<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 MARCH 31, 1998
                                        --------------

                                       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 MAY 11, 1998, 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>
PART  I.  FINANCIAL  INFORMATION


ITEM 1.       FINANCIAL STATEMENTS:

              Consolidated Balance Sheet as of March 31, 1998 (Unaudited) and
                  June 30, 1997.                                                                 3

              Consolidated Statement of Operations for the Three and Nine Months
              ended March 31, 1998 and 1997 (Unaudited).                                         4

              Consolidated Statement of Cash Flows for the Nine Months ended
                 March 31, 1998 and 1997 (Unaudited).                                            5

              Notes to Consolidated Financial Statements (Unaudited).                            6


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



SIGNATURE                                                                                        12
</TABLE>



                                                                               2
<PAGE>   3


PART  I  -  FINANCIAL INFORMATION
ITEM  1  -  FINANCIAL STATEMENTS


                             APPAREL VENTURES, INC.

                           CONSOLIDATED BALANCE SHEET

                                   A S S E T S
<TABLE>
<CAPTION>
                                                                                   MARCH 31,             JUNE 30,
                                                                                     1998                  1997
                                                                                  ------------         ------------
                                                                                  (UNAUDITED)
<S>                                                                               <C>                  <C>         
CURRENT ASSETS
       Cash                                                                       $    183,000         $    476,000
       Due from factor                                                              26,650,000           12,969,000
       Accounts receivable, net of allowance for
         doubtful accounts and discounts of $454,000 and $468,000                    3,737,000            2,540,000
       Inventories                                                                  20,814,000            8,372,000
       Deferred charges                                                              2,143,000            2,643,000
       Deferred income taxes                                                         1,301,000            1,123,000
       Prepaid expenses                                                              1,037,000              511,000
                                                                                  ------------         ------------

                 Total current assets                                               55,865,000           28,634,000
                                                                                  ------------         ------------

PROPERTY AND EQUIPMENT, at cost,  net of
       accumulated depreciation and amortization of
       $4,314,000 and $3,657,000                                                     4,729,000            4,675,000

OTHER ASSETS
       Goodwill and organizational costs, net of accumulated
         amortization of $1,272,000 and $1,019,000                                  12,179,000           12,482,000
       Deferred loan costs, net of accumulated amortization
         of $2,031,000 and $1,641,000                                                1,201,000            1,591,000
       Deferred income taxes                                                         2,517,000            2,517,000
       Other                                                                           580,000              502,000
                                                                                  ------------         ------------

                                                                                  $ 77,071,000         $ 50,401,000
                                                                                  ============         ============

                                           LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES
       Line of credit                                                             $ 23,730,000         $    841,000
       Accounts payable                                                              6,940,000            3,299,000
       Accrued interest payable                                                      1,553,000            2,466,000
       Accrued expenses                                                              4,071,000            2,856,000
       Current portion of notes payable                                                309,000              108,000
                                                                                  ------------         ------------

                 Total current liabilities                                          36,603,000            9,570,000
                                                                                  ------------         ------------

SENIOR NOTES PAYABLE                                                                35,637,000           35,555,000

NOTES PAYABLE, net of current portion                                                2,576,000            2,483,000

STOCKHOLDER'S EQUITY
       Common stock $.01 par value, 10,000 shares authorized, 1,000 shares
         issued and outstanding                                                          1,000                1,000
       Additional paid - in capital                                                 10,935,000           11,038,000
       Cumulative translation adjustment                                              (219,000)            (156,000)
       Accumulated deficit                                                          (8,462,000)          (8,090,000)
                                                                                  ------------         ------------
                                                                                     2,255,000            2,793,000
                                                                                  ------------         ------------

                                                                                  $ 77,071,000         $ 50,401,000
                                                                                  ============         ============
</TABLE>



                 See notes to consolidated financial statements.



                                                                               3

<PAGE>   4

                             APPAREL VENTURES, INC.

