SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549

                                   FORM 10-KSB

/X/  Annual report  pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 for the fiscal year ended December 31, 1996

/ /  Transition  report  pursuant  to  Section  13 or  15(d)  of the  Securities
     Exchange Act of 1934

Commission File number:   0-25918

                           ACTIVE APPAREL GROUP, INC.
                 (Name of small business issuer in Its Charter)

        Delaware                                          13-3672716
--------------------------------             ---------------------------------
(State or other jurisdiction of              (IRS Employer Identification No.)
 incorporation or organization)

1350 Broadway, Suite 2300,  New York, New York            10018
----------------------------------------------           --------
(Address of principal executive offices)                   Zip
Code

Issuer's Telephone Number (212) 239-0990
                          --------------

Securities registered under Section 12(b) of the Exchange Act:

                                                    Name of Each Exchange
         Title Of Each Class                         On Which Registered
         -------------------                         -------------------

              None                                      None

Securities registered under Section 12(g) of the Exchange Act:

                         Common Stock, $0.002 par value
                         ------------------------------
                                (Title of Class)

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 requirement for the past 90 days. YES /X/ NO / /

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained  to  the  best  of  registrant's  knowledge  in  definitive  proxy  or
information statement  incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB / /

State issuer's revenue for its most recent fiscal year: $16,377,529

On March  6,  1997 the  aggregate  market  value  of the  voting  stock  held by
non-affiliates  of the Registrant was  approximately  $24,094,000 based upon the
average of the  highest  and  lowest bid  quotations  for such  Common  Stock as
obtained from the Nasdaq National Market on March 6, 1997.

The number of shares outstanding on March 6, 1997 was 2,452,287 shares of Common
Stock,  $.002 par value and  100,000  shares of Class A Common  Stock,  $.01 par
value..

Documents Incorporated by Reference  -   None

Transitional Small Business Disclosure Format (Check one): YES / /  NO  /X/

<PAGE>

                                TABLE OF CONTENTS

                                                                          Page
                                                                          ----

PART I

Item 1     Business..........................................................1
Item 2     Properties.......................................................10
Item 3     Legal Proceedings................................................10
Item 4     Submission of Matters to a Vote of Security Holders..............10


PART II

Item 5     Market for Registrant's Common Equity and Related
             Stockholder Matters............................................11
Item 6     Management's Discussion and Analysis or Plan of Operation........12
Item 7     Financial Statements.............................................14
Item 8     Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure....................................15


PART III

Item 9     Directors, Executive Officers, Promoters and Control Persons;
                Compliance with Section 16(a) of the Exchange Act...........15
Item 10    Executive Compensation...........................................17
Item 11    Security Ownership of Certain Beneficial Owners
                and Management .............................................22
Item 12    Certain Relationships and Related Transactions...................24
Item 13    Exhibits and Reports on Form 8-K.................................26


Signatures..................................................................30


<PAGE>

                                     PART I

ITEM 1.           BUSINESS

GENERAL

         Active  Apparel Group,  Inc. (the  "Company"),  a Delaware  corporation
organized on July 6, 1992, is engaged in the design, manufacture,  marketing and
sale of  women's  activewear  and  sportswear  featuring  the  widely-recognized
Everlast7 trademark ("Everlast Products"), in the design, manufacture, marketing
and sale of women's and girls'  activewear and sportswear  (excluding  footwear)
featuring the widely-recognized  Converse(R) and Converse All Star(R) trademarks
(the "Converse  Products") and the design,  manufacture,  marketing and sales of
unisex  activewear and accessories  featuring the widely-  recognized "MTV's THE
GRIND"  and/or "THE  GRIND"  trademarks  (the "MTV  Products").  Generally,  the
Company has the exclusive  right to use and  distribute  women's  activewear and
sportswear  featuring  the  Everlast(R)  trademark  (constituting  the  Everlast
Products) in the United States,  its territories and possessions  (collectively,
the "United  States") and Canada,  its provinces,  territories  and  possessions
(collectively,  "Canada"), the exclusive right to use and distribute women's and
girls' activewear and sportswear  (excluding footwear) featuring the Converse(R)
trademarks  (constituting  the Converse  Products) in the United  States and the
exclusive  right  to  use  and  distribute  unisex  activewear  and  accessories
featuring the MTV(R)  trademarks  (constituting  the MTV Products) in the United
States and Canada. SEE "PRODUCTS" AND "LICENSES." The Company is a member of the
Sporting  Goods   Manufacturers   Association,   the  National   Sporting  Goods
Association and the Canadian Sporting Goods Association.

         The  Company's  strategy is to expand the Company's  operations  and to
become a leading brand name supplier of women's  activewear  and  sportswear and
unisex activewear. Key elements of this strategy include:

   .  emphasizing   the  Company's   products  by   establishing   balanced  and
      diversified collections with various products, styles and price ranges.

   .  maintaining  a focused  advertising  and  marketing  program that seeks to
      maximize the visibility of the Company's products.

   .  expanding  the  distribution  system for the  Company's  products  through
      relationships  with a broad  network of  retailers  in the United  States,
      Canada and (subject to  expanding  the  territories  in which the Everlast
      Products,  Converse  Products and MTV  Products are  permitted to be sold)
      elsewhere.

         All of the Company's products are manufactured in the United States and
in foreign countries by third party, independent manufacturing contractors,  and
are  distributed  through a variety  of  department  stores,  specialty  stores,
sporting  goods  stores,  catalog  operations,  and  better  mass  merchandisers
representing approximately 500 separate customers in approximately 20,000 retail
locations throughout the United States and Canada. SEE "SALES AND DISTRIBUTION."

                                       1
<PAGE>
PRODUCTS

         The  Company's  products  consist of the  Everlast  Products,  Converse
Products, and the MTV Products, which are designed and marketed with a goal of a
high  level of brand name  recognition  and  consumer  preference  by  combining
performance,  market appeal and value.  The Company  performs  extensive  market
research  in  attempting  to provide its retail  customers  and  consumers  with
functionality  along with the most desirable styles,  color schemes and fabrics.
The  Company  has  actively  pursued a strategy  of  developing  a balanced  and
diversified mix of products in order to maximize the brand name  recognition and
appeal to various demographic groups and geographic areas. The Company's product
collections include:

         THE EVERLAST WOMAN COLLECTION.  The Company sells a diverse  collection
of Everlast Products  consisting of women's  activewear and sportswear under the
Everlast(R) trademark and logo. Since 1910, Everlast has gained wide recognition
in professional  and amateur boxing.  The Company  believes that the Everlast(R)
name has become synonymous with quality athletic products. The Everlast Products
seek to continue this  tradition,  while  recognizing  that the active woman has
particular  demands  regarding  quality,  comfort  and style in  activewear  and
sportswear.  The Everlast Products consist of approximately 40 separate products
with varying styles and functions.  These include fitness apparel and sportswear
made of nylon,  fleece,  cotton,  Lycra spandex,  and other technical  polyester
fabrics with moisture management properties.  The Everlast Products are designed
to  feature  the  Everlast(R)  trademark  and  logo,  and to focus on the use of
appropriate fabric blends to maximize comfort and performance. The retail prices
for the Everlast Products generally range from $15 to $70.

         THE  CONVERSE  FOR  WOMEN  COLLECTION.  The  Company  sells  a  diverse
collection of Converse Products  consisting of women's and girls' activewear and
sportswear under the Converse(R) and Converse All Star(R)  trademarks and logos.
Since  1908,   Converse  has  gained  wide  recognition  in  men's  and  women's
professional  and amateur  basketball.  The Company  believes  that the Converse
Products continue the Converse tradition of quality, style and performance.  The
Converse All Star for Women collection  offers active  lifestyle  apparel with a
fashion  oriented  approach.  The  collection  includes:  sports  bras,  shorts,
leggings,  tee shirts,  sweatshirts,  and jackets. The collection is designed to
feature the Converse All Star  trademark and to focus on the use of  appropriate
fabric blends to maximize  comfort.  The retail prices for the Converse Products
generally range from $15 to $90.

         MTV'S THE GRIND  COLLECTION.  Since  September 30, 1996 the Company has
been  selling a diverse  collection  of MTV  Products  consisting  of unisex and
women's and girls' activewear and accessories under the "MTV's THE GRIND"(R) and
"THE GRIND" name,  trademark and logo.  Since August 1992 "The Grind" has been a
popular  dance  series on MTV. MTV has  developed a successful  line of exercise
home  videos  based  on "The  Grind",  including  "THE  GRIND  WORKOUT!  HIP HOP
AEROBICS" and "THE GRIND WORKOUT!  FITNESS WITH FLAVA". The Company  understands
that both videos are platinum sellers and are  consistently  among the top three
sellers on the BILLBOARD exercise video charts.  Presently,  "THE GRIND WORKOUT!
STRENGTH AND FITNESS"  exercise home video features  products from the Company's
Grind collection. Additionally, a forthcoming "Grind" exercise video expected to
be released in the fall of 1997 will feature  products from the Company's  Grind
collection.  The MTV Products  seek to tap into  consumers'  passions for music,
fitness and fashion. The products include tank tops, unitards,  leggings,  loose
fitting  baggy shorts and pants and double mesh shorts that are fashion  forward
yet  performance  driven.  The  collection  is designed to feature The  Grind(R)
trademark  and to focus on the use of  appropriate  fabric  blends  to  maximize
comfort. The retail prices for the MTV Products generally range from $16 to $50.

                                       2

<PAGE>

         PRODUCT  DEVELOPMENT.  The  Company's  merchandising  and design  staff
analyzes   demographic,   market,   style,  fashion  and  fabric  and  technical
developments  and  attempts to make the  necessary  adjustments  in product mix,
construction,   design,   styles,  fabrics  and  colors  in  response  to  these
developments.  Members of the  merchandising  and design  staff also  coordinate
their  activities  with the Company's  production and sales staff,  consult with
buyers,  visit  retail  outlets  and attend  fashion  and trade  shows to gather
additional  information during the design process.  Sources of design and prints
include,  for example,  industry fashion analyses,  the Company's  products from
previous years and freelance  artwork  (which,  if purchased by the Company,  is
typically copyrighted).

         After a particular  product  concept has been designed,  members of the
design staff prepare  schematics  containing the proposed  styles,  patterns and
fabrics,  which are reviewed by senior members of the Company's management prior
to  prototype  construction.  Prototypes  of a  potential  new  product are then
constructed  and  subjected  to  numerous  tests  for  fit,  comfort,   quality,
functionality and consumer  acceptance.  New designs are previewed to buyers and
certain  retail  accounts for input as to which styles are likely to be the most
popular. In addition,  the Company's  performance  products are given to fitness
professionals for use and evaluation. The Company's goal is to minimize the risk
of changing fashion trends or consumer preferences, although no assurance can be
given that this objective can be achieved.

LICENSES

         EVERLAST LICENSE.  The Company obtained the Everlast license ("Everlast
License") of June 1, 1992 pursuant to assignment dated July 7, 1992.  Generally,
the Everlast  License  grants to the Company the exclusive  right and license to
use the Everlast(R) trademark in connection with the manufacture,  advertisement
and  promotion,  packaging,  sale and  distribution  of women's  activewear  and
sportswear  in the  United  States and  Canada  during the term of the  Everlast
License. Everlast World's Boxing Headquarters ("Everlast") reserved the right to
use or  license  the  Everlast(R)  trademark  on  products  other  than  women's
activewear and sportswear within the United States and Canada,  and the right to
use or license such trademark outside the United States or Canada.  Everlast has
also  reserved  the  right to sell,  in the  United  States or  Canada,  women's
activewear and sportswear in Everlast's  product catalogs or flyers, but may not
sell such products for less than the lowest price offered by the Company.

         The term of the Everlast  License  ends on December  31,  2002,  but is
renewable  at the  option  of the  Company  for up to two  successive  five year
periods commencing January 1, 2003 and January 1, 2008,  assuming the Company is
not then in default  under the Everlast  License and  assuming  that the Company
achieves  net  sales in the  United  States  of  Everlast  Products  of at least
$10,500,000,  and in Canada, of at least $2,500,000  (assuming an exchange ratio
of $.746) for the  exercise of the first  option and  achieves  net sales in the
United  States of at least  $14,250,000  and in  Canada  of at least  $3,700,000
(assuming an exchange ratio of $.746) for the exercise of the second option. The
Everlast  License may be  terminated  in whole,  or only as to certain  Everlast
Products,  if the Company fails to fulfill its material  obligations  thereunder
(including  payments of royalties or other amounts due),  fails (beyond the cure
period) to use diligent efforts to promote, advertise, manufacture, sell or ship
any  Everlast  Product,  or to fill  accepted  orders for  Everlast  Products to
financially secure  purchasers.  See "MANUFACTURING AND SUPPLIERS." The Everlast
License may also be terminated  if net sales of Everlast  Products do not exceed
certain minimum levels,  or if the Company  voluntarily or involuntarily  enters
into a  bankruptcy  or similar  proceeding.  To date,  the  Company  has been in
compliance with the Everlast License.

