<PAGE>

                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  FORM 10-QSB

(Mark One)

[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
     OF 1934 For the quarterly period ended June 30, 1998

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
     OF 1934 For the transition period from ______ to ______



                       Commission File Number: 333-22895

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

                               PIVOT RULES, INC.

       (Exact name of small business issuer as specified in its charter)

          New York                                      13-3612110
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

                 42 West 39th Street, New York, NY                    10018
              (Address of principal executive offices)              (Zip Code)

                   Issuer's telephone number: (212) 944-8000

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


Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]

As of July 31, 1998, the issuer had outstanding 2,717,788 of shares of Common
Stock, $.01 par value.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]


<PAGE>


                               PIVOT RULES, INC.
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                       PAGE
                                                                                       ----

<S>                                                                                   <C>
 Part I . Financial Information

 Item 1.           Financial Statements

          Condensed Balance Sheets as of June 30, 1998 (unaudited) and
                   December 31, 1997                                                     3

          Condensed Statements of Operations for the six months ended
                   June 30, 1998 and 1997 (unaudited)                                    4

          Condensed Statements of Operations for the three months ended
                   June 30, 1998 and 1997 (unaudited)                                    5

          Condensed Statements of Cash Flows for the six months ended
                   June 30, 1998 and 1997 (unaudited)                                    6

          Notes to Condensed Financial Statements                                        8

 Item 2.  Management's Discussion and Analysis or Plan of Operation                      13

 Part II. Other Information

 Item 2.  Changes in Securities and Use of Proceeds                                      17
 Item 6.  Exhibits and Reports on Form 8-K                                               18


 Signatures                                                                              19
</TABLE>

                                       2

<PAGE>


ITEM 1. - FINANCIAL STATEMENTS

                               PIVOT RULES, INC.

                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                   JUNE 30,        DECEMBER 31,
                                                                     1998              1997
                                                                     ----              ----
                                                                  (Unaudited)      (As restated)
                                                                                      (Note D)

                       ASSETS

<S>                                                               <C>                  <C>       
  Current assets
      Cash                                                        $   67,000           $   55,000
      Funds deposited with factor                                  2,449,000            1,857,000
      Inventories                                                    236,000                   --
      Prepaid expenses and other current assets                      105,000              128,000
      Current assets of discontinued operations                    2,058,000            4,182,000
                                                                  ----------           ----------
            Total current assets                                   4,915,000            6,222,000

  Property and equipment, net                                        529,000              500,000

  Deferred costs and other assets                                     15,000               15,000

  Assets of discontinued operations                                       --              414,000
                                                                  ----------           ----------   

                                                                  $5,459,000           $7,151,000
                                                                  ==========           ==========   

        LIABILITIES AND SHAREHOLDERS' EQUITY

  Current liabilities
      Accounts payable, accrued expenses and other current        $1,194,000           $1,092,000
         liabilities

  Deferred income taxes                                                9,000                9,000
                                                                  ----------           ----------

                                                                   1,203,000            1,101,000
                                                                  ----------           ----------

  Commitments and contingencies

  Shareholders' equity

      Preferred stock -$.01 par value; 2,000,000 authorized               --                   --
        and no shares issued
      Common stock -$.01 par value; 15,000,000 authorized and         27,000               27,000
        2,700,000 issued and outstanding
      Additional paid-in capital                                   6,404,000            6,404,000
      Accumulated deficit                                         (2,175,000)            (381,000)
                                                                  ----------           ----------
                                                                   4,256,000            6,050,000
                                                                  ----------           ----------

                                                                  $5,459,000           $7,151,000
                                                                  ==========           ==========
</TABLE>

  The accompanying notes are an integral part of these financial statements.

                                       3

<PAGE>


                               PIVOT RULES, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
<TABLE>
<CAPTION>

                                                                            SIX MONTHS ENDED
                                                                                JUNE 30,
                                                                    ----------------------------------
                                                                         1998              1997
                                                                         ----              ----
                                                                                      (As restated)
                                                                                         (Note D)

<S>                                                                    <C>              <C>       
 General and administrative expenses                                   $  446,000       $  365,000

 Internet business start up costs                                         103,000               --

 Research and development                                                 126,000               --
                                                                       ----------       ----------

 Operating loss from continuing operations                               (675,000)        (365,000)

 Interest income                                                           81,000           36,000
                                                                      -----------      -----------

 Loss from continuing operations before income taxes                     (594,000)        (329,000)

 Income tax benefit                                                           --            45,000
                                                                      -----------      -----------

 Loss from continuing operations                                         (594,000)        (284,000)
                                                                      -----------      -----------

