<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10 - Q

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

                For the quarterly period ended DECEMBER 31, 1996

                                       OR

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

        For the transition period from _________________ to ___________________

                         Commission file number 33-80570


                             APPAREL VENTURES, INC.
      -------------------------------------------------------------------
             (Exact Name of Registrant as specified in its charter)


 DELAWARE                                                  95 - 4475766
 --------                                                  ------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)


204 WEST ROSECRANS, GARDENA, CALIFORNIA                       90248
(Address of principal executive offices)                    (Zip Code)

                                (310) 538 - 4980
                 -----------------------------------------------
              (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 issuer's
classes of common stock, as of the latest practicable date.

AT FEBRUARY 10, 1997, 1,000 SHARES OF $.01 PAR VALUE COMMON STOCK OF THE
REGISTRANT WERE OUTSTANDING.


<PAGE>   2
                             APPAREL VENTURES, INC.

                                      INDEX


<TABLE>
<CAPTION>
                                                                                PAGE
                                                                                ----
<S>       <C>                                                                   <C>
PART  I.  FINANCIAL  INFORMATION


ITEM 1.   FINANCIAL STATEMENTS:

          Consolidated  Balance  Sheet as of  December 31, 1996  (Unaudited)
               and June 30, 1996.                                                 3

          Consolidated Statement of Operations for the Three and  Six Months
               ended December 31, 1996 and 1995 (Unaudited).                      4

          Consolidated  Statement of  Cash Flows  for the  Six Months  ended
               December 31, 1996 and 1995 (Unaudited).                            5

          Notes to Consolidated Financial Statements (Unaudited).                 6


ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
                   AND FINANCIAL CONDITION.                                       9



PART II.  OTHER  INFORMATION


ITEM 5.       OTHER INFORMATION                                                   12




SIGNATURE                                                                         12
</TABLE>

<PAGE>   3


PART  I  -  FINANCIAL INFORMATION
ITEM  1  -  FINANCIAL STATEMENTS

                             APPAREL VENTURES, INC.

                           CONSOLIDATED BALANCE SHEET

                                   A S S E T S
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,         JUNE 30,
                                                                                1996               1996
                                                                             ------------      ------------
<S>                                                                          <C>               <C>
CURRENT ASSETS
     Cash                                                                    $    123,000      $    244,000
     Due from factor                                                            9,495,000        15,809,000
     Accounts receivable, net of allowance for
          doubtful accounts and discounts of $408,000 and $425,000              1,808,000         2,528,000
     Inventories                                                               19,664,000         7,684,000
     Deferred charges                                                           1,307,000         1,960,000
     Deferred income taxes                                                      3,138,000           999,000
     Prepaid expenses                                                             715,000           227,000
                                                                             ------------      ------------

                   Total current assets                                        36,250,000        29,451,000
                                                                             ------------      ------------

PROPERTY AND EQUIPMENT, at cost, net of
     accumulated depreciation and amortization                                  4,558,000         4,810,000

OTHER ASSETS
     Goodwill and organizational costs                                         12,595,000        12,764,000
     Deferred loan costs                                                        1,851,000         2,110,000
     Deferred income taxes                                                      2,368,000         2,368,000
     Other                                                                        524,000           546,000
                                                                             ------------      ------------

                                                                             $ 58,146,000      $ 52,049,000
                                                                             ============      ============

                      LIABILITIES AND STOCKHOLDER'S EQUITY

 CURRENT LIABILITIES
      Line of credit                                                          $ 10,084,000      $  4,144,000
      Accounts payable                                                           6,003,000         1,500,000
      Accrued interest and other                                                 4,686,000         4,458,000
      Current portion of notes payable                                              86,000           128,000
                                                                              ------------      ------------

                    Total current liabilities                                   20,859,000        10,230,000
                                                                              ------------      ------------

 SENIOR NOTES PAYABLE                                                           35,507,000        35,459,000

 NOTE PAYABLE TO BANK                                                            2,450,000         2,450,000

 NOTES PAYABLE, net of current portion                                              72,000           109,000