         Under the  Everlast  License,  the Company is required to make  royalty
payments to Everlast of 6% of net sales (as defined therein), subject to minimum
annual  payments,  which  increase  over the term (as

                                       3

<PAGE>
extended)  of the  Everlast  License.  The  Company  is  also  required  to make
advertising  expenditures  of at least 2.5% of net sales of  Everlast  Products,
subject  to annual  minimum  expenditure  levels.  The  minimum  annual  royalty
payments under the Everlast  License for sales in the United States are $240,000
and  $450,000  for 1996 and 1997  ($90,000  and $98,500 with respect to sales in
Canada),  respectively.  The minimum annual  advertising  expenditures  required
under the  Everlast  License  for sales in the United  States are  $100,000  and
$187,500  for  1996 and 1997  ($37,500  and  $41,000  with  respect  to sales in
Canada),  respectively.  (The foregoing amounts in US dollars assume an exchange
ratio of $.746). To date, all required levels have been met or exceeded. Royalty
payments and advertising  expenditures are not required with respect to sales of
Everlast Products to Everlast, as discussed above. The Company is also obligated
to  maintain  product  quality  control,  obtain  prior  approval of designs and
standards,  and marketing,  advertising and  distribution  programs,  and may be
required to indemnify Everlast against any losses resulting from alleged defects
in the Everlast  Products  arising out of the  Company's  performance  under the
Everlast  License or the  manufacture,  promotion  or sale of such  products  in
violation  of  applicable  laws or  third-party  rights.  The  Everlast  License
requires that the Company secure and maintain product liability insurance, which
the Company has done.  Under and subject to the terms of the  Everlast  License,
Everlast is required to indemnify the Company  against any losses arising out of
the use of the  Everlast(R)  trademark  or the  exercise  by the  Company of its
rights under the Everlast  License.  Everlast is also  required,  generally,  to
defend the Company's  rights to use the  Everlast(R)  trademark  pursuant to the
Everlast License.

         The Everlast License also requires the Company to maintain,  during the
term thereof,  letters of credit in favor of Everlast for an amount equal to the
minimum annual  amounts due to Everlast under the Everlast  License from time to
time. The Company is in compliance with this requirement.

         CONVERSE  LICENSE.  The  Company  and  Converse  Inc.  entered  into  a
Trademark License Agreement on May 20, 1994 (the "Converse License"). Generally,
the  Converse  License  grants to the  Company  the  exclusive  right to use the
Converse(R) and Converse All Star(R) trademarks  described therein in connection
with the manufacture, import, advertisement and promotion, sale and distribution
of women's and girls'  activewear and sportswear in the United States during the
term of the Converse License.

         The term of the Converse  License ends on  September  30, 1998,  but is
automatically  renewable,  at the  option  of  the  Company,  for an  additional
two-year period (through  September 30, 2000) if the Company sells $5,000,000 of
Converse  Products  from  October 1, 1997 to September  30,  1998.  The Converse
License may be terminated due to, among other reasons, a change in more than 20%
of the  ownership or control of the Company  (other than as a result of a public
offering),  an uncured  failure by the Company  materially to perform any of its
obligations  thereunder (including payments of royalties and other amounts due),
or the Company  voluntarily  or  involuntarily  entering  into a  bankruptcy  or
similar proceeding.

         Under the  Converse  License as  currently  in effect,  the  Company is
required  to make  royalty  payments  to Converse of 7% of net sales (as defined
therein),  subject to guaranteed  minimum annual  payments,  irrespective of net
sales,  of $280,000  with  respect to the  contract  period from May 20, 1994 to
September 30, 1996 and the contract period from October 1, 1996 to September 30,
1997,  increasing  to $350,000 with respect to the contract year from October 1,
1997 to September 30, 1998. If the Converse  License is renewed beyond September
30, 1998 (through  September 30, 2000),  the  guaranteed  minimum annual royalty
payment would equal the greater of (i) 75% of the actual  royalties  payable for
the  prior  contract  year or (ii) an  amount  equal to the  guaranteed  royalty
payment  for the prior  contract  year  plus 10% of such  minimum  payment.  The
Company is also required to make advertising  expenditures of at least 2% of net
sales and to provide Converse,  at no charge,  Converse Products valued at 1% of
net sales, for promotional purposes. Generally, the Company is also obligated to
sell to  Converse,  at a price equal to

                                       4
<PAGE>

the lower of the  Company's  lowest U.S.  wholesale  price  (less the  royalties
payable to Converse) or the Company's cost plus 15%, such quantities of Converse
Products as Converse  orders,  which  products  may be resold by Converse  owned
retail   stores.   Converse   may  also   license   third   parties  to  provide
Converse-branded women's and girls' activewear and sportswear in connection with
premiums,  "giveaways"  or  promotional  arrangements  (with the approval of the
Company).  Converse is also  permitted  to grant a license to any third party to
manufacture,  in or outside the United States, women's and girls' activewear and
sportswear for distribution outside the United States.

         The Converse License requires Converse to indemnify the Company against
any losses  arising out of the  Company's use of the  Converse(R)  trademarks or
Converse's  wrongful  conduct,  although  Converse  is not  required to take any
action  relating  to  any  infringements  or  counterfeits  of,  or  any  unfair
competition affecting the Converse(R) trademarks covered by the Converse License
(nor is the Company permitted to take any such action without the prior approval
of  Converse).  The Converse  License also provides for the  indemnification  of
Converse  by the Company  against  all losses  arising  from  product  liability
claims,  but  excluding  claims based on alleged  design  defects.  The Converse
License requires the Company to secure and maintain product liability insurance,
which the Company has done. To date, the Company has been in compliance with the
Converse License.

         MTV  LICENSE.  The  Company  and MTV  Networks  entered  into a License
Agreement on March 28, 1996 (the MTV License). Generally, the MTV License grants
to the  Company  the  exclusive  right and  license to use "MTV's THE  GRIND"(R)
and/or  "THE  GRIND"(R)  trademarks,  names  and  logos in  connection  with the
manufacture,  advertisement and promotion,  packaging,  sale and distribution of
unisex and women's  activewear  and  accessories in the United States and Canada
during the term of the MTV License. The license is non-exclusive with respect to
the  licensed  products  known as  t-shirts  and  caps  until  such  time as MTV
Network's  ("MTVN")  existing  license  agreement with another licensee for such
licensed  products  expires,  and at such time, it will be  exclusive.  MTVN has
reserved  the right to use or  license  the  "MTV's THE  GRIND"(R)  and/or  "THE
GRIND"(R)  trademarks on products  other than unisex and women's  activewear and
accessories in the United States and Canada and the right to use or license such
trademarks outside the United States or Canada. MTVN has also reserved the right
to sell the licensed  products in the United  States or Canada  through  premium
offers,  combination  and giveaway  sales,  direct  response,  direct mail, home
shopping  type of  networks,  sales  clubs,  incentive  programs and any MTVN or
affiliated  companies'  retail outlets.  MTVN is permitted to grant a license to
any third  party to  manufacture,  in or outside the United  States,  unisex and
women's activewear and accessories for distribution outside the United States.

The term of the MTV License is from April 30, 1996 through  January 31, 1999 but
is  automatically  renewable,  at the option of the Company,  for an  additional
two-year period (February 1, 1999 through January 31, 2001) if the Company sells
$3,500,000 of MTV Products during the License Term and provided that the Company
has satisfactorily  performed its obligations under the License. The MTV License
may be  terminated  if,  among other  reasons,  the  Company  disposes of all or
substantially all of its business or assets to a third party, George Horowitz is
no longer  President of the Company,  there is an uncured failure by the Company
materially to perform any of its obligations  thereunder  (including payments of
royalties) or the Company voluntarily or involuntarily  enters into a bankruptcy
or similar proceeding.

   Under the MTV License,  the Company is required to make  royalty  payments to
MTVN of 8% of net sales (as  defined  therein),  subject to  guaranteed  minimum
annual  payments,  irrespective  of net sales,  of $200,000  with respect to the
contract  term.  If the MTV  License is renewed  beyond  January 31,  1999,  the
guaranteed  minimum annual royalty payment would equal $320,000.  The Company is
also required to

                                       5

<PAGE>

make advertising expenditures of at least 2% of net sales.

         The MTV License  requires  MTVN to  indemnify  the Company  against any
losses arising out of the Company's use of the MTV trademarks or MTVN's wrongful
conduct,  although  MTVN is not  required  to take any  action  relating  to any
infringements  or counterfeits of, or any unfair  competition  affecting the MTV
trademarks  covered by the MTV License (nor is the Company permitted to take any
such action without the prior  approval of MTVN).  The MTV License also provides
for the  indemnification  of MTVN by the Company against all losses arising from
product liability claims,  but excluding claims based on alleged design defects.
The MTV License  requires the Company to secure and maintain  product  liability
insurance,  which  the  Company  has  done.  To date,  the  Company  has been in
compliance with the MTV License.

MARKETING, ADVERTISING AND PROMOTIONS

         The Company  advertises  and promotes the Everlast  Products,  Converse
Products  and MTV Products (as  required  under the Everlast  License,  Converse
License and MTV License,  respectively) to different consumer segments through a
variety of trade and consumer print advertising campaigns, generally in selected
magazines and other publications  (including VOGUE,  SPORTSTYLE and WOMEN'S WEAR
DAILY),  designed and focused to provide high visibility for such products.  The
Company's  advertising  and  promotional  efforts are  designed to appeal to the
demographic  customer profile for the Company's products.  The Company maintains
its  own  marketing  and   advertising   staff  that  oversees  the  conception,
development and implementation of most aspects of the Company's  advertising and
sales promotions. The Company's in-house staff also develops catalogs for all of
its product lines.

         The Company uses several methods to advertise and promote its products.
The Everlast  Products,  Converse Products and MTV Products and the Company have
received  exposure  through  coverage  in both the print and  television  media.
Additionally, the Company takes part in various cooperative advertising programs
such as national advertising,  in-store signage,  point-of-purchase  promotional
giveaways and cooperative  advertising  arrangements  with several of its retail
customers.  In 1994, the Company established  cooperative  advertising  programs
with DuPont Inc.  and Cotton Inc.  The  Company  believes  that its  cooperative
advertising  programs assist in raising consumer awareness and increasing retail
floor space for its products.

         The Company also believes that grass roots promotion programs,  such as
the limited  distribution  of samples of its  products  to local gyms,  athletic
clubs and fitness professionals,  help to advance the recognition and reputation
of its products.  In addition,  the Company has focused many of its  promotional
programs on charitable and community events,  such as AThe New York Race for the
Cure@ of breast  cancer,  "The City of Hope  Workout For Hope" for AIDS  related
research,  "Share-A-Walk"  New York  Fundraiser to raise  awareness in the fight
against cancer,  and "The J-Cap Dream Team"  performance group that travels into
city schools promoting anti-drug  messages.  The Company has also sponsored high
school and college women's basketball teams and cheerleading squads.

         The Company also  attends and  participates  in the Atlanta  Supershow,
National Sporting Goods Association Show and other appropriate trade shows.

MANUFACTURING AND SUPPLIERS

   The  Company  does  not  itself  manufacture  any of its  products,  but uses
third-party,  independent  contractors for the manufacture of all such products.
Since mid-1993,  approximately 75% of the

                                       6
<PAGE>

Company's  products  have been  supplied by  manufacturers  in the United States
while the remaining 25% has been imported from manufacturers  located in foreign
nations,  principally  in Asia.  Currently,  the Company  uses over ten separate
manufacturers.  While the  Company  has no  written  agreements  with any of its
contractors,  the Company believes that its relationships  with such contractors
are  good.  The  Company  does  not  believe  that  the  loss of any  particular
contractor would have a material  adverse effect on its business.  If necessary,
the Company  believes  that  alternative  sources of  products  would be readily
available,  although  no  assurance  can be given.  The supply of the  Company's
foreign-sourced  products is subject to constraints imposed by bilateral textile
agreements between the United States and foreign nations, which impose quotas on
the amounts and types of goods  which can be  imported  into the United  States.
Consequently, some of the Company's source of products may be adversely affected
by  political  instability  resulting  in the  disruption  of trade from foreign
nations in which the  manufacturers  are located,  the  imposition of additional
regulations  relating  to  imports  or duties  and taxes  and other  charges  on
imports. In order to ensure quality control and timely delivery, the Company (or
its agents) conducts on-site inspections at manufacturers'  facilities,  as more
fully described herein. See "QUALITY CONTROL." The Company's strategy is to find
manufacturers with specific product category expertise (such as fitness apparel,
T-shirts or outerwear) and extensive experience in the major athletic brand name
apparel  industry.  The  Company  has no  long-term  agreements  with any of its
manufacturers and competes with other apparel companies for production capacity.

         At December 31, 1995,  the Company's  inventory  was  $1,776,583 on net
sales  during  Fiscal 1995 of  $14,781,208,  with a backlog of orders for future
delivery of  $2,819,472.  At December  31, 1996,  the  Company's  inventory  was
$2,757,700  on net sales  during  Fiscal 1996 of  $16,377,529  with a backlog of
orders for future  delivery  of  $3,117,892.  The  Company  has  implemented  an
Electronic Data Interchange (EDI) Quick Response  Replenishment  System by which
customer  orders are  facilitated in seven working days. This system requires an
inventory  of basic items that are  excluded  from the "just in time"  inventory
program.  Higher  levels of inventory  are required to operate a quick  response
replenishment  program.  Such levels of inventory are needed as sales orders are
generally  received and shipped within a seven day period.  Other than the above
EDI Quick Response  Replenishment System, the Company practices a "just in time"
manufacturing and purchasing  program.  The Company makes  arrangements with its
manufacturers for delivery  approximately 30 days before the scheduled  shipment
of products to the Company's  customers.  The  objectives of the  Ajust-in-time@
system are to decrease  the  Company's  inventory  risk and to allow the Company
flexibility to react to consumer responses to its products and changing consumer
preferences.  The Company  believes that these  objectives  are currently  being
achieved,  although no assurance can be given that such objectives will continue
to be partially or fully achieved in the future. The Company schedules shipments
from its  manufacturers  in a manner that  accounts for  possible  manufacturing
lateness  and  transport  time from  manufacturers  to the  Company's  warehouse
facilities.  Although  manufacturing  lateness  has not been a  material  factor
through the present date, the inability or  unwillingness  of a manufacturer  to
ship orders of the Company's  products in a timely manner could adversely affect
the Company's  ability to deliver  products to its  customers on time.  Delay in
delivery could result in missing certain  retailing  seasons with respect to all
or some of the  Company's  products,  or could  adversely  affect the  Company's
relationship  with its customers,  which could have a material adverse effect on
the Company's business.