 Discontinued operations - Note D
    Loss from operations, net of income tax benefit of $25,000 in        (934,000)        (226,000)
       1997
    Estimated loss on disposal, including provision for operating    
       losses through disposal date, less applicable income tax      
       benefit of $0                                                     (266,000)              --
                                                                     ------------      ------------
       
       
 Loss from discontinued operations                                     (1,200,000)        (226,000)
                                                                     ------------      ------------

        Net loss                                                      $(1,794,000)      $ (510,000)
                                                                     ============      ============



 Basic and diluted loss per share

   Continuing operations                                                    $(.22)           $(.18)
   Discontinued operations
        Loss from operations                                                 (.34)            (.14)
        Estimated loss on disposal                                           (.10)              --
                                                                           ------           -------

   Net loss                                                                 $(.66)           $(.32)
                                                                            =====             =====

 Weighted average shares outstanding                                    2,700,000         1,589,503
                                                                        =========         =========
</TABLE>




  The accompanying notes are an integral part of these financial statements.

                                       4

<PAGE>



                               PIVOT RULES, INC.

                       CONDENSED STATEMENTS OF OPERATIONS

                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                                                                JUNE 30,
                                                                    ----------------------------------
                                                                         1998              1997
                                                                         ----              ----
                                                                                      (As restated)
                                                                                         (Note D)
<S>                                                                   <C>               <C>       
 General and administrative expenses                                   $  207,000        $  203,000

 Internet business start up costs                                         103,000                --

 Research and development                                                 126,000                --
                                                                      -----------       -----------

 Operating loss from continuing operations                               (436,000)         (203,000)

 Interest income                                                           39,000            36,000
                                                                      -----------       -----------

 Loss from continuing operations before income taxes                     (397,000)         (167,000)

 Income tax benefit                                                            --            25,000
                                                                      -----------       -----------

 Loss from continuing operations                                         (397,000)         (142,000)
                                                                      -----------       -----------

 Discontinued operations - Note D

    Loss from operations, net of income tax benefit of $55,000 in        
       1997                                                              (853,000)         (387,000)
    Estimated loss on disposal, including provision for operating     
       losses through disposal date, less applicable income tax                                  
       benefit of $0                                                     (266,000)               --
                                                                      -----------       -----------
 Loss from discontinued operations                                     (1,119,000)         (387,000)
                                                                      -----------       -----------

        Net loss                                                      $(1,516,000)      $  (529,000)
                                                                      ===========       ============



 Basic and diluted loss per share

   Continuing operations                                                    $(.15)            $(.07)
   Discontinued operations
      Loss from operations                                                   (.31)             (.20)
      Estimated loss on disposal                                             (.10)               --
                                                                           ------           -------

        Net loss                                                            $(.56)            $(.27)
                                                                            =====             =====

 Weighted average shares outstanding                                    2,700,000         1,974,725
                                                                        =========         =========
</TABLE>

  The accompanying notes are an integral part of these financial statements.

                                       5

<PAGE>



 
                           PIVOT RULES, INC.
                  CONDENSED STATEMENTS OF CASH FLOWS
                             (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                  SIX MONTHS ENDED
                                                                                                      JUNE 30,
                                                                                          ----------------------------------
                                                                                               1998              1997
                                                                                               ----              ----
                                                                                                             (As restated)
                                                                                                               (Note D)

<S>                                                                                          <C>              <C>        
  Cash flows from operating activities

    Loss from Continuing Operations                                                          $ (594,000)      $ (284,000)
    Adjustments to reconcile loss from continuing operations to net cash (used in)
     provided by operating activities:
      Depreciation and amortization                                                              40,000            6,000
      Changes in operating assets and liabilities
       (Increase) decrease in
          Inventories                                                                          (236,000)              --
          Prepaid expenses and other current assets                                              23,000         (165,000)
          Other assets                                                                               --          (15,000)
       Increase (decrease) in
          Accounts payable, accrued expenses and other current liabilities                      102,000          498,000
                                                                                           ------------     ------------
  Net cash (used in) provided by operating activities - Continuing Operations                  (665,000)          40,000
                                                                                           ------------    -------------


   Loss from Discontinued Operations                                                        (1,200,000)         (226,000)
   Adjustments to reconcile loss from discontinued operation to net cash used in
    operating activities:
     Write-down of property and equipment                                                      245,000                --
     Write-down of prepaid expenses and other current assets                                    90,000                --
     Write-down of other assets                                                                119,000                --
     Amortization of deferred costs for bridge financing                                            --           286,000
     Amortization of debt discount                                                                  --           104,000
     Depreciation and amortization                                                              44,000            20,000
     Changes in operating assets and liabilities
      (Increase) decrease in
          Inventories                                                                          331,000            16,000
          Non-factored receivables                                                              14,000            12,000
          Prepaid expenses and other current assets                                           (112,000)         (166,000)
      Increase (decrease) in
          Income taxes receivable/payable                                                       (1,000)         (196,000)
                                                                                           ------------    -------------

  Net cash used in operating activities - Discontinued Operations                             (470,000)         (150,000)
                                                                                           ------------    -------------

  Net cash used in operating activities                                                     (1,135,000)         (110,000)
                                                                                           ------------    -------------
</TABLE>


  The accompanying notes are an integral part of these financial statements.