 STOCKHOLDER'S EQUITY (DEFICIT)
      Common stock $.01 par value, 10,000 shares authorized, 1,000 shares
          issued and outstanding                                                     1,000             1,000
      Additional paid - in capital                                              11,038,000        11,038,000
      Cumulative translation adjustment                                            (48,000)          (48,000)
      Accumulated deficit                                                      (11,733,000)       (7,190,000)
                                                                              ------------      ------------
                                                                                  (742,000)        3,801,000
                                                                              ------------      ------------

                                                                              $ 58,146,000      $ 52,049,000
                                                                              ============      ============
</TABLE>


                 See notes to consolidated financial statements.


<PAGE>   4
                             APPAREL VENTURES, INC.

                      CONSOLIDATED STATEMENT OF OPERATIONS
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                    SIX MONTHS ENDED                  THREE MONTHS ENDED
                                                      DECEMBER 31,                        DECEMBER 31,
                                            ------------------------------      ------------------------------
                                                1996             1995              1996               1995
                                            ------------      ------------      ------------      ------------
<S>                                         <C>               <C>               <C>               <C>         
NET SALES                                   $ 14,295,000      $ 20,185,000      $ 10,939,000      $ 11,902,000

COST OF SALES                                  8,690,000        14,112,000         6,003,000         6,399,000
                                            ------------      ------------      ------------      ------------

          Gross profit                         5,605,000         6,073,000         4,936,000         5,503,000

OPERATING EXPENSES
     Design                                    1,562,000         1,622,000           913,000           936,000
     Selling                                   2,613,000         2,555,000         1,607,000         1,387,000
     Shipping                                    697,000           772,000           408,000           422,000
     General and administrative                4,438,000         4,374,000         2,306,000         2,280,000
                                            ------------      ------------      ------------      ------------
                                               9,310,000         9,323,000         5,234,000         5,025,000
                                            ------------      ------------      ------------      ------------

          Income (loss) from operations       (3,705,000)       (3,250,000)         (298,000)          478,000
                                            ------------      ------------      ------------      ------------

OTHER ( EXPENSE ) INCOME
     Interest expense                         (2,758,000)       (3,725,000)       (1,404,000)       (1,956,000)
     Interest income                              11,000             6,000             6,000             3,000
     Royalty income                               84,000           136,000            42,000            60,000
     Miscellaneous                              (313,000)          (22,000)         (116,000)          (45,000)
                                            ------------      ------------      ------------      ------------
                                              (2,976,000)       (3,605,000)       (1,472,000)       (1,938,000)
                                            ------------      ------------      ------------      ------------

LOSS BEFORE INCOME TAXES                      (6,681,000)       (6,855,000)       (1,770,000)       (1,460,000)

INCOME TAX BENEFIT                             2,138,000         2,605,000           588,000           674,000
                                             ------------      ------------     ------------      ------------

NET LOSS                                     ($4,543,000)      ($4,250,000)      ($1,182,000)        ($786,000)
                                            ============      ============      ============      ============
</TABLE>



                See notes to consolidated financial statements.

<PAGE>   5
                             APPAREL VENTURES, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                   SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                  1996             1995
                                                             ------------      ------------
<S>                                                          <C>               <C>          
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                ($ 4,543,000)     ($ 4,250,000)
     Depreciation and amortization                                946,000         1,039,000
     Other                                                        (16,000)          (61,000)
     Changes in assets and liabilities
          Due from factor                                       6,314,000         1,898,000
          Accounts receivable, net                                720,000           942,000
          Income taxes payable                                        -              25,000
          Inventories                                         (11,980,000)       (7,030,000)
          Deferred income tax benefits                         (2,139,000)       (2,606,000)
          Prepaid expenses and other assets                       187,000           429,000
          Accounts payable                                      4,503,000         1,454,000
          Accrued interest and other expenses                     229,000          (765,000)
                                                             ------------      ------------
     Net cash used by operating activities                     (5,779,000)       (8,925,000)
                                                             ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchases of equipment                                      (251,000)         (418,000)
     Acquisition of intangibles                                       -            (205,000)
                                                             ------------      ------------
     Net cash used by investing activities                       (251,000)         (623,000)
                                                             ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Borrowing under line of credit                             5,940,000         7,339,000
     Borrowing under (repayment of) senior notes payable           48,000        (3,961,000)
     Borrowing under (repayment of) notes payable                 (79,000)        2,627,000
     Repayment to former stockholders                                 -            (377,000)
     Additional capital infusion                                      -           4,000,000
                                                             ------------      ------------
     Net cash provided by financing activities                  5,909,000         9,628,000
                                                             ------------      ------------