         At December  31, 1996,  the  Company's  backlog of unfilled  orders was
$3,117,892  as  compared to  $2,819,472  as of December  31,  1995.  The Company
expects that  substantially all of its current orders will be shipped within 120
days of the receipt of such orders.  The Company's  backlog can be affected by a
variety of factors, including scheduling of manufacturing,  shipment of products
and customer  preferences.  The Company has an on-line computerized  order-entry
system  which  allows the Company to receive  orders by  computer  and to follow
daily the status of orders received, shipped and unfilled.

                                       7

<PAGE>
SALES AND DISTRIBUTION

         The  Company's  products are  distributed  through  department  stores,
specialty  stores,  sporting  goods stores,  catalog  operations and better mass
merchandisers.  The  Company  distributes  its  products  to  approximately  500
separate  customers in  approximately  20,000 retail  locations  throughout  the
United States and, with respect to the Everlast Products,  Canada. The Company's
products are sold by retailers such as J.C. Penney, Sears,  Burdines,  Mervyn's,
Bloomingdale's,  Macy's,  Lord & Taylor,  Nordstrom,  Robinson's May,  Dillards,
Oshmans,  Sportmart,  Sports Chalet, The Sports Authority and the Army Air Force
Exchange and through catalog operations such as Victoria's Secret, Proactive and
Sears-Canada.  In Canada,  the Company's  products are sold by such retailers as
The Bay, Sears- Canada,  Eaton's,  Sports Experts and Champs. For the year ended
December 31, 1995, two customers  accounted for  approximately 28% of sales, and
for the year ended December 31, 1996 two customers  accounted for  approximately
24% of sales.  The  Company's  strategy  is to expand its  network of  retailers
carrying the Company's products, and is focused on department stores,  specialty
stores, sporting goods stores, catalog operations and better mass merchandisers.

         The Company currently has five in-house sales  representatives.  George
Horowitz, President and Chief Executive Officer, and Rita Cinque, Executive Vice
President,  of the Company, manage these representatives and coordinate sales to
customers.  The Company works closely with its sales  representatives  to ensure
that  a  consistent  and  unified  image  of the  Company  is  projected  to its
customers.

         The Company  cooperates  with major  retailers to gauge  promptly which
styles are the most  popular and to track  consumer  preferences  regarding  the
Company's  products.  Based upon its market data, as well as information  gained
from trade shows,  the Company  attempts to shift its production  orders towards
styles  that are most  popular,  which  shift may take up to a maximum  of eight
weeks.  Many of the retail stores offering the Company's  products rely upon the
Company's  market  information  and solicit the Company's  advice  regarding the
products and quantities to order.  Additionally,  most of the Company's products
are manufactured in the United States,  reducing, in many instances,  the amount
of time  between  orders  placed  by the  Company  with  its  manufacturers  and
shipments  by  such   manufacturers.   The  Company  believes  that  its  market
information  gathering  and shifting in production  efforts  toward more popular
styles also reduces inventory risk.

         During Fiscal 1995,  foreign sales  accounted for 9.1% of the Company's
net sales, all of which were in Canada, and during 1996, foreign sales accounted
for 7.7% of the Company's net sales, all of which were also in Canada.

         Consistent  with  industry  practice,  the  Company  generally  accepts
returns of any products with defects in materials or workmanship or which do not
otherwise  meet the quality  standards of the Company or its customers for up to
30 days. The Company believes that it has experienced  historical  return levels
that are better than the industry  norms of 3% to 5%,  although no assurance can
be given that such levels can be sustained.  Chargebacks are deductions from the
purchase price with or without the Company's  consent,  taken by customers which
may or may not be justified  or which may be taken  pending the receipt from the
Company of additional  information  concerning  the order.  Chargebacks  have an
adverse  effect on the Company's  business and results of operations  since they
reduce  overall  gross profit  margins on sales of the Company's  products.  The
Company  experienced  chargeback levels of approximately 3.3% during 1996, which
is  consistent  with the  industry  norms  of 3% to 5%.  In  1995,  the  Company
experienced  chargeback levels of approximately  3.9%. No assurance can be given
that such levels can be maintained.

                                       8
<PAGE>

QUALITY CONTROL

         Because the Company emphasizes the fit,  performance and quality of its
products,  the Company places high priority on quality control.  The Company has
established  stringent  quality  control  procedures  under which  domestic  and
international production of the Company's products at independent  manufacturing
locations  is  inspected  by agents of the  Company  who visit each  independent
manufacturing  contractor at such frequency as is necessary to ensure compliance
with the Company's specifications and delivery requirements and in order to meet
the Company's shipping schedules.  Prior to manufacture in large quantities, the
Company  receives samples of its products for  investigation,  and if necessary,
alteration.  The Company  performs  various  tests,  including fit tests on live
models, to ensure that the product meets specifications prior to the shipping of
product  by  the  Company.   In  addition,   senior  employees  of  the  Company
periodically  personally  inspect  the  manufacturing  process  and  quality  of
products.

         The  Company  believes  that its  relationships  with  its  warehouses,
customs  brokers and  international  consolidators  are an important part of its
quality  control  program.  The  Company  views  its  service  organizations  as
important resources in maintaining high standards for its products and assisting
in the reliable and timely delivery of its products to its retail customers.

COMPETITION

         The apparel industry is highly competitive.  The Company's  competitors
include apparel  manufacturers of all sizes, many of whom have greater financial
and manufacturing  resources than the Company.  The Company believes that it has
been able to compete in the brand name women's  activewear and sportswear market
because of the high brand name  recognition,  high quality and  affordability of
its products.  The Company's products may also compete with lower-priced women's
and girls' activewear and sportswear products which may or may not be brand name
products.  The Company believes that its principal competitors in the brand name
women's activewear and sportswear industry are Nike, Reebok,  Adidas,  Fila, The
Weekend  Exercise  Company  and  Danskin.  Competition  in  the  activewear  and
sportswear segment of the apparel industry is based on price,  design,  quality,
name  recognition  and the  ability to  respond  quickly  to  changing  consumer
preferences.

CANADIAN BRANCH

         The Company has a Canadian branch (A.A.G. Vetements-Amerique Inc.) that
markets the Everlast  Products in Canada. In September 1993, the Company engaged
a consultant  ("Canadian  Consultant")  pursuant to a consulting  agreement (the
"Consulting  Agreement")  to assist the  Company in the sale,  distribution  and
marketing of the Everlast  Products in Canada  through such branch.  The initial
term of the Consulting  Agreement  expired on December 31, 1996, but was renewed
for a one-year  period  pursuant  to a  provision  in the  Consulting  Agreement
providing for  automatic  renewal for  successive  one-year  periods  unless the
Company  gives  notice of  termination  or if the Everlast  License  relating to
Canada is  terminated  or  otherwise  ceases  to be in  effect.  The  Consulting
Agreement  provides for the payment to the Canadian  Consultant of an annual fee
of U.S. $60,000, plus designated commissions based,  generally, on the Company's
net sales and pre-tax profits in Canada, and reimbursement of expenses.

         During Fiscal 1995, net sales from operations in Canada aggregated U.S.
$1,352,266,  and during fiscal 1996 such net sales  aggregated U.S.  $1,273,286.
With the exception of exchange rate  fluctuations,  the Company does not believe
that the  Canadian  operations  are  subject  to risks  which are  significantly
different from domestic  operations.  The Company does not believe that exchange
rate fluctuations have

                                       9

<PAGE>
had a material adverse effect on the Company's  results of operations,  although
there can be no assurance that such  fluctuations,  with respect to its Canadian
operations,  will not have a material adverse effect on the Company's results of
operations in the future.

EMPLOYEES

         As of March 6, 1997,  the  Company had 24  employees,  all of whom were
employed by the  Company on a  full-time  basis.  In  addition,  the Company may
employ  additional  full-time  and part-time  employees in  connection  with the
design,  marketing  and  sale of its  products  as and if the need  arises.  The
Company currently hires temporary employees from time to time as needed. None of
the Company's employees is covered by a collective bargaining agreement, and the
Company considers its relations with its employees to be satisfactory.

ITEM 2.  PROPERTIES

         The Company  leases its principal  executive  offices in New York City.
The original lease provides for an annual base rent of $98,529  through  January
31, 1997, and for an annual base rent of $93,672  starting  February 1, 1997 and
expiring January 31, 2000. This space, which occupies approximately 3,981 square
feet,  also  includes a showroom for the Everlast  Products.  In July 1994,  the
Company  increased  the space it leases at its offices in New York City by 2,523
square feet to establish a showroom for its Converse Products and to accommodate
additional  employees.  Such lease  provides for an annual base rent of $57,902,
became effective  October 1, 1994 and expires January 31, 2000. In January 1996,
the Company increased the space it leases at its offices in New York City by 656
square feet to  accommodate  additional  employees.  Such lease  provides for an
annual  base rent of  $15,055,  became  effective  January  1, 1996 and  expires
January 31, 2000. The Company leases  approximately  1,200 square feet of office
and  showroom  space in  Montreal,  Canada  at an annual  base  rent of  $18,000
Canadian Dollars. The lease expires in April 1997. The Company expects the lease
to be renewed on similar terms.

         The Company  believes that its existing  facilities will be adequate to
meet its needs for the  foreseeable  future.  In the event the Company  requires
additional  facilities in the future, the Company believes additional facilities
would be available at commercially reasonable rates.

ITEM 3.  LEGAL PROCEEDINGS

   (a)   The Company is not a party to any material litigation.
   (b)   No legal  proceedings  were  terminated  during the  fiscal  year ended
         December 31, 1996.

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

         No matters were submitted to a vote of security holders during the last
quarter of 1996.

                                       10

<PAGE>

                                     PART II

ITEM 5.  MARKET FOR  REGISTRANT'S  COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

MARKET INFORMATION

         The  Company's  common  stock has been  quoted on the  Nasdaq  National
Market since August 14, 1996 under the symbol "AAGP".  Previously, the Company's
common stock had been quoted on the Nasdaq Small Cap Market  (since May 4, 1995)
under the same symbol. The following table sets forth, for the period indicated,
the highest and lowest bid quotations for the common stock, $.002 par value (the
"Common Stock"), as reported by the Nasdaq system.

                                    1995
                        HIGH                         LOW
                        ----                         ---
1st Quarter             N/A                          N/A
2nd Quarter(1)          10 1/2                        7 1/4
3rd Quarter             11 1/4                        9 3/4
4th Quarter             13 1/4                       11 1/4

                                    1996
                        HIGH                         LOW
                        ----                         ---

1st Quarter             15 1/4                       12 1/2
2nd Quarter             15 1/4                       13 13/16
3rd Quarter             14 3/4                       13 3/4
4th Quarter             15 1/2                       14

                                    1997
                        HIGH                         LOW
                        ----                         ---
1st Quarter(2)          15 9/16                      14 3/4

(1) Starting from May 4, 1995
(2) Through March 6, 1997.

HOLDERS

      As of  February  25, 1997 there were 110 record  holders of the  Company's
Common  Stock  (this  number  does  not  include  an  indeterminate   number  of
stockholders  whose shares are held by brokers in "street name"), and one record
holder of the  Company's  Class A Common  Stock,  $.01 par value  (the  "Class A
Common  Stock").  Based  upon  information  received  from some of these  record
holders,  the Company believes there are more than 400 beneficial holders of the
Company's Common Stock.

DIVIDENDS

      The Company has never paid  dividends  on its Common  Stock or its Class A
Common Stock. The Company anticipates that, for the foreseeable future, earnings
will be retained for use in its business and does not  anticipate the payment of
dividends.

                                       11

<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         THIS REPORT ON FORM 10-KSB  CONTAINS  FORWARD-LOOKING  STATEMENTS  THAT
INVOLVE  RISKS AND  UNCERTAINTIES.  THE  COMPANY'S  ACTUAL  RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING  STATEMENTS.  FACTORS
THAT MAY CAUSE SUCH DIFFERENCES  INCLUDE,  BUT ARE NOT LIMITED TO, THE COMPANY'S
EXPANSION INTO NEW MARKETS, COMPETITION, TECHNOLOGICAL ADVANCES AND AVAILABILITY
OF MANAGERIAL PERSONNEL.


GENERAL

         The Company is a designer,  marketer and supplier of women's activewear
and sportswear,  and unisex  activewear and  accessories.  The Company sells its
principal product  collections under the EVERLAST,  CONVERSE and MTV brand names
through   exclusive   licensing   arrangements.   The  Company's   products  are
manufactured by third party independent  manufacturing  contractors and are sold
to approximately 500 separate accounts, representing approximately 20,000 retail
locations  throughout  the United  States  and  Canada,  including  a variety of
department stores,  specialty stores,  sporting goods stores, catalog operations
and better mass merchandisers.

         On May 4, 1995 the  Company  completed  an initial  public  offering of
640,000  shares of Common  Stock at $6.25 per share.  Proceeds  to the  Company,
after deducting initial public offering costs of $319,180, were $3,680,820.