                                       6

<PAGE>


                               PIVOT RULES, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                       SIX MONTHS ENDED
                                                                                                           JUNE 30,

                                                                                               ----------------------------------
                                                                                                    1998              1997
                                                                                                    ----              ----
                                                                                                                  (As restated)
                                                                                                                    (Note D)
<S>                                                                                           <C>             <C>
       Cash flows from investing activities - Continuing Operations
         Purchase of property and equipment                                                       (69,000)          (22,000)
         Funds deposited with factor from initial public offering                                      --        (4,920,000)
         (Decrease) increase in funds deposited with factor                                      (592,000)          884,000
                                                                                               -----------     ------------

       Net cash used in investing activities - Continuing Operations                             (661,000)       (4,058,000)
                                                                                               -----------     ------------

       Cash flows from investing activities - Discontinued Operations
         Purchase of property and equipment                                                       (22,000)          (96,000)
         Trademark costs                                                                           (1,000)           (6,000)
                                                                                               -----------     ------------

       Net cash used in investing activities - Discontinued Operations                            (23,000)         (102,000)
                                                                                               -----------     ------------

       Net cash used in investing activities                                                     (684,000)       (4,160,000)
                                                                                               -----------     ------------

       Cash flows from financing activities - Continuing Operations
         Net proceeds from initial public offering                                                     --         5,939,000
         Deferred costs associated with initial public offering                                                      53,000
                                                                                               -----------     ------------

                                                                                                       
       Net cash provided by (used in) financing activities - Continuing Operations                     --         5,992,000
                                                                                               -----------     ------------

       Cash flows from financing activities - Discontinued Operations                             
         Deferred costs associated with bridge financing                                               --            75,000
         Net proceeds from bridge financing                                                            --         1,215,000
         Repayments of notes payable and short-term loan                                               --          (644,000)
         Repayments of bridge financing                                                                --        (1,500,000)
         Net change in due to/from factor                                                       1,831,000          (892,000)
                                                                                               -----------     ------------
       Net cash provided by financing activities - Discontinued Operations                      1,831,000        (1,746,000)
                                                                                               -----------     ------------

       Net cash provided by financing activities                                                1,831,000         4,246,000
                                                                                               -----------     ------------

       Net increase (decrease) in cash                                                             12,000           (24,000)
       Cash balance - December 31                                                                  55,000            33,000
                                                                                               -----------     ------------
       Cash balance - June 30                                                                  $   67,000     $       9,000
                                                                                               ===========     ============

       Supplemental disclosure of cash flow information: Cash paid during the
            period for:

                Interest                                                                       $   28,000     $      93,000
                                                                                               ===========     ============
                Income taxes                                                                   $    1,000    $       99,000
                                                                                               ===========     ============
            Non-cash financing activities:

                Issuance of warrants in connection with bridge financing                       $       --         $ 138,000
                                                                                               ===========     ============
                                                                                                


  The accompanying notes are an integral part of these financial statements.

                                       7
</TABLE>

<PAGE>

                               PIVOT RULES, INC.
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                             JUNE 30, 1998 AND 1997


NOTE A - BASIS OF PRESENTATION

The condensed financial statements included herein have been prepared by Pivot
Rules, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although management of the
Company believes that the disclosures are adequate to make the information
presented not misleading. These condensed financial statements should be read
in conjunction with the condensed notes thereto. In the opinion of management
of the Company, the accompanying unaudited condensed financial statements
include all adjustments, consisting of only normal recurring adjustments,
necessary to fairly present the results for the interim periods to which these
financial statements relate.

These financial statements should be read in conjunction with the Registration
Statement filed with the Securities and Exchange Commission on Form 8-A and
Form 8-A/A and the Annual Report filed with the Securities and Exchange
Commission on Form 10-KSB. Subsequent to the filing of documents incorporated
by reference herein, the Company discontinued the operations of its golf
sportswear division. Accordingly, financial statements, management's discussion
and analysis or plan of operation contained therein do not reflect the effect
of the discontinued operations.

On June 25, 1998, the Company's Board of Directors adopted a plan to
discontinue operations of the golf sportswear division. The Company intends to
complete its existing sales commitments and liquidate its remaining inventory.
The condensed statements of operations for the three and six month periods
ended June 30, 1997 and for the condensed balance sheet as of December 31, 1997
have been restated. The financial statements have been prepared in accordance
with accounting standards for the presentation of discontinued operations.