NET INCREASE (DECREASE) IN CASH                                  (121,000)           80,000

CASH, BEGINNING OF PERIOD                                         244,000           207,000
                                                             ------------      ------------

CASH, END OF PERIOD                                          $    123,000      $    287,000
                                                             ============      ============
</TABLE>




                See notes to consolidated financial statements.


<PAGE>   6
                             APPAREL VENTURES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995
                                   (Unaudited)


NOTE  1  -  BASIS OF PRESENTATION

         The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying
consolidated financial statements reflect all adjustments (consisting of normal
recurring adjustments) which are necessary for a fair presentation of the
changes in financial position, results of operations and cash flows for the
interim periods reported.

         The results of operations for the three and six months ended December
31, 1996 are not necessarily indicative of the results to be expected for the
full year.

         The accompanying consolidated financial statements should be read with
reference to "Management's Discussion and Analysis of Financial Condition and
Results of Operations " contained herein and the Notes to consolidated financial
statements, as set forth in the Company's Form 10 - K filing for the fiscal year
ended June 30, 1996.

COMPANY BACKGROUND -- Apparel Ventures, Inc. ( the "Company" ) is a wholly
owned subsidiary of AVI Holdings, Inc. ( the "Parent"). The Company was
incorporated in Delaware under the name of AVI Acquisition Co. effective April
20, 1994 and concurrent with a series of transactions on May 23, 1994, changed
its name to Apparel Ventures, Inc.

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its 79% - owned Portuguese subsidiary, Apparel
Ventures Europa -Textil, LDA. Significant intercompany accounts and transactions
are eliminated in consolidation.

NATURE OF BUSINESS - The Company is headquartered in Gardena, California and
designs, manufactures and markets branded women's swimwear. The Company offers
ten proprietary lines catering to the Junior and Missy categories, distributed
through major department stores and specialty retail stores nationwide and,
through its subsidiary, throughout Europe.

TRANSLATION OF FOREIGN CURRENCIES - Cumulative translation adjustments, which
arise from consolidating Portuguese operations, are included in stockholder's
equity.


NOTE  2  -  INVENTORIES

          Inventories consist of the following:

<TABLE>
<CAPTION>
                                               December 31,       June 30,
                                                 1996               1996
                                              -----------        -----------

               <S>                            <C>                <C>
               Piece goods and trim           $ 4,892,000        $ 3,769,000
               Work - in - process              5,181,000            836,000
               Finished goods                   9,591,000          3,079,000
                                              -----------        -----------

                                              $19,664,000        $ 7,684,000
                                              ===========        ===========
</TABLE>
                                                    

<PAGE>   7
NOTE  3  -  LINE OF CREDIT

         The Company has a line of credit with a bank ( the "Credit Facility" )
which provides for advances and commercial letters of credit of up to $32.0
million through May 23, 1999. The Credit Facility has a sublimit of $3.0 million
for commercial letters of credit and $10.0 million for finished goods inventory.
Borrowings are limited to a predetermined percentage of eligible factored
accounts receivable, plus a seasonal overadvance of $2.5 million during
September and increasing to $4.5 million from October to March 15, of each year,
the amount of which is tied to bookings. Interest on base borrowings is charged
at the bank's prime rate plus 1/2 % or LIBOR plus 2.75%, while interest on
seasonal overadvances is charged at the bank's prime rate plus 1 1/2 % or LIBOR
plus 3.75%. The Credit Facility is collateralized by receivables, finished goods
inventories, and general intangibles.