         The financial  statements of the Company and the notes thereto  contain
detailed  information  that  should  be  referred  to in  conjunction  with this
discussion.

RESULTS OF OPERATIONS

         YEAR END 1996 COMPARED TO YEAR END 1995

         Net sales increased to $16,377,529 for the year ended December 31, 1996
from $14,781,208 for the year ended December 31, 1995, an increase of $1,596,321
or 10.8%.  This increase was principally  attributable to increased sales volume
of the Company's  products,  continued market  penetration and acceptance of the
Company's products and increased orders from established  accounts.  In 1996 the
Company experienced an increase in net sales in each of the four quarters versus
comparable 1995 periods.

         Gross profit  increased to $6,186,613  for the year ended  December 31,
1996 from  $4,895,597  for the year ended  December  31,  1995,  an  increase of
$1,291,016  or 26.4%.  Gross profit  increased  as a percentage  of net sales to
37.8% from 33.1%.  This  increase as a percentage of net sales was primarily due
to the Company's ability to maintain normal gross profit margins on sales of its
products.

         Selling and  shipping  expenses  increased to  $3,089,749  for the year
ended December 31, 1996 from $2,255,884 for the year ended December 31, 1995, an
increase of $833,865 or 37.0%.  Selling and shipping expenses as a percentage of
net sales  increased to 18.9% from 15.2%.  This  increase as a percentage of net
sales was primarily  attributable  to an increase in advertising and promotional
expenditures and additional employees. Management believes its marketing efforts
have  helped  create  a  stronger  brand  awareness  and  increased  the  market
penetration of its products.

                                       12

<PAGE>

         General and  administrative  expenses  increased to $1,723,258  for the
year ended  December 31, 1996 from  $1,473,381  for the year ended  December 31,
1995, an increase of $249,877 or 17.0%. General and administrative expenses as a
percentage  of net  sales  increased  to 10.5%  from  9.9%.  The  increase  as a
percentage of net sales was  primarily  attributable  to an increased  number of
employees  for the year ended  December 31, 1996 versus the year ended  December
31, 1995 in order to facilitate the Company's continued growth.

         Financial  expenses  decreased to $291,880 for the year ended  December
31, 1996 from  $480,663  for the year ended  December  31,  1995,  a decrease of
$188,783 or 39.3%.  This decrease was primarily  attributable to the decrease in
the Company's  net  borrowings  for the year ended  December 31, 1996 versus the
year ended December 31, 1995. Of the total financial expenses,  interest expense
decreased to $27,767 for the year ended  December 31, 1996 from $255,964 for the
year ended December 31, 1995. Such decrease is due to reduced  borrowings  under
the credit  facility  (the  "Century  Facility")  with Century  Business  Credit
Corporation  ("Century")  primarily  due to  proceeds  from the  initial  public
offering.

         Operating  income  increased to $1,081,726  for the year ended December
31, 1996 from  $685,669 for the year ended  December  31,  1995,  an increase of
$396,057 or 57.8% for the reasons stated above. Operating income as a percentage
of net sales was 6.6% for the year ended  December  31, 1996 as compared to 4.6%
for the year ended December 31, 1995.

         The Company  earned $21,367 in other income for the year ended December
31, 1996  compared to $135,139 for the year ended  December 31, 1995, a decrease
of $113,772.  In 1995,  $94,924 of other income represents an insurance recovery
relating to the theft of certain merchandise at its Canadian branch.

         The Company  incurred a tax  provision  of $391,845  for the year ended
December  31, 1996 as  compared to a tax  recovery of $24,271 for the year ended
December 31, 1995.  In 1996 the Company had  remaining  only $338,000 of its net
operating loss carryforward to offset taxable income,  compared to 1995 when the
Company was able to  completely  offset  income  before  taxes by use of the net
operating loss carryforward.

         The Company thus had net income of $711,248 for the year ended December
31, 1996 as  compared  to  $845,079  for the year ended  December  31,  1995,  a
decrease of $133,831 or 15.8% for the reasons stated above.

         1997 OUTLOOK

         The retail environment,  particularly as it relates to apparel, in both
the United  States and Canada is expected  to  continue to be weak.  Speculation
remains that further consolidation will continue. Additionally, competition from
other  branded  companies  is  expected to  intensify.  Despite  these  factors,
management  believes  significant  opportunities  exist to allow  for  continued
growth over the next year,  although no assurance  can be given that such growth
will occur.  The addition of the MTV Products to the  Company's  product mix has
been well  received to date and both the  Converse and  Everlast  Products  have
continued to increase market penetration.

LIQUIDITY AND CAPITAL RESOURCES

         On May 4, 1995,  the Company  completed an initial  public  offering of
640,000  shares of Common  Stock at $6.25 per share.  Proceeds  to the  Company,
after deducting initial public offering costs of

                                       13

<PAGE>

$319,180, were $3,680,820.  Upon completion of the offering, the Company applied
$3,600,000  of the net  proceeds  towards  its loan  balance  under the  Century
Facility while the balance was applied to general working capital.

         Net cash provided by (used for) operating activities for the year ended
December  31,  1996 was  $360,249  compared to  ($2,864,839)  for the year ended
December 31, 1995.  This increase was primarily  attributable  to an increase in
the funds held at the factor at  December  31, 1995 as the result of the initial
public  offering.  Net cash used for  investing  activities  for the year  ended
December 31, 1996 was $206,639  compared to $59,363 for the year ended  December
31, 1995.  Net cash provided by (used for)  financing  activities was ($124,713)
for the year ended  December 31, 1996 compared to $3,036,520  for the year ended
December 31, 1995.  This  decrease was primarily  attributable  to the Company's
initial public offering in 1995.

         During the year ended December 31, 1996, the Company's primary need for
funds was to finance working capital,  including inventory,  for the anticipated
growth in net sales of the Company's products.  The Company has relied primarily
upon cash flow from operations and advances drawn against  factored  receivables
to finance its operations and expansion.  At December 31, 1996,  working capital
was  $4,940,176  compared to  $4,755,255  at December 31,  1995,  an increase of
$184,921. This increase was primarily attributable to profitability.

         Due from factor  represents  the amount  receivable  to the Company for
factored  receivables less the amount of outstanding advances made by Century to
the Company under the Century Facility. At December 31, 1996 due from factor was
$2,896,273  as compared  to  $3,287,499  at December  31,  1995.  The  Company's
inventory  increased 55.2% to $2,757,700 at December 31, 1996 from $1,776,583 at
December 31, 1995.

         In June 1994, the Company issued  Convertible  Notes (the  "Convertible
Notes") in an aggregate principal amount of $200,000.  Noteholders had until May
31, 1995 to elect  conversion,  subject to a 15 day grace period. As of December
31,  1995  $50,000  of  principal  and all  accrued  interest  was repaid to the
noteholders. The remaining $150,000 was converted to Common Stock. The number of
shares of Common Stock issued upon the conversion of the  Convertible  Notes was
based upon an average of the  highest  and lowest bid  quotations  of the Common
Stock over a specified period of ten trading days.

         1997 OUTLOOK

         Management  anticipates it will retain a net receivable  position under
the  Century  Facility,  although  no  assurance  to that  effect  can be given.
Positive  cash flow, if it occurs,  will provide for a further  reduction in net
borrowings,  and excess working capital will be sufficient to fund the Company's
anticipated growth over the next 12 months.


ITEM 7.  FINANCIAL STATEMENTS.

         See page 1f.


                                       14

<PAGE>

ITEM 8.  CHANGES  IN  AND  DISAGREEMENT   WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

         On and effective as of May 24, 1995, the Company informed Morgenstern &
Alexander  ("Morgenstern & Alexander"),  certified public accountants,  that the
Board of Directors of the Company  (including the Audit  Committee  thereof) had
decided  not to continue  the  engagement  of  Morgenstern  & Alexander  and had
approved  the  engagement  of  Berenson  &  Company  LLP  as the  Company's  new
independent  certified  public  accountants  ("Berenson") to audit the Company's
financial  statements  (beginning with the fiscal year ending December 31, 1995)
and to assist the Company in the preparation of its annual,  quarterly and other
reports under the Securities Exchange Act of 1934, as amended.

         Morgenstern & Alexander's reports on the financial  statements for each
of the past two fiscal years of the Company ended December 31, 1994 and December
31, 1993,  respectively  ("Applicable Fiscal Years"), did not contain an adverse
opinion or  disclaimer  of  opinion,  and were not  qualified  or modified as to
uncertainty,  audit scope or accounting principles. During the Applicable Fiscal
Years and during the  interim  period  since  December  31,  1994,  there was no
disagreement  between the Company and  Morgenstern  & Alexander on any matter of
accounting  principles or practices,  financial statement disclosure or auditing
scope or procedure,  which disagreement,  if not resolved to the satisfaction of
Morgenstern & Alexander, would have caused it to make a reference to the subject
matter of the disagreement in connection with its reports.

         In connection  with a Form 8-K filed by the Company with the SEC on May
24, 1995,  Morgenstern  & Alexander  agreed with the Company's  statements  that
there were no other reportable  events or disagreements to report in response to
Item  304(a) of  Regulation  S-B,  while  noting that it had not  performed  any
accounting  functions or assisted the Company for any financial  statements  for
any periods subsequent to December 31, 1994.

         PART III

ITEM 9.  DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL   PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         The Company's executive officers and directors are as follows:

NAME                   Age              Position

George Horowitz        46      President;  Chief Executive Officer;  Chairman of
                               the Board; Treasurer; Director(1)
James Anderson         60      Vice Chairman of the Board; Director(1)(2)
Donald J Horowitz      61      Legal   Counsel;   Director;   Secretary  of  the
                               Board(1)
Rita Cinque            31      Executive  Vice   President;   Secretary  of  the
                               Company; Director(3)
Larry Kring            56      Director(2)(3)
Edward Epstein         57      Director(2)(3)
Angelo Giusti          46      Director(2)

                                       15
<PAGE>

(1) Member of the Executive Committee of the Board of Directors
(2) Member of the Compensation Committee of the Board of Directors
(3) Member of the Audit Committee of the Board of Directors

         MR. GEORGE HOROWITZ has been the President,  Chief  Executive  Officer,
Treasurer and a director of the Company since its inception in July 1992.  Since
January,  1996 he has been  Chairman of the Board.  From October 1990 to January
1993,  Mr.  Horowitz was  President  and a director of Total  Impact,  Inc.,  an
activewear  apparel company in New York City. From March 1976 to March 1990, Mr.
Horowitz was employed by Golden Touch Imports, Inc. (AGolden Touch@), an apparel
company in New York City, where he served as Vice President-Operations and was a
shareholder  of that  company.  He is currently  serving on the Fitness  Apparel
Council as an industry advisor of the Sporting Goods Manufacturers  Association.
Mr. Horowitz is the brother of Donald Horowitz, the Legal Counsel and a director
of the  Company,  and the  uncle  of  Russell  Horowitz,  Director  of  Investor
Relations of the Company.

         MR.  ANDERSON has been a director of the Company  since August 1992 and
was  Chairman  of the Board from  January  1994  through  December  1995.  Since
January,  1996 he has been Vice-Chairman of the Board. Since August 1996, he has
been Managing Partner of Millenium Venture Management LLC, and CEO of Compucolor
LLC, an anti-graffiti  company. From July 1987 he was a management consultant in
restructuring  businesses.  From 1981 to 1987, he was President of Pacific First
Financial Corp. and Pacific First Federal Savings Bank, and in 1984, also became
chairman  of the board and CEO of each  company.  He has served on the boards of
directors of numerous business, civic, arts and educational organizations and is
a member of the Whitman College Board of Overseers.  He is currently a member of
the Board of Directors of HERS Interactive,  Inc. a software publishing company,
the Washington Hospital Insurance Fund and the Washington Casualty Company.

         MR.  DONALD J HOROWITZ has been a director of the Company  since August
1992,  General  Counsel of the Company from  September 1994 through August 1996,
and Legal Counsel of the Company since  September  1996. Mr. Horowitz has been a
Superior Court Judge of the State of  Washington,  a Senior  Assistant  Attorney
General of the State of  Washington  and a law school  adjunct  professor.  From
January  1977 to June  1990,  Mr.  Horowitz  was a  partner  in the law  firm of
Levinson,  Friedman,  Vhugen, Duggan, Bland & Horowitz, and since July 1990, has
been Of Counsel to the law firm of DeFunis & Balint. Mr. Horowitz also serves as
a mediator and arbitrator. He has served on numerous governmental,  business and
civic boards and commissions.

         MS.  CINQUE has been  Executive  Vice  President  and a director of the
Company since May 1994.  From April 1993 to May 1994,  she was Vice  President -
Operations,  of the Company, and from August 1992 to April 1993, she served as a
consultant to the Company in operations management. From November 1990 to August
1992,  Ms.  Cinque was the  President of ITEW,  Ltd.,  a  management  consulting
company in the apparel industry.  In 1986, she was a founding member of Women in
International  Trade, an organization to promote  international trade, where she
served as a director from January 1990 to January 1993.

         MR. KRING has been a director of the Company since January 1993 and has
served as  Vice-Chairman  of the Board of Directors  since January  1994.  Since
August 1993, Mr. Kring has been a Group

                                       16
<PAGE>

Vice  President  of  Esterline  Technologies,   a  diversified  instrumentation,
equipment  and  component  manufacturing  company  listed on the New York  Stock
Exchange and located in Bellevue,  Washington.  From July 1978 to July 1993, Mr.
Kring was the President  and Chief  Executive  Officer of Heath Tecna  Aerospace
Company,  a  manufacturer  of aircraft  interior and aerospace  components and a
division of Ciba-Geigy Corporation.