                      CONSOLIDATED STATEMENT OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                 NINE MONTHS ENDED                       THREE MONTHS ENDED
                                                      MARCH 31,                               MARCH 31,
                                         ---------------------------------         ---------------------------------
                                             1998                 1997                 1998                 1997
                                         ------------         ------------         ------------         ------------
<S>                                      <C>                  <C>                  <C>                  <C>         
NET SALES                                $ 52,063,000         $ 45,695,000         $ 34,266,000         $ 31,400,000

COST OF SALES                              31,001,000           27,172,000           20,287,000           18,483,000
                                         ------------         ------------         ------------         ------------

          Gross profit                     21,062,000           18,523,000           13,979,000           12,917,000

OPERATING EXPENSES
      Design                                2,449,000            2,017,000              587,000              455,000
      Selling                               5,795,000            4,851,000            2,947,000            2,238,000
      Shipping                              1,535,000            1,340,000              780,000              643,000
      General and administrative            6,857,000            6,423,000            2,364,000            1,985,000
                                         ------------         ------------         ------------         ------------
                                           16,636,000           14,631,000            6,678,000            5,321,000
                                         ------------         ------------         ------------         ------------

      Income from operations                4,426,000            3,892,000            7,301,000            7,596,000
                                         ------------         ------------         ------------         ------------

OTHER (EXPENSE) INCOME
      Interest expense                     (4,672,000)          (4,405,000)          (1,802,000)          (1,663,000)
      Interest income                          15,000               17,000                5,000                6,000
      Royalty income                          169,000              127,000               83,000               43,000
      Royalty expense                        (507,000)             (73,000)            (373,000)             (50,000)
      Miscellaneous                            26,000             (311,000)              15,000               (4,000)
                                         ------------         ------------         ------------         ------------
                                           (4,969,000)          (4,645,000)          (2,072,000)          (1,668,000)
                                         ------------         ------------         ------------         ------------

INCOME (LOSS) BEFORE INCOME TAXES            (543,000)            (753,000)           5,229,000            5,928,000

INCOME TAX BENEFIT (PROVISION)                173,000              236,000           (1,674,000)          (1,902,000)
                                         ------------         ------------         ------------         ------------

NET INCOME (LOSS)                        $   (370,000)        $   (517,000)        $  3,555,000         $  4,026,000
                                         ============         ============         ============         ============
</TABLE>



                 See notes to consolidated financial statements.



                                                                               4

<PAGE>   5

                             APPAREL VENTURES, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                    NINE MONTHS ENDED MARCH 31, 1998 AND 1997
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                      1998                 1997
                                                                  ------------         ------------
<S>                                                               <C>                  <C>          
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                       $   (370,000)        $   (517,000)
   Depreciation and amortization                                     1,320,000            1,386,000
   Other                                                               (28,000)             (12,000)
   Changes in assets and liabilities
      Due from factor                                              (13,681,000)          (9,287,000)
      Accounts receivable, net                                      (1,197,000)            (816,000)
      Inventories                                                  (12,442,000)          (8,067,000)
      Deferred charges and other assets                                500,000               91,000
      Deferred income tax benefits                                    (178,000)            (237,000)
      Prepaid expenses and other assets                               (604,000)            (321,000)
      Accounts payable                                               3,641,000            3,966,000
      Accrued interest and other expenses                              302,000             (136,000)
                                                                  ------------         ------------
   Net cash used in operating activities                           (22,737,000)         (13,950,000)
                                                                  ------------         ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of equipment                                             (712,000)            (453,000)
                                                                  ------------         ------------
   Net cash used in investing activities                              (712,000)            (453,000)
                                                                  ------------         ------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Borrowing under line of credit                                   22,889,000           14,577,000
   Advances to Parent                                                 (253,000)                  --
   Contribution of capital from an officer of a subsidiary             144,000                   --
   Borrowing under  senior notes payable                                82,000               72,000
   Borrowing under (repayment of) notes payable                        294,000              (97,000)
                                                                  ------------         ------------
   Net cash provided by financing activities                        23,156,000           14,552,000
                                                                  ------------         ------------


NET INCREASE (DECREASE)  IN CASH                                      (293,000)             149,000

CASH, BEGINNING OF PERIOD                                              476,000              244,000
                                                                  ------------         ------------

CASH, END OF PERIOD                                               $    183,000         $    393,000
                                                                  ============         ============
</TABLE>



                 See notes to consolidated financial statements.



                                                                               5

<PAGE>   6

                             APPAREL VENTURES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 1998 AND 1997
                                   (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 nine months ended March
31, 1998 are not necessarily indicative of the results to be expected for the
full year.