         The credit agreement includes a $2,450,000 term loan due December 5,
1998. Interest on the term loan is payable monthly at the bank's prime rate. The
term loan is collateralized by receivables, finished goods inventories, and
general intangibles of the Company as well as certain personal assets pledged by
the Company's President.

         The Credit Facility contains covenants requiring the maintenance of
minimum tangible net worth, fixed charge coverage ratios and other matters. The
Company was in compliance with these covenants for the quarter ended December
31, 1996.


NOTE  4  -  SENIOR NOTES PAYABLE

         On May 23, 1994, the Company issued $40 million principal amount of
Series A Senior Notes. The Senior Notes are due December 30, 2000 and bear
interest of 12 1/4%, payable July 1 and January 1 each year. The Senior Notes
were issued at a discount of $800,000, which is being amortized over the term of
the Senior Notes to yield a constant interest rate of 12.7%. As of December 31,
1996 there is $36.0 million principal amount of bonds outstanding net of
$493,000 in unamortized discount.

         The Company may redeem the Senior Notes, subject to a premium for
redemption, after December 31, 1998. The Senior Notes contain certain
restrictions requiring the Company to offer to redeem the Senior Notes including
a premium for redemption, in the event of a change in control of the Company.

         The indenture governing the Senior Notes contains customary covenants
regarding maintaining specified ratios of earnings to fixed charges,
restrictions on transactions with officers and affiliates, and other matters.
For the year ended June 30, 1996 the Company failed to meet the fixed charge
coverage ratio covenant required by the indenture. The bondholders agreed to
waive the violation and forego their right to require redemption of 10% of the
bonds. As part of this agreement with the Company, the bondholders received
stock warrants allowing them to purchase an additional 5% of the outstanding
shares of the Parent company's common stock at $0.01 per share. As of June 30,
1996, the fair value of the warrants was estimated to be between $100,000 and
$200,000. Although the value of the warrants has not been recorded by the
Company, management is of the opinion that the effect of the transaction would
not be significant to the Company's operating results or financial position.

         The fair value of the senior notes payable is determined based on the
estimated current rates available to the Company for debt of similar maturities
and terms. The fair value of senior notes payable as of December 31, 1996 is
estimated to be between $37.5 million and $39.5 million.


NOTE  5  -  COMMITMENT - PARENT COMPANY CAPITAL STRUCTURE

         In connection with the acquisition of the Company, AVI Holdings, Inc. (
the "Parent" ) issued $10 million of Subordinated Senior Notes, $3.8 million of
Subordinated Junior Notes, $300,000 of common stock, $1.7 million of Class A
Preferred Stock, $1.7 million of Class B Preferred Stock and $1.0 million of
Class C Stock. A Subordinated Junior Note in the amount of $650,000 was
immediately repaid in full for $350,000. Since the Company is a wholly - owned
subsidiary of the Parent and is the sole operating unit of the consolidated
entity, the Company is the sole source of any cash to be paid by the parent on
such securities in the form of interest, dividends or principal repayments. The
cash required by the Parent to make these payments will be provided by dividends
or cash advances by the Company. While the Parent company's debt service
requirements will be funded by the Company, the debt of the Parent is not
reflected in the balance sheet of the Company since the Company has not
guaranteed, pledged assets as security for, or have plans, intentions, or a
requirement to directly assume or repay the Parent company's organizational
obligations.



<PAGE>   8
         On December 5, 1995, in order for the Company to obtain waivers of
certain defaults from the Senior Note holders, the Parent authorized the
issuance of 6,450 shares of Class D Preferred Stock and issued to certain
subscribers 4,000 shares of Class D Preferred Stock for cash consideration of
$4.0 million. Such proceeds were then contributed by the Parent to the Company.