         MR.  EPSTEIN has been a director  since January 1, 1996. Mr. Epstein is
an  attorney  admitted to practice  law in both New York and  Florida.  He is an
experienced litigator, and has represented clients in all aspects of the garment
industry  for 29 years.  He is a member of the bars of the Supreme  Court of the
State of Florida,  the Supreme  Court of the State of New York,  various  United
States  District  Courts and the United  States  Court of Appeals for the Second
Circuit.  He is a  member  of the  Commercial  Panel  of  Arbitrators,  American
Arbitration   Association,   the  New  York  State  Trial  Lawyers  Association,
Association  of Trial  Lawyers  of  America  and the  Florida  Academy  of Trial
Lawyers.


         MR. GIUSTI has been a director  since  January 3, 1997.  Since 1984 Mr.
Giusti has been President of Universal Business Forms, a printing concern in New
York  City.  From 1978 to 1984,  Mr.  Giusti  was Sales  Manager in New York for
Uarco,  a national  printing  company.  Mr. Giusti has served on many  community
boards and  activities.  He was a New York City Public School  teacher,  and has
remained active in local education and in youth sports activities.  He currently
is President of the Holmdel (Jersey shore) Pop Warner Football League.

         SECTION 16(A) REPORTING.  Section 16(a) of the Securities  Exchange Act
of 1934 as amended, requires the Company's directors and executive officers, and
persons who own more than ten percent of the  Company's  Common  Stock,  to file
with the  Securities  and Exchange  Commission  (the ASEC@)  initial  reports of
ownership of Common Stock and other equity securities of the Company.  Officers,
directors  and  greater  than  ten  percent  stockholders  are  required  by SEC
regulation to furnish the Company' with copies of all Section 16(a) reports they
file. To the Company's  knowledge,  based solely on review of the copies of such
reports  furnished to the Company during the fiscal year ended December 31, 1996
all required  Section  16(a) filings by  beneficial  owners were complied  with,
except that on February 10, 1997 James  Anderson  filed a Form 5 relating to the
conversion of 3,000 shares of preferred stock to 3,000 shares of common stock in
July 1996.

ITEM 10.  EXECUTIVE COMPENSATION

        The following Summary  Compensation Table sets forth certain information
concerning  total annual  compensation  paid to George  Horowitz,  the Company's
President,  Chief Executive Officer and Treasurer and Rita Cinque, the Company's
Executive  Vice President and Secretary (the "Named  Executive  Officers"),  for
services  rendered in all  capacities by them to the Company during fiscal years
1996, 1995, and 1994.

                                       17

<PAGE>
                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>



                                                               ANNUAL COMPENSATION
                                                ----------------------------------------------------

            Name and                                                                   Other Annual              All Other
            --------
       Principal Positions         Year          Salary ($)        Bonus ($)         Compensation ($)         Compensation ($)
      --------------------         ----          ----------        ---------         ----------------         ----------------

<S>            <C>                 <C>            <C>             <C>                       <C>                   <C>
George Horowitz(1)                 1996           250,000         24,000(2)                 18,635(3)             560(6)
  (President; Chief                1995           165,000         15,000                    20,336(4)             469(6)
  Executive Officer;               1994           112,500              0                    12,940(5)             384(6)
  Treasurer)

Rita Cinque(1)                     1996           125,000         16,000(2)                 12,155(7)             0
 (Executive Vice President;        1995            98,077         10,000                    11,364(8)             0
Secretary)                         1994            56,812              0                     9,266(9)             0
</TABLE>

----------------------
(1)     Other than Mr. George Horowitz and Rita Cinque no officer of the Company
        was paid more than $100,000 in total salary and bonus for the year ended
        December 31, 1996,  and  accordingly,  no other officers are included in
        the table above.

(2)     The  Company  has  agreed  to pay the  amount  of tax owed on the  bonus
        payment noted in the column above.

(3)     Consists of an aggregate of $18,635 paid to or on behalf of Mr. Horowitz
        by the  Company  in Fiscal  1996 in  connection  with  automobile  lease
        installment payments ($13,659),  related insurance premiums ($2,176) and
        parking expenses ($2,800).

(4)     Consists of an aggregate of $20,336 paid to or on behalf of Mr. Horowitz
        by the  Company  in Fiscal  1995 in  connection  with  automobile  lease
        installment payments ($13,659),  related insurance premiums ($1,184) and
        parking expenses ($2,800).

(5)     Consists of an aggregate of $12,940 paid to or on behalf of Mr. Horowitz
        by the  Company  in Fiscal  1994 in  connection  with  automobile  lease
        installment  payments  ($8,416),  related insurance  premiums ($504) and
        parking expenses ($4,020).

(6)     Represents premiums paid by the Company in Fiscal 1996, 1995 and 1994 on
        term life insurance policies for the benefit of Mr. Horowitz.

(7)     Consists of an aggregate  of $12,155 paid to or on behalf of Ms.  Cinque
        by the  Company  in Fiscal  1996 in  connection  with  automobile  lease
        installment  payments ($5,134),  related insurance premiums ($4,216) and
        parking expenses ($2,805).

(8)     Consists of an aggregate  of $11,364 paid to or on behalf of Ms.  Cinque
        by the  Company  in Fiscal  1995 in  connection  with  automobile  lease
        installment  payments ($5,624),  related insurance premiums ($1,775) and
        parking expenses ($3,965).

                                       18
<PAGE>

(9)     Consists of an aggregate of $9,266 paid to or on behalf of Ms. Cinque by
        the  Company  in  Fiscal  1994  in  connection  with  automobile   lease
        installment  payments  ($4,395),  related insurance  premiums ($972) and
        parking expenses ($3,900).

LONG-TERM INCENTIVE AND PENSION PLANS

        The Company  currently  has no long-term  incentive  or defined  pension
plans. The Company is the beneficiary of Akey-executive@ life insurance policies
on George Horowitz and Rita Cinque in the amounts of $12,000,000 and $4,500,000,
respectively.

                        OPTION GRANTS IN LAST FISCAL YEAR

                    Number of     % of Total
                    Securities    Options
                    Underlying    Granted to      Exercise
                    Options       Employees in    Price -    Expiration
Name                Granted       Fiscal Year     $/Share    Date
----                -------       -----------     -------    ----

George Horowitz     25,000(1)         46%          $14.25    November 7, 2006
CEO, President

Rita Cinque         15,000(2)         27%          $14.75    December 13, 2006
Executive Vice
President

(1) The options set forth herein were granted on November 7, 1996.  One third of
    the options  vest on  November 7, 1997,  one third vests on November 7, 1998
    and the balance vests on November 7, 1999.

(2) The options set forth herein were granted on December 13, 1996. One third of
    the options vest on December 13, 1997,  one third vests on December 13, 1998
    and the balance vests on December 13, 1999.

COMPENSATION OF DIRECTORS

         As  compensation  for  their  services  as  directors  of the  Company,
effective January 1, 1995 non-employee  directors of the Company receive options
to  purchase  the  Company's   common  stock  pursuant  to  the  Company's  1995
Non-Employee  Director Stock Option Plan. The plan provides for annual automatic
grants of options to  purchase  3,000  shares of common  stock to each  director
serving  at the time of the  grant  who is not an  officer  or  employee  of the
Company. The Chairman and Secretary of the Board (provided they are not officers
or  employees of the  Company)  also  receive an  automatic  grant of options to
purchase an additional 200 shares, and the chair of a Board committee  (provided
he or she is not an  officer  or  employee  of the  Company)  also  receives  an
automatic  grant of options to purchase an additional  100 shares.  The exercise
price per share for all such  options is the fair market  value of the shares of
common stock covered by the option on the date of grant of such option. The term
of each  option is seven years from the date of grant,  and the options  vest in
three equal  installments on the first,  second and third  anniversaries  of the
date of grant. Directors also receive reimbursement of expenses incurred by them
in  performing  their  duties and in attending  Board  meetings,  provided  such
expenses are reasonable

                                       19

<PAGE>


and evidenced by appropriate documentation.

EMPLOYMENT CONTRACTS

GEORGE  HOROWITZ.  The Company and George  Horowitz are parties to an employment
agreement,  dated as of August 1, 1994 (the  "Agreement")  pursuant to which Mr.
Horowitz serves as the President and Chief Executive Officer of the Company, for
which Mr.  Horowitz  was paid an annual base  salary of $125,000  from August 1,
1994 through  December 31, 1994,  $165,000 from January 1, 1995 through December
31, 1995, $250,000 from January 1, 1996 through December 31, 1996 and is paid an
annual  base  salary of  $265,000  commencing  January  1,  1997 and  continuing
thereafter  through  the  Term  (as  defined  below)  of the  Agreement,  unless
increased by the Board of  Directors  on an annual  basis  during the Term.  The
initial term of the Agreement expires on July 31, 2000 but continues  thereafter
for additional  one-year periods unless either Mr. Horowitz or the Company gives
the  other  ninety  days'  prior  written  notice of  non-renewal  (as and if so
extended, the "Term"). At the discretion of the Board of Directors,  the Company
may also pay Mr.  Horowitz  a cash  bonus on or before  December  31 of any year
during the Term.  In addition to such base salary and  contingent  cash bonuses,
Mr. Horowitz is entitled to receive an automobile  allowance which on August 12,
1996 was  modified  from $12,000  annually to  reimbursement  for an  automobile
commensurate  with  his  position  and  duties  with  the  Company  (to  include
appropriate  insurance),  reimbursement  for parking expenses which was modified
from a limit of $6,000  annually to such amount as is reasonably and customarily
charged in the area of the  Company's  principal  offices,  health  and  medical
insurance and is entitled to participate in any retirement,  life and disability
insurance,  dental insurance and any bonus,  incentive or  profit-sharing  plans
which the  Company  makes  available  from time to time to its  executives.  Mr.
Horowitz  is  also  entitled  to  receive   reimbursement   of  all   reasonable
out-of-pocket  expenses that he actually  incurs  relating to his services under
the Agreement.

         The Agreement also restricts,  generally,  Mr. Horowitz from disclosing
certain confidential  information obtained by Mr. Horowitz during the Term for a
period of three years  following the  termination or expiration of the Term, and
further  restricts  Mr.  Horowitz  from  competing  with the Company  (including
soliciting the Company's employees or agents) for a period of one year following
the  expiration or  termination  of the Term. The Agreement may be terminated by
the Company "for cause" (as defined in the Agreement),  and in the event of such
termination,  or in the event of the voluntary resignation by Mr. Horowitz,  the
obligations  of the Company  under the  Agreement  will  terminate  (except with
respect   to  certain   indemnification,   confidentiality   and   "non-compete"
provisions).  In the event of the  termination of the Agreement by reason of Mr.
Horowitz's death, his estate is entitled to receive an amount equal to twice his
then-current  base salary (which,  in the case of Mr.  Horowitz's  death, may be
funded, wholly or partially, by a life insurance policy paid for by the Company,
at its  option).  If the  Agreement  is  terminated  for reasons  other than Mr.
Horowitz's  death,  voluntary  resignation or Afor cause,@ Mr.  Horowitz will be
entitled to receive an amount equal to twice his then-current base salary,  plus
all  other  amounts  due to him  under the  Agreement  through  the date of such
termination.

RITA CINQUE. The Company and Rita Cinque are parties to an employment agreement,
dated as of August 1, 1994,  pursuant to which Ms.  Cinque  serves as  Executive
Vice  President  of the  Company,  for which Ms.  Cinque was paid an annual base
salary of $70,000  from August 1, 1994 through  December 31, 1994,  $90,000 from
January  1, 1995  through  June 30,  1995,  $105,000  from July 1, 1995  through
December 31, 1995,  $125,000 from January 1, 1996 through December 31, 1996, and
is paid an  annual  base  salary  of  $140,000  commencing  January  1, 1997 and
continuing  thereafter  through  the Term (as defined  below) of the  agreement,
unless  increased  by the Board of Directors on an annual basis during the Term.
The  initial  term of such  agreement  expires  on July 31,  1997 but  continues
thereafter  for  additional  one-year  periods  unless  either Ms. Cinque or the
Company gives the other ninety days' prior written

                                       20
<PAGE>

notice of non-renewal (as and if so extended,  the "Term"). At the discretion of
the Board of  Directors,  the Company may also pay Ms. Cinque a cash bonus on or
before  December 31 of any year during the Term. In addition to such base salary
and  contingent  cash  bonuses,  Ms. Cinque is entitled to receive an automobile
allowance of $9,000  annually,  reimbursement  for parking expenses up to $4,800
annually,  health and medical insurance,  and is also entitled to participate in
any retirement,  life and disability insurance,  dental insurance and any bonus,
incentive or profit-sharing plans which the Company makes available from time to
time to its executives. Ms. Cinque is also entitled to receive reimbursement for
all reasonable  out-of-pocket  expenses that she incurs relating to her services
under such agreement.