The results of operations of the Company for the three and six months ended
June 30, 1998 are not necessarily indicative of the results to be expected for
the full year.


NOTE B - THE COMPANY

The Company is building and intends to market and promote a Web site (the "Web
site") that will offer men's, women's and children's apparel and accessories at
significant discounts as well as provide information on current trends and
other fashion related content.

In June 1998, the Company determined to discontinue the operations of its golf
sportswear division and to devote all of the Company's energy and resources to
building the Web site.

NOTE C - SIGNIFICANT ACCOUNTING POLICIES

1.    USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

                                       8

<PAGE>

                                PIVOT RULES, INC
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                             JUNE 30 1998 AND 1997

2.   INVENTORIES

Inventories, which consist of finished goods, are valued at the lower of cost
or market. Cost is determined by the first-in, first-out ("FIFO") method.

3.   EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share excludes dilution and is computed by dividing
earnings (loss) available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings (loss) per share
is computed by dividing earnings (loss) available to common shareholders by the
weighted average number of common shares outstanding for the period, adjusted
to reflect potentially dilutive securities. Options and warrants were not
included in the computation of diluted earnings per share because the exercise
price was greater than the market price of the stock.

4.    RESEARCH AND DEVELOPMENT

Research and development costs are expensed when incurred. During the three and
six month periods ending June 30, 1998, amounts charged to research and
development were $126,000.

5.    START UP COSTS

During the three-month period ending June 30, 1998, the Company adopted
Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-Up
Activities". Start-up activities include (i) one-time activities relating to
the introduction of a new product or service, conducting business in a new
territory, conducting business with a new class of customer or commencing a new
operation and (ii) organization costs. Start-up activities are expensed as
incurred. During the three and six month periods ending June 30, 1998, $103,000
of start-up costs relating to the formation of the Internet business were
incurred and charged to operations. The Company believes that there is no
cumulative effect on the amount of retained earnings at December 31, 1997
resulting from the adoption of SOP 98-5.

6.    RECLASSIFICATION

The 1997 financial statements have been reclassified in order to conform with
the 1998 presentation. See Note D relating to the restatement of the financial
statements in connection with the discontinuance of the golf sportswear
division.

NOTE D - DISCONTINUED OPERATIONS

The operating loss from discontinued operations of $934,000 includes a $454,000
loss relating to the write down of the assets of the golf sportswear division.
The estimated loss on the disposal of the discontinued operations of $266,000
represents the provision for expected operating losses during the phase-out
period from June 25, 1998 through June 25, 1999.

The disposal of the golf sportswear division has been accounted for as a
discontinued operation and, accordingly, its net assets have been segregated
from continuing operations in the accompanying condensed balance sheets, and
its operating results are segregated and reported as discontinued operations in
the accompanying condensed statements of operations and cash flows.

                                       9

<PAGE>

                                PIVOT RULES, INC
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                             JUNE 30 1998 AND 1997


Information relating to the discontinued operations of the golf sportswear
division for the six months ended June 30, 1998 and 1997 is as follows:

                                                      JUNE 30,       JUNE 30,
                                                        1998           1997
                                                        ----           ----
                                                    (Unaudited)    (Unaudited)

Net sales                                           $ 2,387,000    $ 4,406,000
Cost of sales                                         2,208,000      3,229,000
                                                    -----------    -----------
     Gross profit                                       179,000      1,177,000
Selling, marketing, design and administrative           769,000        899,000
Write down of property and equipment                    364,000             --
                                                    -----------    -----------
     Operating (loss) income                           (954,000)       278,000

Other income (expense)                                   20,000       (243,000)
Amortization and write-off of deferred costs for 
  bridge financing                                           --       (286,000)
                                                    -----------    -----------
    Loss before provision for income taxes             (934,000)      (251,000)

Benefit for income taxes                                     --         25,000
                                                    -----------    -----------

    Net loss                                        $  (934,000)   $  (226,000)
                                                    ===========    ===========


The net assets of the golf sportswear division included in the accompanying
condensed balance sheets as of June 30, 1998 and December 31, 1997 are as
follows:

                                                   JUNE 30,        DECEMBER 31,
                                                     1998             1997
                                                     ----             ----
                                                 (Unaudited)      (As restated)

Due from factor                                  $   433,000        $2,264,000
Non-factored receivables                              37,000            51,000
Inventories                                        1,082,000         1,413,000
Prepaid expenses and other current assets            193,000           157,000
Income taxes receivable                              204,000           203,000
Property and equipment, net                           15,000                --
Deferred income taxes                                 94,000            94,000
                                                ------------        ----------
    Total current assets of discontinued    
       operations                                 $2,058,000        $4,182,000
                                                ============        ==========

Property and equipment, net                      $        --        $  274,000
Deferred costs and other assets                           --           140,000
                                                ------------        ---------
    Total assets of discontinued operations      $        --        $  414,000
                                                ============        =========


The Company's liabilities will not be assumed by others, therefore, in
accordance with the accounting standards for the presentation of discontinued
operations all liabilities are recorded as continuing operations.