         The $10.0 million Senior Subordinated Notes issued by the Parent bear
interest at 12% and require semi-annual interest payments on April 30 and
October 31 each year, commencing October 31, 1994. The notes are due on April
30, 2004. The remaining $3.15 million Junior Subordinated Notes bear interest at
10.78% and require semi-annual interest payments on the 150th day following the
second and fourth quarter of each fiscal year, commencing with the second fiscal
quarter ended December 31, 1994. The notes are due in equal annual installments
on June 30, 2002, 2003 and 2004. In the aggregate, annual debt service
requirements for each of the next 5 years is $1,540,000.

         The Company did not meet the fixed charge ratio requirement for the
fiscal year ended June 30, 1996 and therefore is precluded under its bond
indenture from making any advances to the Parent for its payment obligation.
However, the Parent has satisfied these payment obligations by issuing
promissory notes (bearing interest at the default rate) in the amounts of the
interest due.

         All classes of preferred stock of the Parent are 6% cumulative shares.
The dividends shall be paid, at the option of the Board of Directors, in the
form of cash or preferred stock, payable November 1 of each year. The payment of
cash dividends shall be restricted if such payment would result, directly or
indirectly, in a default under any obligation of the Company. The preferred
shares may be redeemed at any time for $1,000 per share plus accrued but unpaid
dividends. All shares not previously redeemed shall be redeemed by payment of
cash of $1,000 per share plus all accrued and unpaid dividends on September 30,
2004.



NOTE 6 - FINANCIAL INSTRUMENTS

         Statements of Financial Accounting Standard No. 107 " Disclosures About
Fair Value of Financial Instruments " (SFAS 107) requires the disclosure of the
fair market value of financial instruments for which it is practicable to
estimate fair value. The Company's financial instruments include cash,
receivables, accounts payable, line of credit, notes payable, and senior notes
payable. The Company considers the carrying amounts of all financial instruments
except for senior notes payable to approximate their fair value. The estimated
fair value of senior notes payable is indicated in Note 4.

<PAGE>   9


PART  I  -  FINANCIAL INFORMATION

                             APPAREL VENTURES, INC.

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


          The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial position and
operating results during the periods included in the accompanying consolidated
financial statements.

RESULTS OF OPERATIONS

          The following tables set forth information with respect to the
percentage relationship of net sales of certain items of the consolidated
statement of operations of the Company for the three and six months ended
December 31, 1996 and 1995.

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED DECEMBER 31,
                                                 ----------------------------------------------------------------
                                                      1996                    %             1995              %
                                                 -------------             -----       ------------         -----
<S>                                              <C>                       <C>         <C>                  <C>   
NET SALES                                        $ 10,939,000              100.0%      $ 11,902,000         100.0%

COST OF SALES                                       6,003,000               54.9%         6,399,000          53.8%
                                                 ------------                          ------------

               Gross profit                         4,936,000               45.1%         5,503,000          46.2%

OPERATING EXPENSES
          Design                                      913,000                               936,000
          Selling                                   1,607,000                             1,387,000
          Shipping                                    408,000                               422,000
          General and administrative                2,306,000                             2,280,000
                                                 ------------                          ------------
                                                    5,234,000               47.8%         5,025,000          42.2%
                                                 ------------                          ------------

               Income (loss) from operations         (298,000)              -2.7%           478,000           4.0%

OTHER ( EXPENSE ) INCOME
          Interest expense                         (1,404,000)                           (1,956,000)
          Interest income                               6,000                                 3,000
          Royalty income                               42,000                                60,000
          Miscellaneous                              (116,000)                              (45,000)
                                                 ------------                          ------------
                                                   (1,472,000)             -13.5%        (1,938,000)        -16.3%
                                                 ------------                          ------------

LOSS BEFORE INCOME TAXES                           (1,770,000)             -16.2%        (1,460,000)        -12.3%

INCOME TAX BENEFIT                                    588,000                5.4%           674,000           5.7%
                                                 ------------                          ------------

NET LOSS                                         ($ 1,182,000)             -10.8%      ($   786,000)         -6.6%
                                                 ============                          ============
</TABLE>