                                       21


<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

         The following table sets forth certain  information with respect to the
beneficial  ownership of the Company's  Common Stock as of March 6, 1997 for (i)
each of the Company's  directors (ii) each of the Company=s  executive  officers
(iii)  each  stockholder  known to be the  beneficial  owner of more  than  five
percent of any class of the Company's  voting  securities and (iv) all directors
and executive officers as a group:
                                                    Beneficial Ownership
                                                        Common, and
                                                     Class A Common (1)
                                                                 Percentage of
Name and Address of                           Number (2)          Outstanding
Beneficial Owner                              ----------              Stock
----------------                                                      -----


    George Q. Horowitz                         591,628(3)             21.09%
    c/o Active Apparel Group, Inc.
    1350 Broadway, Suite 2300
    New York, NY 10018

    Donald J.  Horowitz                        253,058(4)              9.02%
    800 United Airlines Bldg.
    2033 Sixth Ave.
    Seattle, WA 98121

    James K. Anderson                          158,724(5)              5.66%
    4903 163rd Ave., N.E.
    Redmond, WA 98052

    Rita Cinque                                 85,700(6)              3.06%
    c/o Active Apparel Group, Inc.
    1350 Broadway, Suite 2300
    New York, NY 10018

    Larry Kring                                 35,904(7)              1.28%
    3265 126th Ave., N.E.
    Bellevue, WA 98005

    Edward R. Epstein                            1,000(8)               *
    915 Middle River Drive
    Suite 419
    Fort Lauderdale, FL 33304

    Angelo Giusti                                  400(9)               *
    19 Deer Park
    Holmdel, NJ 07733

All directors and                            1,126,414               40.16%
executive officers as a group (7
persons)

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

(1)  Under rules adopted by the Securities and Exchange Commission,  a person is
     deemed to be a beneficial  owner of  securities  with respect to which such
     person has or shares: (i) voting power, which includes the power to vote or
     direct the vote of the security,  or (ii) investment power,  which includes
     the power to  dispose  of or to direct  the  disposition  of the  security.
     Unless otherwise indicated below, the persons named in the table above have
     sole voting and  investment  power with respect to all shares  beneficially
     owned.

                                       22
<PAGE>

(2)  As of March 6, 1997,  there  were  outstanding  2,452,287  shares of Common
     Stock and 100,000  Class A Common Stock.  The Class A Common  stock,  while
     held by George Horowitz,  as they currently are, entitle George Horowitz to
     five (5) votes for each share held. See "CERTAIN  RELATIONSHIPS AND RELATED
     TRANSACTIONS  - Issuance of Shares of Class A Common  Stock".  Thus,  while
     there are 2,552,287  shares  outstanding  (not  including  any  unexercised
     options) this represents 2,952,287 votes.

(3)  Consists of (i) 479,628 shares of Common Stock (1,000 of which are owned by
     minor  children) (ii) 100,000 shares of  super-voting  Class A Common Stock
     issued to Mr.  George Q.  Horowitz  in July 1995 in  exchange  for  112,500
     shares of Common Stock. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
     - Issuance of Shares of Class A Common  Stock," and (iii) 12,000  shares of
     Common Stock  issuable  upon exercise of options  exercisable  currently or
     within 60 days,  including an option to purchase  2,000 shares at $6.25 per
     share granted by Donald Horowitz,  George Horowitz's brother, which expires
     on December 31, 1999,  and an option to purchase  10,000 shares  granted by
     the Company for $11.75 per share, which expires on November 3, 2005.

(4)  Consists of (i) 180,050  shares of Common  Stock and (ii) 73,008  shares of
     Common Stock  issuable upon the exercise of currently  exercisable  Options
     ("Option  Shares"),  consisting  of: 2,517  Option  Shares  purchasable  at
     exercise  prices  of  $1.75,  $3.00  and  $5.00  per  share  and  having an
     expiration date of December 31, 2004; 4,706 Option Shares purchasable at an
     exercise price of $0.85 per share and having an expiration date of December
     31,  2003;  20,000  Option  Shares  purchasable  at an  exercise  price  of
     approximately  $0.37 per share and  having an  expiration  date of June 30,
     1998; 9,785 Option Shares purchasable at exercise prices of $3.30 and $5.50
     with expiration dates of June 30, 1999 or December 31, 1999,  respectively;
     30,000 Option Shares  purchasable  upon the exercise of Options  granted to
     Mr.  Horowitz  pursuant to the 1994 Donald Horowitz  Employment  Agreement,
     which  Options have an exercise  price of $6.25 and an  expiration  date of
     October  1, 1998;  and an option to  purchase  6,000  shares for $11.75 per
     share,  which expire on November 3, 2005.  See "CERTAIN  RELATIONSHIPS  AND
     RELATED TRANSACTIONS - Donald Horowitz Employment Agreement".  Mr. Horowitz
     shares voting and investment power with Lynda Horowitz, his wife, only with
     respect to 39,400  shares of Common  Stock held.  Of the 180,050  shares of
     Common Stock,  22,500 shares are subject to options granted by Mr. Horowitz
     and his wife during 1995 and 1996 to his children,  and as to 2,000 shares,
     to George  Horowitz,  Donald  Horowitz's  brother  and the Chief  Executive
     Officer of the Company. These options are at $6.25 per share, and expire on
     December 31, 1999.

(5)  Consists of (i) 104,300  shares of Common  Stock and (ii) 54,424  shares of
     Common Stock issuable upon the exercise of currently  exercisable  Options,
     consisting of: 3,356 Option Shares purchasable at exercise prices of $1.75,
     $3.00 $5.00 and $6.25 per share and having an  expiration  date of December
     31, 2004; 4,706 Option Shares purchasable at an exercise price of $0.85 per
     share and having an  expiration  date of December 31, 2003;  28,400  Option
     Shares  purchasable at an exercise price of  approximately  $0.37 per share
     and having an  expiration  date of June 30, 1998;  and 15,830 Option Shares
     purchasable at exercise prices of $3.30 and $5.50 with expiration  dates of
     June 30, 1999 or December  31,  1999,  respectively;  an option to purchase
     1,066  shares of Common  Stock  granted by the  Company on November 3, 1995
     exercisable  at $11.75 per share and which expires on November 3, 2002; and
     an option to purchase  1,066 shares of Common Stock  granted by the Company
     on January  2, 1996  exercisable  at $12.50 per share and which  expires on
     January 2, 2003.  Mr.  Anderson  shares  voting and  investment  power with
     Sandra  Anderson,  his wife,  only with  respect to the  100,000  shares of
     Common Stock held.

                                       23
<PAGE>

(6)  Consists of 78,700  shares of Common Stock and an option to purchase  7,000
     shares  of  Common  Stock  granted  by the  Company  on  November  3,  1995
     exercisable at $11.75 per share and which expires on November 3, 2005.

(7)  Consists of (i) 22,750  shares of Common  Stock and (ii)  13,154  shares of
     Common Stock issuable upon the exercise of currently  exercisable  Options,
     consisting of: 3,356 Option Shares purchasable at exercise prices of $1.75,
     $3.00,  $5.00 and $6.25 per share and having an expiration date of December
     31, 2004; 3,762 Option Shares purchasable at an exercise price of $0.85 per
     share and having an expiration  date of December 31, 2003; and 3,970 Option
     Shares at exercise prices of $3.30 with $5.50 and expiration  dates of June
     30, 1999 or December 31, 1999,  respectively;  an option to purchase  1,033
     shares  of  Common  Stock  granted  by the  Company  on  November  3,  1995
     exercisable  at $11.75 per share and which expires on November 3, 2002; and
     an option to purchase  1,033 shares of Common Stock  granted by the Company
     on January  2, 1996  exercisable  at $12.50 per share and which  expires on
     January 2, 2003.

(8)  Consists  solely of 1,000 shares of Common Stock issuable upon the exercise
     of currently exercisable Options granted by the Company on January 2, 1996,
     exercisable at $12.50 per share and which expires on January 2, 2003.

(9)  Consists solely of 400 shares of Common Stock.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         DONALD HOROWITZ EMPLOYMENT  AGREEMENT.  The Company and Donald Horowitz
(a  director of the  Company)  are  parties to a one year  agreement,  effective
September 1, 1996  pursuant to which Mr.  Horowitz  serves as Legal  Counsel and
advisor to the Company,  for which he is paid, a total base salary of $36,000 in
cash,  payable on a quarterly  basis and Options to purchase 3,200 Option Shares
exercisable  at an amount  equal to the  exercise  price of  options  granted to
non-employee  members of the Board of Directors  for their  service for the year
1997. Mr. Horowitz is also entitled to receive  reimbursement for all reasonable
out-of-pocket expenses that he incurs relating to his services.

         The 1996 Agreement  replaced a previous  Agreement of September 1, 1994
which  expired on September 1, 1996,  pursuant to which Mr.  Horowitz  served as
General  Counsel  of the  Company,  for which he was paid or  granted,  over the
two-year of such agreement, an annual base salary of $45,000 in cash, payable on
a quarterly basis and Options to purchase 30,000 Option Shares exercisable at an
exercise price of $6.25 (which was the public offering price of the Shares).

         RUSSELL  HOROWITZ  AGREEMENT.  The Company and Russell Horowitz have an
agreement,  whereby Mr. Horowitz (who is the son of Donald Horowitz, Counsel and
a  director,  and the  nephew of George  Horowitz,  President,  Chief  Executive
Officer, and a director) as an independent contractor,  provides services to the
Company on a less than full time basis as the Director of Investor  Relations (a
non- executive  officer  position).  Mr. Horowitz is paid $60,000 per annum plus
reimbursement  for all reasonable  out-of-pocket  expenses he incurs relating to
his  services,  and is  entitled to  participate  in such  bonus,  option  plan,
medical,  dental,  life  and  disability  insurance,  as the  Company  may  make
available.  From  September  1,  1995 to  September  1, 1996  (when the  current
arrangement  became  effective),  Mr. Horowitz had the same arrangement with the
Company,  but as a  Company  employee.  Previously,  from  September  1, 1994 to
September 1, 1995, Mr.  Horowitz,  as a full time employee of the Company in the
same position, was paid $90,000 per annum plus reimbursement and benefits as set
forth above.

                                       24

<PAGE>

         1994 BRIDGE FINANCING. In connection with the 1994 bridge financing and
the issuance by the Company of the unsecured  Convertible  Notes, which were due
May 31, 1995 (with a 15 day grace period to June 15, 1995), with interest at the
prime rate plus 2% and were convertible into common stock,  during 1995,  George
Horowitz  acquired from a holder of $15,000 of  Convertible  Notes such holder's
rights to $7,500 of such  Notes and  converted  such  Notes  into 953  shares of
Common Stock based on the applicable formula.

         ISSUANCE OF SHARES OF CLASS A COMMON STOCK.  On May 17, 1995,  pursuant
to  provisions  of the corporate  charter,  the Board of Directors  (without the
participation  of George  Horowitz)  decided to issue 100,000  shares of Class A
Common Stock to George  Horowitz,  the Chief Executive  Officer and President of
the Company in exchange for 112,500 shares of Common Stock.  Mr. Horowitz is the
only holder of Class A Common Stock.  While held by Mr. Horowitz,  each share of
Class A Common  Stock will vote with the Common  Stock and is  entitled  to five
votes on all matters upon which holders of Common Stock are entitled to vote. If
Mr.  Horowitz  sells,  transfers or otherwise  disposes of any shares of Class A
Common Stock  (voluntarily  or  involuntarily),  or if Mr.  Horowitz  dies or is
terminated  by, or resigns  from,  the Company,  from and after the date of such
sale,  transfer,  disposition,  death,  termination or  resignation,  all of the
shares of Class A Common  Stock so sold,  transferred  or disposed of or held by
Mr.  Horowitz  on the  date  of  his  death,  termination  or  resignation  will
automatically  be converted  into that number of shares of Common Stock equal to
112.5% of the number of shares of Class A Common  Stock so sold or  existing  on
such date.

         Mr.  Horowitz,  as holder of the Class A Common  Stock,  is entitled to
receive  ratably  (among other holders of Common Stock) such dividends as may be
declared by the Board of  Directors,  in its  discretion,  out of funds  legally
available  therefore,  and is further  entitled to share  ratably  (among  other
holders of Common  Stock) in any  distribution  of the Company's  assets,  after
payment of all debts and other liabilities of the Company, upon any liquidation,
dissolution  or winding up of the affairs of the  Company.  Mr.  Horowitz has no
preemptive rights, rights to cumulative voting, rights to redeem such shares and
no rights to convert such shares into any other  securities of the Company.  All
shares of Class A Common Stock, upon issuance and delivery to Mr. Horowitz, were
validly issued, fully paid and non-assessable.

         The Board of Directors decided to issue the 100,000 shares of the Class
A Common Stock to Mr. Horowitz in order to permit him to maintain  approximately
the same voting power after the Company's initial public offering of securities,
which  occurred in April and May 1995,  that he held before such  offering.  The
Board of Directors  determined,  for various  business  reasons (in light of the
Company's  relationships with Converse,  Everlast, its suppliers,  and Century),
that it was in the best  interests  of the Company for Mr.  Horowitz to maintain
the voting power and flexibility  that he held before such offering with respect
to the day-to-day management of the Company. In exchange for the shares of Class
A Common Stock issued to Mr. Horowitz,  Mr. Horowitz  surrendered 112,500 shares
of Common Stock,  an exchange ratio  determined to be fair and reasonable by the
Board of  Directors  after an analysis  of various  factors,  including  without
limitation,  other companies with dual classes of outstanding  common stock. The
Company  believes that Mr.  Horowitz did not gain any direct  economic  benefits
solely from his receipt of the Class A Common Stock since he gave up  equivalent
value consisting of the requisite number of shares of Common Stock.

                                       25
<PAGE>
ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

<TABLE>
<CAPTION>

Exhibit                                                            Filed         Incorporated By
Index          Description of Document                           Herewith         Reference to:
-----          -----------------------                           --------         -------------

<S>            <C>                                                               <C>
3(i)           Certificate of Incorporation of the                               Exhibit 3.(i) of Registration
               Company ("Certificate of                                          Statement File No.33-87954 (the
               Incorporation").                                                  "1995 Registration Statement."


