,  as amended,  will be adequate to
satisfy current and planned operations for at least the next twelve (12) months.

BACKLOG

     The Company's customers order specific quantities of goods on a fixed-price
basis three to nine months in advance of a selling season.  Such customer orders
are placed in backlog upon their receipt and acceptance by the Company. Customer
orders  are  generally  cancelable  on notice to the  Company  without  penalty.
Although  the  Company has not had  significant  cancellations  in the past,  no
assurance  can be  given  that it will not  experience  a  significant  level of
cancellations  in the  future or that its  backlog  at any point in time will be
converted to sales.  Many of the Company's orders are received  significantly in
advance of scheduled delivery periods.  Consequently, the Company had backlog of
$114.5  million at June 30, 1999,  all of which it expects to ship over the next
three to nine months.  However,  in recent months the Company has  experienced a
significant  increase in orders  involving a rapid  turnaround from the date the
order is placed to the shipment date.

VARIABILITY OF RESULTS; SEASONALITY; CYCLICALITY

     Sales of  children's  apparel are  seasonal.  Consequently,  the  Company's
operating  results have varied  substantially  from quarter to quarter,  and the
Company  expects that they will  continue to do so.  Generally,  the Company has
experienced  significantly  higher net sales in the first and third  quarters as
compared to the second and fourth  quarters,  although this may change from time
to time. The seasonality of the Company's business also affects borrowings under
the  Company's  lines of credit and its level of  backlog,  which  fluctuate  in
response to demand for the  Company's  products.  Therefore,  the results of any
interim  period  are not  necessarily  indicative  of the  results  that  may be
achieved for an entire year.  In  addition,  the apparel  industry is a cyclical
industry

                                     - 16 -
<PAGE>

heavily dependent upon the overall level of consumer spending, with purchases of
apparel and related goods tending to decline  during  recessionary  periods when
disposable  income  is low.  A  difficult  retail  environment  could  result in
downward price pressure which could adversely  impact the Company's gross profit
margins.

MANAGEMENT INFORMATION SYSTEMS

     General

     The Company believes that advanced  information  processing is essential to
maintaining its competitive position. The Company participates in the electronic
data interchange  program maintained by many of its larger customers,  including
JC Penney, Kids R Us, Sears, Target and WalMart. This program allows the Company
to receive customer orders,  provide advanced  shipping  notices,  monitor store
inventory and track orders  on-line from the time such orders are placed through
delivery.

     Year 2000 Compliance

     In 1998, the Company  established  an oversight  committee to review all of
the Company's computer systems and programs,  as well as the computer systems of
the third  parties upon whose data or  functionality  the Company  relies in any
material  respect,  and to assess their ability to process  transactions  in the
Year 2000 and beyond. The Company,  through such oversight committee,  currently
is upgrading its management  information  systems,  which it expects to complete
during the third quarter of 1999, to ensure  proper  processing of  transactions
relating to Year 2000 and beyond. The Company continues to evaluate  appropriate
courses  of  corrective  actions,  including  replacement  of  certain  systems.
Although the Company does not expect the costs  associated  with  ensuring  Year
2000 compliance to have a material  affect on its financial  position or results
of  operations,  if the  computer  systems  used by the  Company,  or any of its
suppliers or vendors fail or experience significant  difficulties related to the
Year 2000,  the Company  could  experience  delays in  manufacturing,  delays in
shipping, an inability to monitor customer orders or to manage inventory, or may
experience  related risks that could  materially  adversely affect the Company's
financial position or its results of operations.  The Company has identified and
been in contact  with its major  customers,  its bank and its factor.  The reply
from each such entity  indicates that each is, or will be, Year 2000  compliant.
The  Company has  incurred  approximately  $100,000  of  expenses  for Year 2000
remediation costs in 1999 and estimates future additional  expenditures for Year
2000 remediation of approximately  $100,000. All costs associated with Year 2000
compliance  are being funded with cash flow  generated  from  operations and are
being  expensed as incurred.  The Company has not developed a  contingency  plan
with respect to Year 2000 issues should they arise.



                                     - 17 -
<PAGE>

EUROPEAN MONETARY UNION

     On January 1, 1999,  eleven of the fifteen member countries of the European
Union set fixed  conversion  rates between their existing legacy  currencies and
the euro. As such, these  participating  countries have agreed to adopt the euro
as their common legal currency.  The eleven  participating  countries will issue
sovereign debt exclusively in euro and will redenominate  outstanding  sovereign
debt.  The legacy  currencies  will continue to be used as legal tender  through
January 1, 2002, at which point the legacy  currencies will be canceled and euro
bills  and  coins  will be  used  for  cash  transactions  in the  participating
countries.