                                      10

<PAGE>

                                PIVOT RULES, INC
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                             JUNE 30 1998 AND 1997

NOTE E - LONG LIVED ASSETS

The Company's policy is to evaluate long-lived assets and certain identifiable
intangibles for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. This
evaluation is based on a number of factors, including expectations for
operating income and undiscounted cash flows that will result from the use of
such assets.

The Company has identified certain long-lived assets specifically relating to
the golf sportswear division that have no future value. Accordingly, as of June
30, 1998 the Company has written-off the net book amount of these assets,
aggregating $364,000, and such amount is included in Discontinued
Operations-Loss from operations. The net book amount on the measurement date
(June 25, 1998) was:

                PROPERTY AND EQUIPMENT
                ----------------------
                Leasehold improvements                          $  20,000
                Concept area fixtures                             270,000
                Office equipment                                   65,000
                Computer software                                  20,000
                                                                ---------
                                                                  375,000

                Less accumulated depreciation                     130,000
                                                                ---------
                                                                $ 245,000
                                                                =========
                DEFERRED COSTS AND OTHER ASSETS
                -------------------------------
                Trademarks                                      $ 174,000
                Less accumulated amortization                      55,000
                                                                ---------
                                                                $ 119,000
                                                                =========

Certain assets for the discontinued operations relating to the warehouse
operations will remain in use until approximately October 31, 1998. As of June
30, 1998, the net book amount of these assets is as follows:

                PROPERTY AND EQUIPMENT
                ----------------------
                Leasehold improvements                          $  12,000
                Computer equipment                                 34,000
                                                                ---------
                                                                   46,000
                Less accumulated depreciation                      31,000
                                                                ---------
                                                                $  15,000
                                                                =========

NOTE F -COMMITMENTS AND CONTINGENCIES

In July 1998, the Company entered into an employment agreement, effective June
15, 1998, with its Executive Vice President. The employment agreement expires
on July 31, 2002 and provides for a base salary and discretionary annual
bonuses. In addition, the employment agreement provides for two option grants,
one upon commencement of employment and the second on July 31, 1998.

NOTE G -SUBSEQUENT EVENTS

In July 1998, the Company entered into an employment agreement with its
Executive Vice President of Operations, who will be subsequently appointed on
August 31, 1998 to serve as Chief Financial Officer. The employment agreement
expires on July 13, 2002 and provides for a base salary and discretionary
annual bonuses. In addition, the employment agreement provides for an option
grant upon commencement of employment.

                                      11

<PAGE>


                                PIVOT RULES, INC
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                             JUNE 30 1998 AND 1997


In May 1998, the Company entered into an agreement ("Agreement") with a web
development agency ("Agency") to create and design its Web site. The Agreement
requires total compensation of a combination of cash and Common Stock of the
Company valued at the market price on the date of the Agreement. The Company
has agreed to pay additional cash compensation if certain performance
objectives are met. On July 1, 1998, the Company issued 17,788 shares of Common
Stock valued at $2.00 per share. The remaining shares of Common Stock will vest
upon the satisfaction of certain performance objectives.


<PAGE>


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The Company is building and intends to market and promote the Web site that
will offer men's, women's and children's apparel and accessories at significant
discounts as well as provide information on current trends and other fashion
related content.

The Company began the research of the Web site in March 1998, and in May 1998
the Company's Board of Directors approved the formation of the Internet
division. The Company is using its experience and relationships in the fashion
industry, knowledge of fashion trends and its marketing skills to build and
promote its Web site. The Company believes that the projected growth in the
number of Internet users (and, in particular the number of female users), the
high disposable income of today's Internet shopper, and the absence of a
dominant online apparel and fashion accessory retailer, combine to create a
highly favorable climate in which to launch the Web site.

The Company is designing its online store to combine the best traditional
retailing practices with innovative and convenient features made possible by
the Internet. As an online commerce and content provider, the Company intends
to provide a compelling and enjoyable online shopping experience that includes
a broad selection of name brand products at significant discounts to retail
prices, an intuitive store layout, friendly customer service, a visually
pleasing environment, a liberal return policy, the convenience of shopping from
home in a store that never closes, and sophisticated search technology features
which will allow customers to locate quickly the items which interest them.