          Certain amounts for prior periods have been reclassified to be
comparable with the current period presentation.

          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, 1997.

COMPANY BACKGROUND AND NATURE OF BUSINESS - Apparel Ventures, Inc. ("AVI" or
the "Company") is a wholly owned subsidiary of AVI Holdings, Inc. The Company
was incorporated in Delaware on May 23, 1994 and is headquartered in Gardena,
California. AVI designs, manufactures and markets branded women's swimwear. The
Company offers seven 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.

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its 79% - owned Portuguese subsidiary, Apparel
Ventures Europa - Textil, LDA ("AVE"), and wholly owned Mexican subsidiary, AVI
de Mexico, S.A. de C.V. Significant intercompany accounts and transactions are
eliminated in consolidation.

REVENUE RECOGNITION - Revenue is recognized when shipment of product occurs. An
estimate for returns and allowances is recorded against gross sales amounts to
arrive at net sales.

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

DEFERRED CHARGES - Deferred charges primarily consist of costs incurred for the
design changes of swimsuit styles to be produced and sold in the upcoming year.
The costs are deferred and are charged against the period benefited, on the
basis of unit sales to total unit sales expected for the next season.

ADVERTISING COSTS - Advertising costs are expensed in the period incurred.


NOTE  2  -  INVENTORIES

          Inventories consist of the following:

<TABLE>
<CAPTION>
                                       March 31,          June 30,
                                         1998               1997
                                      -----------        -----------
<S>                                   <C>                <C>        
          Piece goods and trim        $ 4,991,000        $ 3,977,000
          Work - in - process           5,630,000            769,000
          Finished goods               10,193,000          3,626,000
                                      -----------        -----------

                                      $20,814,000        $ 8,372,000
                                      ===========        ===========
</TABLE>



                                                                               6

<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. Borrowings are limited to a predetermined
percentage of eligible factored accounts receivable and eligible finished goods
inventory, plus a seasonal overadvance of $2.5 million during September
increasing to $4.5 million from October 1 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%; however borrowings may be fixed, at management's
discretion, for periods of 30 to 180 days on which interest is charged, at LIBOR
plus 2.75 %. Interest on seasonal overadvances is charged at the bank's prime
rate plus 1 1/2%; however borrowings may be fixed, at management's discretion,
for periods of 30 to 180 days on which interest is charged, at 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 May 23, 1999.
Interest on the term loan is payable monthly at the bank's prime rate or LIBOR
plus 2.5%. 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 and cash charge coverage ratios and other
matters. For the period ended March 31, 1998 the Company failed to satisfy the
cash charge coverage ratio covenant as required by the Credit Agreement. The
covenant violation has been waived by the lender.


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 March 31,
1998 there is $36.0 million principal amount of bonds outstanding net of
$363,000 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, 1997 the Company failed to meet the fixed charge
coverage ratio covenant required by the indenture. The bondholders waived the
violation and their right to require redemption of 10% of the bonds.

       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 estimated fair value of senior notes payable as of March 31, 1998
is their carrying value.

       Based on information currently available, the Company is unable at this
time to determine whether it will be in compliance with the fixed charge
coverage ratio covenant in the indenture and in the Credit Agreement for the
year ending June 30, 1998.


NOTE  5  -  COMMITMENT - PARENT COMPANY CAPITAL STRUCTURE

       AVI Holdings, Inc. (the "Parent"), at incorporation, 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 Preferred Stock.
On December 5, 1995 the Company issued $4.0 million of Class D Preferred Stock.
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.



                                                                               7

<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. 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. The notes are due in equal annual installments on
June 30, 2002, 2003 and 2004. In the aggregate, annual debt service requirement
is approximately $2,100,000.

       The Indenture for the Company's Senior Notes prohibits the Company from
making distributions to the Parent for the payment of interest on the Senior
Subordinated Notes unless the Company satisfies a fixed charge coverage ratio
requirement. The Company has not satisfied this requirement and has not made any
advances to the Parent for the payment of interest. However, the Parent has
satisfied this payment obligation by issuing promissory notes (bearing interest
at the default rate) in the amounts of the interest due. In the quarter ended
September 30, 1997, the Company made an advance to the Parent in the amount of
$100,000 for the payment of certain fees and in the quarter ended March 31, 1998
the Company made an advance of $153,000 to the Parent for repurchase of shares
of the Parent's common and preferred stocks from one of the shareholders. These
payments were permitted by the indenture for the Senior Notes.