     The Company does not denominate its agreements or transactions with foreign
entities in foreign currencies.  The Company currently does not believe that the
euro conversion will have a material impact on the Company's financial condition
or results of operations.

EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 1998, the FASB issued Statement of Financial  Accounting  Standards
No. 133 ("SFAS No. 133"),  "Accounting  for Derivative  Instruments  and Hedging
Activities,"  which is effective for the Company's  fiscal year ending  December
31, 2000.  SFAS No. 133 will require the Company to recognize all derivatives on
the  balance  sheet at fair value.  Adoption of SFAS No. 133 is not  expected to
have a material effect on the Company's financial statements.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

INTEREST RATE EXPOSURE

     The Company is subject to market risk from  exposure to changes in interest
rates  relating  primarily to the Company's  short-term  debt  obligations.  The
Company  primarily  enters  into such  short-term  debt  obligations  to support
general corporate purposes,  including capital  expenditures and working capital
needs.  All of the Company's debt is short-term  with variable  rates. To manage
its exposure to changes in interest  rates,  the  Company's  policy is to manage
such interest rate exposure through the use of short-term borrowings,  which are
negotiated  with their lenders on an annual  basis.  The Company does not expect
changes in interest  rates to have a material  adverse  effect on income or cash
flows in fiscal 1999,  although  there can be no assurance  that interest  rates
will not significantly change.



                                     - 18 -
<PAGE>
                                     Part II

ITEM 1.  LEGAL PROCEEDINGS.

     On July 12, 1999, the Company's  Board of Directors (the "Board")  received
for  consideration a proposal (the  "Proposal") from H.I.G.  Capital,  L.L.C., a
private  investment  firm  (the  "Buyer"),  to  recapitalize  the  Company  in a
going-private  transaction (the "Proposed Transaction") (more fully described in
"Item 5. Other  Information.").  In  connection  with the Proposed  Transaction,
three  class  action  lawsuits  were  filed on  behalf of the  Company's  public
shareholders,  alleging,  among other  things,  certain  breaches  of  fiduciary
duties, and seeking,  among other remedies,  to enjoin the Proposed Transaction.
On July 14, 1999 and July 19,  1999,  each of Glenn  Whipple and Arthur  Kaplan,
respectively,  filed a complaint in the Supreme  Court of the State of New York,
New York County,  naming the Company, its majority  shareholders,  consisting of
Jack M. Benun,  Mark J. Benun and Isaac M. Levy (the  "Majority  Shareholders"),
and the Buyer as defendants (Glenn Whipple v. Happy Kids Inc., et al., Index No.
99/603371 and Arthur Kaplan v. Happy Kids Inc.,  et al.,  Index No.  99/1144421,
respectively).  On July 26, 1999, John Tsapelas filed a complaint in the Supreme
Court of the  State of New  York,  New York  County,  naming  the  Company,  the
Majority  Shareholders,  and Messrs.  Marvin  Azrak,  Stephen I. Kahn and Andrew
Glasgow  (who,  in  addition to Messrs.  Jack Benun,  Mark Benun and Isaac Levy,
comprise the Company's  entire Board of Directors) as defendants  (John Tsapelas
v. Happy Kids Inc.,  et. al.,  Index No.  99/115078).  The Company's  management
believes that the claims are without merit,  and the Company plans to defend the
actions vigorously.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

     Changes in Securities

     On April 13, 1999,  the Company  issued 95,693 shares of restricted  Common
Stock having a fair market value of $1.0 million to Mr. Andrew D.  Glasgow.  See
"Item 5. Other Information."

     The Company did not employ an underwriter  in connection  with the issuance
or sale of the securities  described above. The Company claims that the issuance
or sale of the foregoing  securities was exempt from registration  under Section
4(2) of the Securities Act of 1933, as amended (the "Act"), as a transaction not
involving  any public  offering  and such  securities  having been  acquired for
investment  and not  with a view to  distribution.  An  appropriate  legend  was
affixed to the stock  certificate  issued in connection with the issuance of the
above-referenced  securities.  Mr.  Glasgow had adequate  access to  information
about the Company.



                                     - 19 -
<PAGE>

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

     The Company's 1999 Annual Meeting of Shareholders was held on May 25, 1999.