<PAGE>   10

<TABLE>
<CAPTION>
                                                            SIX MONTHS ENDED DECEMBER 31,
                                         ----------------------------------------------------------------
                                            1996                     %             1995              %
                                         ------------              -----       ------------         -----
<S>                                      <C>                       <C>         <C>                  <C>   
NET SALES                                $ 14,295,000              100.0%      $ 20,185,000         100.0%

COST OF SALES                               8,690,000               60.8%        14,112,000          69.9%
                                         ------------                          ------------

               Gross profit                 5,605,000               39.2%         6,073,000          30.1%

OPERATING EXPENSES
          Design                            1,562,000                             1,622,000
          Selling                           2,613,000                             2,555,000
          Shipping                            697,000                               772,000
          General and administrative        4,438,000                             4,374,000
                                         ------------                          ------------
                                            9,310,000               65.1%         9,323,000          46.2%
                                         ------------                          ------------

               Loss from operations        (3,705,000)             -25.9%        (3,250,000)        -16.1%

OTHER ( EXPENSE ) INCOME
          Interest expense                 (2,758,000)                           (3,725,000)
          Interest income                      11,000                                 6,000
          Royalty income                       84,000                               136,000
          Miscellaneous                      (313,000)                              (22,000)
                                         ------------                          ------------
                                           (2,976,000)             -20.8%        (3,605,000)        -17.9%
                                         ------------                          ------------

LOSS BEFORE INCOME TAXES                   (6,681,000)             -46.7%        (6,855,000)        -34.0%

INCOME TAX BENEFIT                          2,138,000               15.0%         2,605,000          12.9%
                                         ------------                          ------------

NET LOSS                                 ($ 4,543,000)             -31.8%      ($ 4,250,000)        -21.1%
                                         ============                          ============
</TABLE>


NET SALES

          Net sales for the first six months of fiscal 1997 decreased by $5.9
million or 29.2% as compared to the same period of fiscal 1996. This decrease
was due primarily to the decrease in sales of 462,000 units totaling $5.3
million of prior season merchandise and a $1.7 million decrease in sales of
current season merchandise, primarily in the Sassafras Group. This decrease was
offset by a $1.0 million decrease in returns and allowances which was primarily
due to the elimination of the "preview" line for the La Blanca label in the
fourth quarter of fiscal 1996 and general improved performance of the brands in
fiscal 1996.

          Net sales for the quarter ended December 31, 1996 declined by $1.0
million or 8.1% as compared to the same period of fiscal 1996. This decrease was
due primarily to a $1.6 million decrease in Sassafras Group current season
merchandise sales in the period. Customer orders for the Sessa and Too Hot
Brazil labels for shipment in the second quarter were significantly less than
the prior year.


GROSS PROFIT

          Gross profit for the first six months of fiscal 1997 decreased by $0.5
million or 7.7% ; $1.8 million due to lower volume offset by improved margin of
$1.3 million. Gross profit as a percent of net sales increased from 30.1% to
39.2%, as a result of the significant decrease in sales of prior season
merchandise as cited above.

          Gross profit for the quarter ended December 31, 1996 decreased by $0.6
million or 10.3% as compared to the quarter ended December 31, 1995; $0.5
million due to lower volume and $0.1 million to lower margin.


<PAGE>   11
OPERATING EXPENSES

         Operating expenses for the first six months of fiscal 1997 were
comparable with the same period of fiscal 1996.

         Operating expenses for the quarter ended December 31, 1996 increased by
$0.2 million due primarily to an increase in selling salaries and sample related
expenses. This increase in selling salaries was due to the re - organization of
the Company's New York and Los Angeles showrooms and the conversion of key sales
representatives from commission to salary status.


OTHER EXPENSES

         Other expenses for the first six months of fiscal 1997 decreased by
$0.6 million due primarily to a decrease in interest expense of $1.0 million
offset by expenses relating to a litigation settlement and related legal expense
and reduced royalty income from an international licensee. The decrease in
interest expense is due primarily to the more effective use of assets through
improved accounts receivable collection efficiency and inventory planning, as
mentioned below.