       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
to approximate their fair value.


CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

       Various forward-looking statements, within the meaning of the federal
securities laws, have been made in this Form 10-Q. This includes any
statements concerning plans and objectives of management relating to the
Company's operations or economic performance, and assumptions related thereto.

       These forward-looking statements are made based on management's
expectations and beliefs concerning future events impacting the Company and
therefore involve a number of risks and uncertainties. Management cautions that
forward-looking statements are not guarantees and that actual results could
differ materially from those expressed or implied in the forward looking
statements.

       Important factors that could cause the actual results of operations or
financial condition of the Company to differ include, but are not necessarily
limited to, the overall level of consumer spending for swimwear; changes in
trends in the swimwear industry market in which the Company competes; actions of
competitors that may impact the Company's business; and the impact of unforeseen
economic changes in the markets where the Company competes, such as changes in
interest rates, currency exchange rates, recession, weather and the external
economic and political factors which the Company has no control.



                                                                               8

<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 nine months ended March
31, 1998 and 1997.

<TABLE>
<CAPTION>
                                                                     THREE MONTHS ENDED MARCH 31,
                                           ------------------------------------------------------------------------------

                                               1998                       %                1997                       %
                                           ------------                 -----          ------------                 -----
<S>                                        <C>                          <C>            <C>                          <C>   
NET SALES                                  $ 34,266,000                 100.0%         $ 31,400,000                 100.0%

COST OF SALES                                20,287,000                  59.2%           18,483,000                  58.9%
                                           ------------                                ------------

         Gross profit                        13,979,000                  40.8%           12,917,000                  41.1%

OPERATING EXPENSES
         Design                                 587,000                                     455,000
         Selling                              2,947,000                                   2,238,000
         Shipping                               780,000                                     643,000
         General and administrative           2,364,000                                   1,985,000
                                           ------------                                ------------
                                              6,678,000                  19.5%            5,321,000                  16.9%
                                           ------------                                ------------

             Income from operations           7,301,000                  21.3%            7,596,000                  24.2%

OTHER (EXPENSE) INCOME
         Interest expense                    (1,802,000)                                 (1,663,000)
         Interest income                          5,000                                       6,000
         Royalty income                          83,000                                      43,000
         Royalty expense                       (373,000)                                    (50,000)
         Miscellaneous                           15,000                                      (4,000)
                                           ------------                                ------------
                                             (2,072,000)                 -6.0%           (1,668,000)                 -5.3%
                                           ------------                                ------------

INCOME BEFORE INCOME TAXES                    5,229,000                  15.3%            5,928,000                  18.9%

INCOME TAX PROVISION                         (1,674,000)                 -4.9%           (1,902,000)                 -6.1%
                                           ------------                                ------------

NET INCOME                                 $  3,555,000                  10.4%         $  4,026,000                  12.8%
                                           ============                                ============
</TABLE>



                                                                               9

<PAGE>   10


<TABLE>
<CAPTION>
                                                                      NINE MONTHS ENDED MARCH 31,
                                           ------------------------------------------------------------------------- 

                                               1998                       %                1997                  %
                                           ------------                 -----          ------------            ----- 
<S>                                        <C>                          <C>            <C>                     <C>   
NET SALES                                  $ 52,063,000                 100.0%         $ 45,695,000            100.0%

COST OF SALES                                31,001,000                  59.5%           27,172,000             59.5%
                                           ------------                                ------------

             Gross profit                    21,062,000                  40.5%           18,523,000             40.5%

OPERATING EXPENSES
         Design                               2,449,000                                   2,017,000
         Selling                              5,795,000                                   4,851,000
         Shipping                             1,535,000                                   1,340,000
         General and administrative           6,857,000                                   6,423,000
                                           ------------                                ------------
                                             16,636,000                  32.0%           14,631,000             32.0%
                                           ------------                                ------------

             Income from operations           4,426,000                   8.5%            3,892,000              8.5%