     There were present at the Annual Meeting in person or by proxy shareholders
holding an aggregate of 10,289,847  shares of Common Stock out of a total number
of 10,375,693 shares of Common Stock issued and outstanding and entitled to vote
at the Annual Meeting. The results of the vote taken at such Annual Meeting with
respect to each nominee for director were as follows:

Common Stock Nominees                      For                     Withheld
---------------------                      ---                     --------
Jack M. Benun                       10,288,397 Shares            1,450 Shares
Mark J. Benun                       10,288,397 Shares            1,450 Shares
Isaac M. Levy                       10,288,397 Shares            1,450 Shares
Andrew Glasgow                      10,288,397 Shares            1,450 Shares
Marvin Azrak                        10,288,397 Shares            1,450 Shares
Stephen I. Kahn                     10,288,397 Shares            1,450 Shares


     In addition,  a vote of the shareholders was taken at the Annual Meeting on
the proposal to ratify the  appointment of Grant Thornton LLP as the independent
auditors of the Company for the fiscal year ending  December  31,  1999.  Of the
shares present at the meeting in person or by proxy, 10,288,037 shares of Common
Stock were voted in favor of such  proposal,  1,310  shares of Common Stock were
voted  against  such  proposal  and 500 shares of Common  Stock  abstained  from
voting.

ITEM 5.  OTHER INFORMATION.

     Asset Purchase

     On April 13, 1999,  the Company  entered into an asset  purchase  agreement
(the "Purchase  Agreement")  with D. Glasgow & Sons Inc., a New York corporation
(the  "Seller")  and Mr.  Andrew D. Glasgow,  its sole  shareholder,  to acquire
certain  of the  assets  (the  "Assets")  of the  Seller.  The  Assets  included
intellectual  property rights under license agreements to design and manufacture
children's  apparel  bearing  logos,  trademarks  and tradenames of the National
Football League, the National Basketball Association,  Major League Baseball and
the National  Hockey  League,  as well as certain Warner  Brothers'  properties,
including  Looney Tunes,  and Saban's Power Rangers,  among other licenses.  The
Company also  acquired  certain  machinery and  equipment  from the Seller.  The
purchase price for the Assets included a cash  consideration of $3.7 million and
the  issuance  of 95,693  shares of Common  Stock of the  Company  having a fair
market value of $1.0 million. Such shares of Common Stock are restricted shares,
and the Company has granted certain piggy-back registration rights to the holder
of such restricted  stock. The Purchase  Agreement also provided for the Company
to purchase the Seller's  apparel  inventory for an  additional  cash payment of
approximately $2.9 million.



                                     - 20 -
<PAGE>

     Management Change and Addition to the Board of Directors

     In connection  with the execution of the Purchase  Agreement,  Mr. Glasgow,
formerly the  President of the Seller,  was elected as a Director of the Company
in April 1999.  In addition,  Mr.  Glasgow was appointed  Vice  President of the
Company and will serve as  President  of the  Company's  Glasgow  Division.  Mr.
Glasgow also  executed a five (5) year  Employment  Agreement  with the Company.
Under the terms of such  Employment  Agreement,  Mr.  Glasgow is  entitled to an
annual base salary of $250,000  and bonuses  commensurate  with other  executive
officers of the Company, which amounts and payments are within the discretion of
the Compensation  Committee of the Board of Directors.  In addition, Mr. Glasgow
is  also  entitled  to  receive,  in  quarterly  payments,   subject  to  annual
adjustment,  a percentage of certain divisional profits and certain import sales
profits of the Company's Glasgow Division.  Mr. Glasgow's  Employment  Agreement
requires Mr. Glasgow to maintain the  confidentiality of Company information and
requires that during the term of his employment  with the Company and thereafter
for a period of two years,  he will not compete with the Company in any state or
territory of the United  States  where the Company does  business by engaging in
any  capacity  in a  business  which is  competitive  with the  business  of the
Company.  Mr. Glasgow's Employment Agreement also provides that, for a period of
two years following the termination of his employment with the Company, he shall
not solicit the Company's licensors, customers or employees.