3(ii)          Bylaws of the Company.                                            Exhibit 3.(ii) of the 1995
                                                                                 Registration Statement

10.1           Trademark License Agreement, dated as                             Exhibit 10.1 of the 1995
               of May 20, 1994, between Converse                                 Registration Statement
               Inc. and the Company.

10.2           License Agreement, dated as of June 1,                            Exhibit 10.2 of the 1995
               1992 ("Everlast License"), between                                Registration Statement
               Everlast World's Boxing
               Headquarters Corp. ("Everlast") and
               Total Impact, Inc. ("Total Impact").

10.3           First Amendment Agreement to                                      Exhibit 10.3 of the 1995
               Everlast License, dated as of June 1,                             Registration Statement
               1992, between Everlast and Total
               Impact.

10.4           Assignment of Everlast License, dated                             Exhibit 10.4 of the 1995
               as of July 7, 1992, between Everlast                              Registration Statement
               and the Company.

10.5           Consent to Assignment of Everlast                                 Exhibit 10.5 of the 1995
               License, dated as of August 18, 1992,                             Registration Statement
               by Everlast to Total Impact.

10.6           Second Amendment Agreement to                                     Exhibit 10.6 of the 1995
               Everlast License, dated as of January 1,                          Registration Statement
               1993 between Everlast and the
               Company.

10.7           Third Amendment Agreement to                                      Exhibit 10.7 of the 1995
               Everlast License, dated as of November                            Registration Statement
               15, 1993 between Everlast and the
               Company.

10.8           License Agreement (Canada), dated as                              Exhibit 10.8 of the 1995
               of January 1, 1993, ("Canada Everlast                             Registration Statement
               License") between Everlast and the
               Company.

10.9           First Amendment Agreement to Canada                               Exhibit 10.9 of the 1995
               Everlast License, dated as of November                            Registration Statement
               5, 1993, between Everlast and the
               Company.
</TABLE>

                                       26

<PAGE>

<TABLE>
<CAPTION>

Exhibit                                                            Filed         Incorporated By
Index          Description of Document                           Herewith         Reference to:
-----          -----------------------                           --------         -------------

<S>            <C>                                                               <C>

10.10          Consulting Agreement, dated as of                                 Exhibit 10.10 of the 1995
               September 1, 1993, between the                                    Registration Statement
               Company and Michael Bick.

10.11          Buying Agency Agreement, dated as of                              Exhibit 10.11 of the 1995
               December 1, 1992, between the                                     Registration Statement
               Company and D&P Fashion Collections
               Ltd.

10.12          Services Agreement, dated as of July 7,                           Exhibit 10.12 of the 1995
               1992, between the Company and Total                               Registration Statement
               Impact.

10.13          Factoring Agreement, dated as of                                  Exhibit 10.13 of the 1995
               August 21, 1992 and as subsequently                               Registration Statement
               amended, between the Company and
               Century Business Credit Corporation.

10.14          Lease Agreement, dated as of May 16,                              Exhibit 10.14 of the 1995
               1991 ("Lease Agreement"), between                                 Registration Statement
               Total Impact and 1350 Broadway
               Associates.

10.15          Assignment of Lease Agreement, dated                              Exhibit 10.15 of the 1995
               as of September 23, 1992, by Total                                Registration Statement
               Impact to the Company.

10.16          Memorandum of Agreement of Lease,                                 Exhibit 10.16 of the 1995
               dated as of September 27, 1993,                                   Registration Statement
               between the Company and 433 Building
               Corporation.

10.17          Lease, dated as of July 20, 1994,                                 Exhibit 10.17 of the 1995
               between the Company and 1350                                      Registration Statement
               Broadway Associates.

10.18          Lease, dated as of July 21, 1994,                                 Exhibit 10.18 of the 1995
               between the Company and 1350                                      Registration Statement
               Broadway Associates.

10.19          Form of Registration Rights                                       Exhibit 10.19 of the 1995
               Agreement, dated as of August 20,                                 Registration Statement
               1992, between the Company and the
               holders of Preferred Stock.

10.20          Form of Registration Rights                                       Exhibit 10.20 of the 1995
               Agreement, dated as of August 20,                                 Registration Statement
               1992, between the Company and the
               holders of Common Stock.

10.21          Form of Senior Subordinated Notes of                              Exhibit 10.21 of the 1995
               the Company due December 31, 1994.                                Registration Statement

10.22          Form of Non-Negotiable Convertible                                Exhibit 10.22 of the 1995
               Promissory Notes of the Company due                               Registration Statement
               May 31, 1995.
</TABLE>

                                       27
<PAGE>
<TABLE>
<CAPTION>

Exhibit                                                            Filed         Incorporated By
Index          Description of Document                           Herewith         Reference to:
-----          -----------------------                           --------         -------------

<S>            <C>                                                               <C>

10.23          Employment Agreement, dated as of                                 Exhibit 10.23 of the 1995
               August 1, 1994, between the Company                               Registration Statement
               and George Horowitz.

10.24          Employment Agreement, dated as of                                 Exhibit 10.24 of the 1995
               September 1, 1994, between the                                    Registration Statement
               Company and Donald J Horowitz.

10.25          Employment Agreement, dated as of                                 Exhibit 10.25 of the 1995
               August 1, 1994, between the Company                               Registration Statement
               and Rita Cinque.

10.26          Employment Agreement, dated as of                                 Exhibit 10.26 of the 1995
               September 1, 1994, between the                                    Registration Statement
               Company and Rita Cinque.

10.27          Option Agreement, dated as of                                     Exhibit 10.27 of the 1995
               November 23, 1994, between Century                                Registration Statement
               Business Credit Corporation and the
               Company.

10.28          1993 Stock Option Plan of the                                     Exhibit 10.28 of the 1995
               Company.                                                          Registration Statement

10.29          1995 Non-Employee Director Stock                                  Exhibit 10.29 of the 1996 Form
               Option Plan of the Company, adopted                               10-KSB for the year ended
               on October 6, 1995.                                               December 31, 1995

10.30          Amendment to 1993 Stock Option Plan                               Exhibit 10.30 of the 1996 Form
               of the Company, adopted on October 6,                             10-KSB for the year ended
               1995.                                                             December 31, 1995

10.31          Amendment dated October 3, 1995 of                                Exhibit 10.31 of the 1996 Form
               Trademark License Agreement dated                                 10-KSB for the year ended
               May 20, 1994 between the Company                                  December 31, 1995
               and Converse Inc.

10.32          Amendment dated April 28, 1995 to                                 Exhibit 10.32 of the 1996 Form
               amend Lease dated September, 1993                                 10-KSB for the year ended
               between the Company and 433 Building                              December 31, 1995
               Corporation.

10.33          Amendment of Lease, made as of                                    Exhibit 10.33 of the 1996 Form
               November 1, 1995 between the                                      10-KSB for the year ended
               Company and 1350 Broadway                                         December 31, 1995
               Associates.

10.34          Consolidated Amendment Agreement to                               Exhibit 10.1 of the Form 8-K
               Everlast License, dated as of January 1,                          filed on January 17, 1997
               1997 between Everlast and the
               Company.

10.35          Consolidated Amendment Agreement to                               Exhibit 10.2 of the Form 8-K
               Canada Everlast License, dated as of                              filed on January 17, 1997
               January 1, 1997 between Everlast and
               the Company.

</TABLE>

                                       28
<PAGE>

<TABLE>
<CAPTION>

Exhibit                                                            Filed         Incorporated By
Index          Description of Document                           Herewith         Reference to:
-----          -----------------------                           --------         -------------

<S>            <C>                                                   <C>

10.36          Third Amendment to the Trademark                      X
               License Agreement, dated as of January
               7, 1997 between the Company and
               Converse Inc.

10.37          Fourth Amendment to the Trademark                     X
               License Agreement, dated as of January
               22, 1997 between the Company and
               Converse Inc.

10.38          Employment Agreement, dated as of                     X
               September 1, 1996 between the Company
               and Donald Horowitz

10.39          Amendment to Employment                               X
               Agreement, dated as of August 9, 1996
               between the Company and George
               Horowitz

27             Financial Data Schedule                               X

</TABLE>


(b) REPORTS ON FORM 8-K

             No Current Reports on Form 8-K were filed by the Company during the
last quarter of 1996.


                                       29

<PAGE>
      In  accordance  with  Section  13 or  15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.


                                     ACTIVE APPAREL GROUP, INC.


                                     By:/s/ George Horowitz
                                        -------------------
                                        George Horowitz
                                        Chairman and
                                        Chief Executive Officer


Dated: March 31, 1997

        Pursuant to the requirement of the Securities  Exchange Act of 1934 this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.


March 31, 1997                      /s/ George Horowitz
                                    ---------------------------------
                                    George Horowitz (Chairman; Chief
                                    Executive Officer; Chief Financial Officer;
                                    and principal accounting officer)

March 31, 1997                      /s/ James Anderson
                                    ---------------------------------
                                    James Anderson (Director)

March 31, 1997                      /s/ Donald J. Horowitz
                                    ----------------------------------
                                    Donald J. Horowitz (Director)

March 31, 1997                      /s/ Rita Cinque
                                    ----------------------------------
                                    Rita Cinque (Director)

March 31, 1997                      /s/ Larry Kring
                                    ----------------------------------
                                    Larry Kring (Director)

                                    ---------------------------------
                                    Edward Epstein (Director)

                                    ---------------------------------
                                    Angelo Giusti (Director)

                                       30
<PAGE>
                           ACTIVE APPAREL GROUP, INC.


                              FINANCIAL STATEMENTS


                                DECEMBER 31, 1996


<PAGE>


                           ACTIVE APPAREL GROUP, INC.


                                TABLE OF CONTENTS



                                                                         Page
                                                                         ----

Independent Auditors' Report                                                1f


Balance Sheet                                                               2f


Statements of Income                                                        3f


Statements of Changes in Stockholders' Equity                               4f


Statements of Cash Flows                                                    5f


Notes to Financial Statements                                             6f-15f


<PAGE>
                          INDEPENDENT AUDITORS' REPORT


Board of Directors
Active Apparel Group, Inc.
New York, NY


We have audited the accompanying  balance sheet of Active Apparel Group, Inc. as
of  December  31,  1996,  and the  related  statements  of  income,  changes  in
stockholders'  equity,  and cash flows for the years ended December 31, 1996 and
1995.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of Active Apparel Group, Inc. as
of December  31, 1996 and the results of its  operations  and its cash flows for
the years ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.


/s/ BERENSON & COMPANY LLP
--------------------------
BERENSON & COMPANY LLP

New York, NY
January 30, 1997


<PAGE>

                           ACTIVE APPAREL GROUP, INC.                 Page 2f

                                  BALANCE SHEET

                                DECEMBER 31, 1996


                                   A S S E T S

Current assets:
  Cash and cash equivalents                                   $  163,241
  Due from factor                                              2,896,273
  Inventory                                                    2,757,700
  Prepaid royalties                                               52,513
  Prepaid expenses and other current assets                      122,807
                                                              ----------
          Total current assets                                 5,992,534

Note receivable, officer                                         120,000
Property and equipment, net                                      292,777
Security deposits and other assets                               339,968
                                                              ----------

                                                              $6,745,279
                                                              ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                            $  552,858
  Accrued expenses and other current liabilities                 499,500
                                                              ----------
          Total liabilities, all current                       1,052,358
                                                              ----------

Commitments and contingencies

Stockholders' equity:
  Common stock, par value $.002; 10,000,000 shares
   authorized; 2,620,237 issued; 2,447,737 outstanding             5,240
  Class A common stock, par value $.01; 100,000 shares
   authorized; 100,000 shares issued and outstanding               1,000
  Paid-in capital                                              6,054,035
  Retained earnings                                              358,271
                                                              ----------
                                                               6,418,546
  Less treasury stock, at cost (172,500 common shares)          (725,625)
                                                              ----------
                                                               5,692,921

                                                              $6,745,279
                                                              ==========

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

<PAGE>
                           ACTIVE APPAREL GROUP, INC.
                                                            Page 3f
                              STATEMENTS OF INCOME

                                                       Years ended
                                                       December 31,
                                                ---------------------------
                                                  1 9 9 6           1 9 9 5
                                                -----------       ---------

Net sales                                       $16,377,529       $14,781,208

Cost of goods sold                               10,190,916         9,885,611
                                                -----------       -----------

Gross profit                                      6,186,613         4,895,597
                                                -----------       -----------

Operating expenses:
  Selling and shipping                            3,089,749         2,255,884
  General and administrative                      1,723,258         1,473,381
  Financial expenses, including interest
   expense of $27,767; $255,964-1995                291,880           480,663
                                                -----------       -----------

                                                  5,104,887         4,209,928
                                                -----------       -----------

Income from operations                            1,081,726           685,669

Other income                                         21,367           135,139
                                                -----------       -----------

Income before provision (recovery)
 for income taxes                                 1,103,093           820,808

Provision (recovery) for income taxes               391,845           (24,271)
                                                -----------       -----------

Net income                                      $   711,248       $   845,079
                                                ===========       ===========


Primary earnings per share                           $.26              $.37
                                                     ====              ====

Fully diluted earnings per share                     $.26              $.34
                                                     ====              ====


                     The accompanying notes are an integral
                        part of the financial statements.
<PAGE>

                           ACTIVE APPAREL GROUP, INC.