In June 1998, the Company determined to discontinue the operations of its golf
sportswear division and to devote all of the Company's energy and resources to
building the Web site. The golf sportswear division had been operating at a
loss, and despite efforts to promote the brand, orders for the sportswear
collection had been significantly below the Company's business plan and even
further below the prior year's levels. As a result, the Company discontinued
the operations of this division in June 1998. The Company has accrued $266,000
for future anticipated losses relating to the discontinuation of such division.

YEAR 2000 ISSUES

The Company will be interacting with certain computer programs in connection
with credit card transactions, fulfillment operations, and programs used by the
Company's vendors and suppliers. These programs may refer to annual dates only
by the last two digits (e.g., "97" for "1997"), and could lose functionality in
the year 2000. While the Company believes that all of its internal programs are
year 2000 compliant ("Compliant"), the Company cannot guarantee that all of the
other companies with which the Company interacts has taken the year 2000
problem into account or has otherwise updated their programs. The Company does
not believe it will incur any material expenditures in connection with respect
to making its own programs Compliant but cannot predict what, if any,
expenditures will be required in the event that one or more of the companies
with which it interacts is not Compliant. Such problem could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1998 ("FIRST HALF OF 1998") COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1997 ("FIRST HALF OF 1997")

RESULTS FOR CONTINUING OPERATIONS

General and administrative expenses increased by $81,000, or 22.2% in the First
Half of 1998 to $446,000 from $365,000 in the First Half of 1997. This increase
was primarily a result of the additional costs in operations relating to public
company filings, registration fees, and other related expenses and as a result
of an increase in depreciation expense of $32,000 and insurance expense of
$20,000 resulting from the Company's Director's and Officer's liability policy.

The Company has incurred start up costs of $103,000 in the First Half of 1998.
These costs relate to the start up of its Internet business. The Company
anticipates that such costs will continue until the Web site reaches productive
capacity.

The Company has incurred research and development costs of $126,000 in the
First Half of 1998 primarily relating to the design and development of the
Company's Web site. The Company anticipates that it will incur additional
research and development costs in the future.

                                      13

<PAGE>


The Company earned interest of $81,000 and $36,000 on the proceeds from the
Company's 1997 initial public offering ("IPO") in the First Half of 1998 and
1997, respectively.

The Company's loss from continuing operations increased by $310,000 to a net
loss of $594,000 in the First Half of 1998 from a loss of $284,000 in the First
Half of 1997. The loss in the First Half of 1997 was offset by an income tax
benefit of $45,000.

RESULTS FOR DISCONTINUED OPERATIONS

In June 1998, the Company discontinued the operations of its golf sportswear
division. The Company's condensed financial statements present the operating
loss, estimated loss on disposal, and net assets of the discontinued operations
separately from continuing operations. Prior periods have been restated to
conform with this presentation. Discontinued operations for the First Half of
1998 reflect a loss from operations of $934,000 net of tax. The loss from
operations includes a loss of $454,000 relating to the disposal of the assets
of the golf sportswear division. The net sales of this division decreased by
$2,019,000, or 45.8%, to $2,387,000 in the First Half of 1998 from $4,406,000
in the First Half of 1997. Gross profit decreased by $998,000, or 84.8%, to
$179,000 in the First Half of 1998 from $1,177,000 in the First Half of 1997.
This decrease is a result of the decrease in sales volume as well as due to
approximately $250,000 in inventory markdowns that were recorded in the First
Half of 1998. The additional markdowns were recorded due to the level of
inventory on hand that the Company will have to sell in the close-out market
resulting from the discontinued operations.

THREE MONTHS ENDED JUNE 30, 1998 ("SECOND QUARTER OF 1998") COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1997 ("SECOND QUARTER OF 1997")

RESULTS FOR CONTINUING OPERATIONS

General and administrative expenses increased by 4,000, or 2.0% in the Second
Quarter of 1998 to $207,000 from $203,000 in the Second Quarter of 1997. This
increase is a result of the additional costs in operations relating to the
Company completing the IPO in May 1997 and due to the increase in depreciation
expense due to the property and equipment purchased in the fourth quarter of
1997. This increase is offset by a decrease in employee's salaries from the
allocation of $52,000 to the start up costs of the Internet business.

The Company has incurred start up costs of $103,000 in the Second Quarter of
1998. These costs relate to the start up of its Internet business. The Company
anticipates that such costs will continue until the Internet business is
operational.

The Company has incurred research and development costs of $126,000 in the
Second Quarter of 1998 primarily relating to the design and development of the
Company's Web site. The Company anticipates that it will incur additional
research and development costs in the future.

The Company earned interest of $39,000 and $36,000 on the proceeds from the IPO
in the Second Quarter of 1998 and 1997, respectively.