     Going Private Transaction

     On July 12, 1999, the Company's  Board of Directors (the "Board")  received
for  consideration a proposal (the  "Proposal") from H.I.G.  Capital,  L.L.C., a
private  investment  firm  (the  "Buyer"),  to  recapitalize  the  Company  in a
leveraged going-private transaction (the "Proposed Transaction").  Certain terms
and conditions of the Proposed  Transaction  are set forth in a Letter of Intent
dated July 9, 1999, entered into by and among the Buyer and each of the Majority
Shareholders  (the  "Letter of  Intent").  As  contemplated  under the Letter of
Intent,  an entity to be formed by the Buyer  ("Newco") would be merged with and
into the Company (the "Merger").  Upon consummation of the Merger,  the separate
existence of Newco shall cease to exist,  and the Company shall be the surviving
corporation  and shall continue  under the name "Happy Kids Inc.".  In addition,
each share of the  Company's  Common  Stock then held by the public  (other than
shares held by the Majority  Shareholders)  would be converted into the right to
receive  $11.50  payable  entirely in cash,  without any interest  thereon.  The
Majority  Shareholders,  who presently  beneficially own 74.69% of the Company's
Common Stock in the  aggregate,  would  continue to own 23.61% of the  Company's
Common Stock in the aggregate upon consummation of the Merger and would receive,
in the aggregate,  approximately $49.25 million in connection with their sale of
shares of the Company's Common Stock.  Each  outstanding  option to purchase the
Company's Common Stock, whether or not then exercisable, would be cancelled upon
consummation  of the  Merger  and  the  holders  thereof  would  be  compensated
accordingly. The Merger is conditioned upon, among other things, the approval of
the  Company's  Board of  Directors,  the approval of  two-thirds  of all of the
Company's  shareholders,  negotiation and execution of a definitive  acquisition
agreement, the receipt of financing on acceptable terms in amounts sufficient to
effect the Merger, and other customary conditions. The Board has formed a



                                     - 21 -
<PAGE>

special committee,  consisting of its two independent directors,  Messrs. Marvin
Azrak and Stephen I. Kahn (the  "Special  Committee")  to evaluate  the Proposed
Transaction.  The Proposed  Transaction is subject to the  recommendation of the
Special  Committee,  and, if so recommended,  will be submitted to the Company's
shareholders for their approval.  The Special Committee has engaged  independent
legal  counsel  and an  independent  investment  banking  firm to  assist in its
evaluation of the fairness of the Proposed  Transaction to the Company's  public
shareholders  from a financial  point of view. It is expected that, in the event
the Merger is  consummated,  the  registration  of the  Company's  Common  Stock
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, would
be  terminated,  and the  Common  Stock  would  cease to be listed on the Nasdaq
National Market.

     As of the date hereof,  the Company's  Board of Directors has not responded
to the Proposal. Although the Majority Shareholders have indicated in the Letter
of Intent  that  they  have  agreed to  support  the  Proposal,  there can be no
assurance  that the Board of  Directors  of the Company will accept the Proposal
or, if accepted,  that the conditions set forth in such Proposal,  including the
obtaining of requisite financing,  will be satisfied, that a mutually acceptable
definitive  acquisition  agreement  will be entered  into,  or that the Proposed
Transaction will be consummated.

     In connection with the Proposed  Transaction,  the Company,  its Board, the
Majority  Shareholders  and the Buyer have been named as  defendants  in certain
class-action litigation. See "Part II. Item 2. Legal Proceedings."



                                     - 22 -
<PAGE>

ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K.

(a)    Exhibits.

       10.1    Amendment  No. 7, dated as of April 13,  1999,  to the  Company's
               Financing Agreement with CIT Group/Commercial  Services, Inc., as
               agent  for  itself  and  certain  other  lenders,  as  previously
               amended.

       10.2    Amendment  No. 1, dated  July 1,  1999,  to the Change in Control
               Severance  Pay  Agreement,  dated as of January 12, 1999,  by and
               between the Company and Stuart Bender.

       27      Financial Data Schedule.

(b)    Reports on Form 8-K.

       On April 27, 1999,  the  Company  filed a  Current  Report on Form 8-K in
       connection  with the acquisition by the  Company of certain of the assets
       of D. Glasgow & Sons, Inc.



                                     - 23 -
<PAGE>

                                   SIGNATURES


     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.




                                      HAPPY KIDS INC.




DATE:  August 12, 1999                By:  /s/ Jack M. Benun
                                           -------------------------------------
                                           Jack M. Benun
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)




DATE:  August 12, 1999                By:  /s/ Stuart Bender
                                           -------------------------------------
                                           Stuart Bender
                                           Chief Financial Officer
                                           (Principal Financial and Accounting
                                           Officer)