OTHER (EXPENSE) INCOME
         Interest expense                    (4,672,000)                                 (4,405,000)
         Interest income                         15,000                                      17,000
         Royalty income                         169,000                                     127,000
         Royalty expense                       (507,000)                                    (73,000)
         Miscellaneous                           26,000                                    (311,000)
                                           ------------                                ------------
                                             (4,969,000)                 -9.5%           (4,645,000)           -10.2%
                                           ------------                                ------------

LOSS BEFORE INCOME TAXES                       (543,000)                 -1.0%             (753,000)            -1.6%

INCOME TAX BENEFIT                              173,000                   0.3%              236,000              0.5%
                                           ------------                                ------------

NET LOSS                                   $   (370,000)                 -0.7%         $   (517,000)            -1.1%
                                           ============                                ============
</TABLE>


NET SALES

         Net sales for the nine months of fiscal 1998 increased by $6.4 million
or 13.9%, as compared to the same period of fiscal 1997. This increase was due
primarily to the increase in the sale of licensed merchandise totaling $7.5
million, increased private label sales of $2.7 million, and increased La Blanca
and Studio La Blanca sales of $4.0 million, offset by a decrease in the
Sassafras Group branded merchandise sales of $5.6 million and a decrease in
prior season merchandise sales of $2.2 million.

         Net sales for the quarter ended March 31, 1998 increased by $2.9
million or 9.1%, as compared to the same period of fiscal 1997. This increase
was due primarily to a $5.6 million increase in licensed product sales, and
increased La Blanca and Studio La Blanca sales of $1.8 million, offset by
decrease in Sassafras Group branded merchandise sales of $3.8 million and a
decrease in prior season merchandise sales of $2.7 million.

GROSS PROFIT

         Gross profit for the nine months of fiscal 1998 increased $2.5 million
or 13.7% and remained unchanged from the prior year, as a percent of net sales,
at 40.5%. Gross profit on branded merchandise decreased from 44.8% of net sales
in fiscal 1997 to 43.4% of net sales in fiscal 1998. This decrease in gross
profit, as a percent of net sales, was primarily in the Sassafras group, where
the gross margin decreased from 48% in fiscal 1997 to 41.3% in fiscal 1998. This
deterioration was due primarily to the poor reception of the Sessa and Too Hot
Brazil brands.

         Gross profit for the quarter ended March 31, 1998 increased $1.1
million or 8.2% , but decreased as a percent of net sales, from 41.1% to 40.8%,
due primarily to the decrease in gross margin for the Sessa and Too Hot Brazil
brands.



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<PAGE>   11


OPERATING EXPENSES


       Operating expenses for the first nine months of fiscal 1998 increased
$2.0 million or 13.7% but remained constant as a percent of net sales, at
32.0%. This increase in operating expenses is primarily due to increased design
expense of $0.4 million, increased selling expense of $0.9 million, increased
distribution expense of $0.2 million and increased general and administrative
expense of $0.4 million. The increase in selling expense was attributable to
increased commissions of $0.1 million, increased advertising expense of $0.4
million relating primarily to increased co-op advertising, due to increased
branded sales and payments made to licensors on licensed products, and an
increase in amortization of deferred sample expense of $0.2 million. The
increase in general and administrative expense was attributable to increased
production and operation salaries of $0.2 million, increased factor commissions
of $0.1 million and increased travel expense of $0.1 million.

       Operating expense for the quarter ended March 31, 1998 increased $1.4
million and also increased as a percent of net sales from 16.9% to 19.5%, due
primarily to increased design expense of $0.1 million, increased selling expense
of $0.7 million, increased distribution expense of $0.1 million and increased
general and administrative expense of $0.4 million. The increase in selling
expense is attributable to increased advertising of $0.5 million relating
primarily to increased co-op advertising due to increased branded sales and
payments made to licensors on licensed products, and increased commission
expense of $0.1 million. The increase in general and administrative expenses was
due primarily to increased bonus accrual of $0.2 million, increased factor
commission of $0.1 million and increased other costs of $0.1 million.