The Company's loss from continuing operations increased by $255,000 to a net
loss of $397,000 in the Second Quarter of 1998 from a loss of $142,000 in the
Second Quarter of 1997. The loss in the Second Quarter of 1997 was offset by an
income tax benefit of $25,000.

RESULTS FOR DISCONTINUED OPERATIONS

In June 1998, the Company discontinued the operations of its golf sportswear
division. The Company's condensed financial statements present the operating
loss, estimated loss on disposal, and net assets of the discontinued operations
separately from continuing operations. Prior periods have been restated to
conform with this presentation. Discontinued operations for the Second Quarter
of 1998 reflect a loss from operations of $853,000 net of tax. The loss from
operations includes a loss of $454,000 relating to the disposal of the assets
of the golf sportswear division. The net sales of this division decreased by
$1,138,000, or 56.6%, to $872,000 in the Second Quarter of 1998 from $2,010,000
in the Second Quarter of 1997. Gross profit decreased by 


                                      14

<PAGE>

$383,000, or 67.8%, to $182,000 in the Second Quarter of 1998 from $565,000 in
the Second Quarter of 1997. This decrease is a result of a decrease in sales
volume as well as the lower gross margins associated with sales in the closeout
market. In the Second Quarter of 1998, approximately 48.2% of the Company's
sales were to the closeout market as compared to less than 1% in the Second
Quarter of 1997. The decrease was also attributable to approximately $150,000
in inventory markdowns that were recorded in the Second Quarter of 1998. The
additional markdowns were recorded due to the level of inventory on hand that
the Company will have to sell in the closeout market resulting from the
discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary funding requirements are to finance working capital and
the launch and marketing of the Web site. These requirements will increase as a
result of the start up costs and working capital needed for the Web site. Based
upon its current business plan, the Company believes it has sufficient
resources to finance its working capital needs for at least the next twelve
months.

The discontinued golf sportswear division has assets of $2,058,000, of which
$1,082,000 represents inventory. The Company intends to honor the sales order
commitments of its discontinued operations for its Fall 98 collection and is
liquidating all remaining inventories to the closeout market.

CASH FLOW - CONTINUING OPERATIONS

During the First Half of 1998, net cash used by operating activities was
$665,000 compared to cash provided by operating activities of $40,000 in the
First Half of 1997. The increase in cash used by operations was primarily the
result of increases in the Company's loss from continuing operations as well as
$236,000 in purchases of inventory of the Web site.

During the First Half of 1998, net cash used in investing activities was
$661,000, compared to $4,058,000 in the First Half of 1997. The cash used in
the First Half of 1998 was the result of deposits made with the Company's
factor ("Factor"). In the First Half of 1997, the Company completed the IPO.
Such funds were deposited with the Factor and invested at a rate of 1.75% below
prime. Funds are transferred into the Company's operating account as needed.

During the First Half of 1997, the Company completed the IPO and received net
proceeds of $5,939,000. The funds, net of debt repayments of approximately
$2,144,000 and deferred costs relating to the IPO were deposited with the
Factor.

Factoring Agreement: The Company is party to a Retail Collection Factoring
Agreement ("Factoring Agreement") pursuant to which the Company sells all of
its eligible accounts receivable to the Factor. The Company renegotiated such
agreement in November 1997. The Company is eligible for advances, at the
Factor's discretion, of up to 90% of the net balance due on eligible accounts
receivable. As a result of the discontinuation of the golf sportswear division,
the Company anticipates that it will have factored receivables only through
October 1998. Borrowings thereafter would require a renegotiation of the 
Agreement. There can be no assurance that such agreement can be attained.
At June 30, 1998, there was approximately $2,449,000 in funds invested with 
the Factor under the Factoring Agreement and approximately $433,000 in 
factored receivables, net of returns and allowances. Interest on the net amount
due is payable monthly in arrears at the rate of 1% above the Chase Manhattan 
Bank, NA prime rate ("Prime"). Interest on the net receivable is received 
monthly in arrears at the rate of 1.75% below Prime

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

Certain written and oral statements made or incorporated by reference from time
to time by the Company or its representatives in this report, other reports,
filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 (the "Act").
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result," or
words or phrases of similar meaning. Forward-looking statements involve risks
and uncertainties that may cause actual results to differ materially from the
forward-looking statements. The risks and uncertainties are detailed from time
to time in reports filed by the Company with the Securities and Exchange
Commission, including Forms 8-A, 8-K, 10-QSB, and 10-KSB, and include, among
others, the following: lack of operating history of Internet business; risks
associated with the start-up of the Internet business; limited working capital
(possible need for additional financing); recent losses 