         Other expenses for the quarter ended December 31, 1996 decreased by
$0.5 million due primarily to a decrease in interest expense of $0.6 million
offset by expenses relating to a litigation settlement and the related legal
expense and reduced royalty income from an international licensee.


LIQUIDITY AND CAPITAL RESOURCES

         The Company's working capital requirements are seasonal, with peak
needs arising near the end of the third quarter and the beginning of the fourth
quarter of the fiscal year, primarily as a result of building inventories in the
first and second quarters of the fiscal year to supply third and fourth quarter
demand and the financing of accounts receivable in the fourth quarter of the
fiscal year. The Company meets its seasonal working capital needs by utilizing
amounts available under its line of credit. The Company's loan balance was
$10,084,000 at December 31, 1996.

         At December 31, 1996, the net collateral availability under the line of
credit was approximately $7,500,000.

         During late fiscal 1995 and early 1996, the Company initiated several
changes in executive personnel and instituted more comprehensive financial
reporting and controls to improve the Company's performance. Taken as a whole,
these initiatives have resulted in lower inventory levels, higher gross profit
margins, reduced costs and greater financial liquidity than in fiscal 1995 and
1996. The days sales outstanding (DSO) in accounts receivable has been reduced
from 137 days at December 31, 1995 to 75 days at December 31, 1996. This
improvement in DSO is due to improved collection efficiency, reduced chargebacks
and reduced sales. Shipments made to specialty retailers and others during the
second quarter are typically given extended dating to May 10th of the following
year. Accordingly, with current season sales down by $1.6 million, this has
favorably impacted the calculation. The days in inventory on hand has decreased
from 95 at December 31, 1995 to 83 days at December 31, 1996, which is the
direct result of improved planning and scheduling.

         The Company does not have any mandatory long - term debt principal
payment requirements until December 1998. Based upon current levels of
operations, anticipated growth and construction of the Mexico sewing facility (
as discussed in Part II ), the Company expects that sufficient cash flow will be
generated from operations so that, with the other financing alternatives
available to it, the Company will be able to meet all of its debt service
requirements as well as its capital expenditure requirements for the foreseeable
future.


SEASONALITY

         The Company's business is highly seasonal. In fiscal 1996,
approximately 73% of the Company's gross sales were generated in the second half
of its fiscal year. The Company expects this pattern to continue in its current
and subsequent fiscal years. This seasonality and the relatively long times
required to design and manufacture new products have led to the development of
this standard selling cycle. The Company operates with a deficit in cash flow
from operations ( seasonal working capital requirements ) for the first nine
months of each fiscal year.

<PAGE>   12
PART  II  -  OTHER  INFORMATION


ITEM 5  -  OTHER INFORMATION

         Apparel Ventures, Inc. has committed to establishing a sewing plant in
Mexico. AVI has formed an operating company and has obtained a Maquiladora
Permit. The Company has signed a letter of intent to lease the land and the
building, with an option to purchase, and is in process of building a 33,000
square foot building with an option to build another building of similar size.
The facility is located near Cuernavaca, approximately one hour south of Mexico
City. In year two of its operation, the Company believes the plant will
accommodate approximately 300 operators, which will be capable of producing
approximately 33% of the Company's current production needs. The investment in
start-up costs, equipment and improvements will be approximately $2.0 million,
excluding the 5 year lease. AVI expects that this plant will make a significant
contribution to its operating income, as the Mexico fully loaded labor rate is
approximately 25% of the comparable U.S. rate.








                                    SIGNATURE

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.





                                       APPAREL VENTURES, INC.





      February 10, 1997                / s /   WILLIAM F. SINGLETARY
------------------------------         -------------------------------------
           Date                        WILLIAM  F.  SINGLETARY
                                       Chief Financial Officer
                                       (Duly authorized officer and
                                       principal financial and
                                       accounting officer)