OTHER EXPENSES

       Other expenses for the first nine months of fiscal 1998 increased $0.3
million due primarily to an increase in interest expense of $0.3 million, in
order to fund the higher inventory and accounts receivable levels, and increased
royalty expense of $0.4 million for the licensed product sales of Nautica and
Ocean Pacific, offset by reduced other expense relating to a litigation
settlement and related legal expense in the prior year.

       Other expenses for the quarter ended March 31, 1998 increased $0.3
million due primarily to increased interest expense of $0.2 million and
increased royalty expense of $0.3 million, offset by reduced other expenses
relating to a litigation settlement and related legal expense in the prior year.

INCOME TAX BENEFIT AND NET LOSS

       Net loss before income tax benefit for the nine months of fiscal 1998 was
($0.5) million compared to ($0.7) for the same period of fiscal 1997. The
decrease in net loss is due to increased gross profit margin of $2.5 million,
offset by increased operating expenses of $2.0 million and increased other
expenses of $0.3 million.

       Net income before income tax provision was $5.2 million for the quarter
ended March 31, 1998, compared to $5.9 million for the same quarter in fiscal
1997. The decrease in net income reflects increased operating expenses of $1.3
million and increased other expenses of $0.5 million, offset by increase in
gross profit margin of $1.1 million.

       The income tax benefit (provision) is estimated at a 32% effective tax
rate, consistent with the prior year. The Company expects to utilize a portion
of the net operating loss carryforwards during fiscal 1998 as it realizes
taxable income.


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
$23,730,000 at March 31, 1998.

            At March 31, 1998, the net collateral availability under the line of
credit was approximately $5,475,000.

       The Company anticipates that over the next year it will spend
approximately $0.4 million to make its management information system Year 2000
compliant. The Company has been analyzing this problem for many months and has
embarked on a cost effective plan of action which will include a combination of
program modification and operational changes. Management believes it will be
Year 2000 compliant by December 31, 1998.

       In December 1997, the Company's Portuguese subsidiary, AVE, in order to
receive certain local government business expansion incentives, obtained an
additional $694,000 contribution to its capital. AVI contributed $550,000 (79%
of $694,000) by reducing the loan balance due by AVE to AVI. The balance of
$144,000 was contributed by an officer of AVE, who owns the remaining 21% of
AVE. The Company advanced these funds to that officer who then contributed the
funds to AVE. AVI recorded the $144,000 advance to the officer in AVI's books
under Accounts Receivable.



                                                                              11

<PAGE>   12


       The days sales outstanding (DSO) in accounts receivable decreased from 76
days at March 31, 1997 to 74 days at March 31, 1998. This decrease in DSO is due
to improved collection efforts. The days inventory on hand has increased from
100 at March 31, 1997 to 188 at March 31, 1998. This increase in days inventory
is the direct result of disappointing sales for the months of February and
March, 1998 as compared to the forecast. Sales were less than planned due to
late deliveries in the Sassafras Group, poor weather in the Company's major
markets and other general business conditions. These issues caused the Company
to take $6.0 million in order cancellations during the last two weeks of March,
as compared to $1.8 million in the comparable period last year. This increased
inventory level should only have a short term effect on the Company's working
capital availability, which should be remedied with improved sales in the fourth
quarter.

       The Company does not have any mandatory long-term debt principal
payment requirements until May 1999. Based upon current levels of operations and
anticipated growth of the Mexico sewing facility, 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.

BACKLOG

       Backlog represents booked unshipped customer orders which, although
terminable without penalty, are believed by the Company to be firm. Because of
the seasonality of the Company's business, the Company's backlog varies over the
course of the year. Backlog usually peaks in December and January. The Company's
backlog at March 31, 1998 increased by $4.0 million or 38.7% over March 31,
1997. The backlog was $14.4 million at March 31, 1998 as compared to $10.4
million at March 31, 1997. This increase in backlog is primarily due to Nautica,
Ocean Pacific and private label orders to be shipped in the fourth quarter.

SEASONALITY

       The Company's business is highly seasonal. In fiscal 1997, approximately
78% 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.



                                    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.



          May 11, 1998                         /s/  WILLIAM F. SINGLETARY
       ------------------                      ---------------------------------
             Date
                                               WILLIAM  F. SINGLETARY
                                               Chief Financial Officer
                                               (Duly authorized officer and
                                               principal financial and
                                               accounting officer)



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