                                      15

<PAGE>

and anticipated future losses; competition; the potential for competitors with
greater resources to enter such business and the Company's lack of experience
in such business; risk of litigation for sale of unauthentic or damaged goods;
dependence on third parties and certain relationships; availability of
merchandise; uncertain acceptance of the Company's brand; risk of capacity
constraints; reliance on internally developed systems; system development
risks; consumer acceptance of the Internet as a medium for purchasing apparel;
the capital intensive nature of such business taking into account the need for
advertising to promote a Web site; seasonality and quarterly fluctuations and
the Company's ability to retain qualified personnel for the Internet business.
The risks included herein are not exhaustive. Other sections of this report may
include additional factors that could adversely impact the Company's business
and financial performance. Moreover, the Company operates in a very competitive
and rapidly changing environment. New risk factors emerge from time to time and
it is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors in the Company's business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results.

                                      16

<PAGE>


PART II

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

Effective May 15,1997, the Company completed the IPO (Commission File No.
333-22895). The representative of the underwriters of the IPO was Southeast
Research Partners, Inc. (formerly known as GKN Securities Corp). The following
table shows the title of each class of securities registered and the title of
any class of securities into which such securities may be converted, if any:

                      (1)    Units
                      (2)    Common Stock
                      (3)    Warrants
                      (4)    Representative's Unit Purchase Option
                      (5)     Bridge Warrants

         UNITS: Each Unit consists of one share of Common Stock and one Warrant.

         WARRANTS: Each Warrant is exercisable into one share of Common Stock
         at $5.00 per share, subject to adjustment, at any time until the close
         of business on May 15, 2002.

         REPRESENTATIVE'S UNIT PURCHASE OPTION: Representative's right to
         purchase up to 150,000 Units for an aggregate price of $100.

         BRIDGE WARRANTS: Warrants issued to certain persons in connection with
         the Company's January 1997 bridge financing which were converted in
         May 1997 (on a one-for-one basis) into the Warrants.

The following table represents the amount and aggregate offering price of
securities registered and sold:

<TABLE>
<CAPTION>
                                                     Aggregate offering
                                                       Price of Amount                                  Aggregate Offering
   Title of Security         Amount Registered           Registered               Amount Sold          Price of Amount Sold
------------------------- ------------------------ ------------------------ ------------------------- ------------------------
<S>                            <C>                      <C>                     <C>                       <C>  
          Unit                   1,725,000               $8,625,000                1,500,000                $7,500,000
 Representative's Unit               1                      $100                       1                       $100
    Purchase Option
</TABLE>

The net offering proceeds totaled $5,939,343 after deducting total expenses
listed below. The following amounts represent total expenses in connection with
issuance and distribution of the securities registered for each category listed
below:

         Underwriting discounts and commissions             $750,000
         Expenses paid to or for underwriters                243,335
         Other expenses                                      567,321

         The amounts shown above represent direct or indirect payments to
others.

                                      17

<PAGE>



Based upon the Company's decision to discontinue the operations of the golf
sportswear division and build and promote its Web site, the Company has
reallocated its use of proceeds accordingly by adding to the description of
Working Capital and general corporate purposes to include costs related to the
Web site. As of June 30, 1998, the net offering proceeds of $5,939,343 were
used for the following cash expenditures:

<TABLE>
<CAPTION>
<S>                                                                               <C>       
         Repayment of indebtedness and other obligations (with interest)          $2,031,580
         Marketing and advertising                                                   908,115
         Installation of concept shops and/or concept areas                          232,964
         Construction of plant, building, and facilities                             276,489
         Working capital and general corporate purposes
             including fixed assets - computer hardware and software
             and costs relating to the Web site                                    1,785,000
</TABLE>

The balance of the proceeds have been deposited with the Company's factor and
invested at a rate of 1.75% below Prime. The amounts shown above represent
direct or indirect payments to others.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) The following is a list of exhibits filed as part of this Report:

    EXHIBIT NO.   DESCRIPTION

     10.24        Employment  Agreement  dated  as of  July  13,  1998  by  and
                  between Pivot Rules, Inc. and Patrick Barry.
     10.25        Employment  Agreement  dated  as of  June  15,  1998  by  and
                  between Pivot Rules, Inc. and Jonathan Morris.
     27           Financial Data Schedule.

(b) Reports on Form 8-K.

The Company filed a Current Report on Form 8-K dated July 2, 1998 reporting
under Item 5 the discontinuation of the registrant's golf sportswear division.

                                      18

<PAGE>


                                   SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                              PIVOT RULES, INC.

                                              By: /s/ E. Kenneth Seiff
                                                  -------------------------
                                                   E. Kenneth Seiff
                                                   President

                                              By: /s/ Meena N. Bhatia
                                                  -------------------------
                                                   Meena N. Bhatia
                                                   Chief Financial Officer

August 10, 1998

                                      19