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                     YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>

                                                       9% cumulative
                                                       convertible
                                                       preferred stock                   Common Stock
                                                       ---------------                   ------------
                                                    Shares          Amount           Shares        Amount
                                                    ------          ------           ------        ------

<S>                                                <C>             <C>                <C>           <C>
Balance, December 31, 1994                          600,000        $150,000         1,296,875      $2,714

Initial public offering                                -               -              640,000       1,280

Public offering costs                                  -               -                 -           -

Issuance of Class A common stock
 in exchange for common stock                          -               -             (112,500)       -

Conversion of notes payable                            -               -               19,062          38

Conversion of preferred stock                      (596,000)       (149,000)          596,000       1,192

Net income, year ended December 31, 1995               -               -                 -           -
                                                   --------        --------         ---------      ------

Balance, December 31, 1995                            4,000           1,000         2,439,437       5,224

Stock options exercised                                -               -                5,300          10

Redemption of preferred stock                        (1,000)           (250)             -           -

Public offering costs                                  -               -                 -           -

Conversion of preferred stock                        (3,000)           (750)            3,000           6

Net income, year ended December 31, 1996               -               -                 -           -
                                                   --------        --------         ---------      ------

Balance, December 31, 1996                             -           $   -            2,447,737      $5,240
                                                   ========        ========         =========      ======
</TABLE>

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


<PAGE>
                                                                         Page 4f
<TABLE>
<CAPTION>

                   Class A                                    Retained
                 Common Stock                                 earnings             Treasury Stock
            --------------------          Paid-in           (accumulated       -----------------------
            Shares        Amount          Capital              Deficit)        Shares          Amount               Total
            -------       ------         ----------         ---------------    -------        ---------           -------

<S>         <C>           <C>            <C>                 <C>               <C>           <C>                 <C>
               -          $ -            $1,374,129          $(1,198,056)       60,000        $ (22,500)          $  306,287

               -            -             3,998,720                 -             -                -               4,000,000

               -            -              (314,980)                -             -                -                (314,980)


            100,000        1,000            702,125                 -          112,500         (703,125)                -

               -            -               149,962                 -             -                -                 150,000

               -            -               147,808                 -             -                -                    -

               -            -                  -                 845,079          -                -                 845,079
            -------       ------         ----------          -----------       -------        ---------           ----------

            100,000        1,000          6,057,764             (352,977)      172,500         (725,625)           4,986,386

               -            -                 1,977                 -             -                -                   1,987

               -            -                (2,250)                -             -                -                  (2,500)

               -            -                (4,200)                -             -                -                  (4,200)

               -            -                   744                 -             -                -                    -

               -            -                  -                 711,248          -                -                 711,248
            -------       ------         ----------          -----------       -------        ---------           ----------

            100,000       $1,000         $6,054,035          $   358,271       172,500        $(725,625)          $5,692,921
            =======       ======         ==========          ===========       =======        =========           ==========
</TABLE>

<PAGE>
                                                                         Page 5f
                           ACTIVE APPAREL GROUP, INC.

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>


                                                                                            Years ended
                                                                                            December 31,
                                                                                  ----------------------------
                                                                                   1 9 9 6            1 9 9 5
                                                                                  ----------         --------
<S>                                                                               <C>                <C>
Cash flows from operating activities:
  Net income                                                                      $  711,248         $  845,079
  Adjustments to reconcile net income to net cash
   provided (used) by operating activities:
     Depreciation                                                                     54,191             30,459
     Provision for bad debts                                                          14,442             65,395
     Deferred tax (benefit) expense                                                   33,664            (63,664)
     Loss on disposal of property and equipment                                          252               -
     Changes in assets (increase) decrease:
       Due from factor                                                               391,226         (3,287,499)
       Inventory                                                                    (981,117)            79,572
       Prepaid expenses and other current assets                                      26,770             18,679
       Prepaid royalties                                                              45,162             55,308
       Other assets                                                                 (249,418)           (48,168)
     Changes in liabilities increase (decrease):
       Accounts payable and accrued expenses
        and other current liabilities                                                313,829           (560,000)
                                                                                  ----------         ----------

          Net cash provided (used) by operating activities                           360,249         (2,864,839)
                                                                                  ----------         ----------

Cash flows used by investing activities:
  Acquisition of property and equipment                                             (206,639)           (59,363)
                                                                                  ----------         ----------

Cash flows from financing activities:
  Proceeds from initial public offering                                                 -             4,000,000
  Initial public offering costs                                                       (4,200)          (174,905)
  Repayment of convertible notes                                                        -               (50,000)
  Due to factor                                                                         -              (738,575)
  Note receivable, officer                                                          (120,000)              -
  Redemption of preferred stock                                                       (2,500)              -
  Proceeds from stock options exercised                                                1,987               -
                                                                                  ----------         ----------

          Net cash provided (used) by financing activities                          (124,713)         3,036,520
                                                                                  ----------         ----------

Net increase in cash and cash equivalents                                             28,897            112,318

Cash and cash equivalents, beginning of year                                         134,344             22,026
                                                                                  ----------         ----------

Cash and cash equivalents, end of year                                            $  163,241         $  134,344
                                                                                  ==========         ==========


Supplemental  disclosures  of cash flow  information:  Cash paid during the year
  for:
    Interest                                                                      $   27,767         $  268,116
    Income taxes                                                                      43,514             16,818

Supplemental disclosures of noncash financing activity:
  Class A common stock issued in exchange for common stock                        $     -            $  703,125
  Notes payable converted to common stock                                               -               150,000
  Preferred stock converted to common stock                                              750            149,000
</TABLE>

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

<PAGE>
                                                                         Page 6f

                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995



1.      Nature of business:

        Active Apparel Group,  Inc. (the "Company") is a distributor of licensed
        women's and girls sportswear and activewear throughout the United States
        and Canada and unisex  activewear and accessories  throughout the United
        States and Canada.

2.      Initial public offering:

        On May 4, 1995,  the Company  completed  an initial  public  offering of
        640,000  shares of  common  stock at $6.25 per  share.  Proceeds  to the
        Company, after deducting initial public offering costs of $319,180, were
        $3,680,820.

3.      Significant accounting policies:

        a.    Inventory:

              Inventory,  consisting  solely of finished goods, is stated at the
              lower of cost (first-in, first-out basis) or market.

        b.    Property and equipment:

              Property  and  equipment  are  stated  at  cost.  Depreciation  is
              computed by the  straight-line  method over the  estimated  useful
              lives of the assets. Leasehold improvements are amortized over the
              terms of the  respective  leases or estimated  life of the assets,
              whichever is shorter. Expenditures for maintenance and repairs are
              charged to operations as incurred.

        c.    Cash and cash equivalents:

              The Company  maintains its cash and cash  equivalents  accounts at
              various  commercial  banks.  The cash  balances are insured by the
              Federal Deposit Insurance  Corporation  (FDIC) up to $100,000,  at
              each bank.

              For  purposes  of  the  statements  of  cash  flows,  the  Company
              considers all short-term  investments with an original maturity of
              three months or less to be cash equivalents.

        d.    Fair value of financial instruments:

               i.    Cash and cash equivalents:

                     The carrying  amounts  reflected in the balance  sheets for
                     cash  and  cash  equivalents,  none of  which  are held for
                     trading  purposes,  approximate  the respective fair values
                     due to the short maturities of those instruments.

<PAGE>

                                                                         Page 7f

                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995




3.      Significant accounting policies: (Continued)

        d.    Fair value of financial instruments: (Continued)

              ii.    Due from factor and accounts payable:

                     The  carrying  amounts  of due  from  factor  and  accounts
                     payable  approximates  its fair values because of the short
                     maturities of these instruments.

        e.    Advertising expense:

              The Company expenses advertising costs as they are incurred.

              As of  December  31,  1996 and  1995,  the  Company  had  incurred
              advertising  and  promotions  expense of  $508,689  and  $326,977,
              respectively.

        f.    Estimates:

              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.

        g.    Accounting for stock based compensation:

              The  Company  applies APB Opinion 25 in  accounting  for  employee
              stock option plans (note 10).  Accordingly,  no compensation  cost
              has been recognized in 1996 and 1995. Had  compensation  cost been
              determined  on the basis of FASB  Statement  123,  net  income and
              earnings per share would have been reduced as follows:

                                                     1 9 9 6          1 9 9 5
                                                   ----------        --------
              Net income:
                As reported                         $711,248         $845,079
                                                    ========         ========
                Pro forma                           $662,470         $812,417
                                                    ========         ========

              Primary earnings per share:
                As reported                         $    .26         $    .37
                                                    ========         ========
                Pro forma                           $    .25         $    .35
                                                    ========         ========

              Fully diluted earnings per share:
                As reported                         $    .26         $    .34
                                                    ========         ========
                Pro forma                           $    .24         $    .33
                                                    ========         ========

<PAGE>

                                                                         Page 8f

                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995


3.      Significant accounting policies: (Continued)

        g.    Accounting for stock based compensation: (Continued)

              The fair  value of  compensation  was  computed  using an  option-
              pricing model which took into account the following  factors as of
              the grant date:

              -  the exercise price and expected life of the option
              -  the current price of the stock and its expected volatility
              -  expected dividends,  if any
              -  the risk-free interest rate for the expected term of the option
                 using  Treasury  Note rates with a remaining  term equal to the
                 expected life of the options

4.      Due from factor:

        Substantially  all of the  Company's  accounts  receivable  are assigned
        without recourse to a commercial  factor. The amount due from the factor
        represents net sales assigned in excess of advances received. The amount
        due from the  factor is net of a  provision  for future  chargebacks  of
        $75,000 at December 31, 1996.  Interest is charged at 1-1/2% above prime
        on  advances.  This  factoring  arrangement  is  collateralized  by  the
        Company's accounts receivable.

5.      Property and equipment:

              Furniture and fixtures                $106,147
              Machinery and equipment                271,855
              Leasehold improvements                  26,743
                                                    --------
                                                     404,745
              Less accumulated depreciation
               and amortization                      111,968
                                                    --------
                                                    $292,777
                                                    ========
6.      Note receivable, officer:

        The  Company  has a  promissory  note dated  December  23, 1996 with the
        President  and Chief  Executive  Officer in the amount of $120,000.  The
        unpaid principal bears interest at prime plus 1-1/2%. The note is due on
        or before July 31, 2000.

7.      Notes payable converted:

        The Company had issued  $200,000 of  unsecured  convertible  notes which
        were due May 31,  1995  (with a 15 day grace  period to June 15,  1995),
        with interest at the prime rate plus 2% and were convertible into common
        stock at the option of the noteholder.

<PAGE>
                                                                         Page 9f

                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995

7.      Notes payable converted: (Continued)

        As of June 30, 1995,  $50,000 of principal and all accrued  interest was
        repaid to the  noteholders.  The remaining note holders  exercised their
        option to convert the  outstanding  amount of $150,000 to common  stock.
        The notes were  converted to common stock based on its fair market value
        for a  specified  period  after a minimum  of 100 days from the  initial
        public  offering date (see note 2). The Company  issued 19,062 shares in
        connection with the conversion.

8.      Commitments and contingencies:

        a.    License agreements:

              Revenues  are  generated  principally  from the  sale of  licensed
              merchandise.  The Company is the licensee on four agreements which
              provide for certain royalty payments and charges.  Pursuant to two
              of the  agreements  (with  the  same  licensor),  the  Company  is
              required  to  pay a  royalty  of  6% of  net  sales,  on  licensed
              merchandise  sold in the U.S.  and Canada,  and to spend 2-1/2% of
              annual net sales on advertising. The original agreements with this
              licensor expired December 31, 1996. Effective January 1, 1997, the
              agreements  were  amended  to  reflect  a new  expiration  date of
              December 31, 2002 with two five year renewal  options,  subject to
              minimum  sales  requirements,   available  to  the  Company.   The
              agreements  provide  for  minimum  guaranteed  payments  annually.
              Future minimum guaranteed payments are approximately as follows:

                                  UNITED STATES               CANADA
                                ----------------------   ---------------------
                                ROYALTY    ADVERTISING   ROYALTY   ADVERTISING
                                -------    -----------   -------   -----------
         Twelve months ending
          December 31, 1997     $450,000    $187,500     $ 98,500   $41,000
                       1998      495,000     206,250      112,000    46,600
                       1999      540,000     225,000      125,400    52,200
                       2000      585,000     243,750      138,800    57,800
                       2001      630,000     262,500      152,200    63,400
                       2002      675,000     281,250      165,700    69,000

              The amounts for Canada are presented in U.S.  dollars  assuming an
              exchange  rate of $.746.  The  Company is  required  to maintain a
              standby letter of credit equal to the annual minimum royalties due
              per  the  licensing  agreements.  The  standby  letter  of  credit
              outstanding as of December 31, 1996 is $330,000,  based on minimum
              royalties due for 1996.

<PAGE>
                                                                        Page 10f

                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995

8.      Commitments and contingencies: (Continued)

        a.    License agreements: (Continued)

              The third  license  agreement  expires  September  30, 1998. It is
              automatically extended for two years to September 30, 2000, if net
              sales exceed  $5,000,000 in contract year three (ending  September
              30,  1998).  The  license  fee is 7% of net sales.  The Company is
              required to spend 2% of net sales on advertising.  Pursuant to the
              third  amendment  to  the  agreement,  future  minimum  guaranteed
              payments are as follows:

                  Twelve months ending December 31,  1997         $297,500
                                                     1998          262,500

              The  fourth  license  agreement  is  effective  April 30,  1996 to
              January  31,  1999.  The  Company  has the  option  to  renew  the
              agreement  for an  additional  two years if net sales  during  the
              initial term of the agreement exceeds $3.5 million. The Company is
              required  to  pay a  royalty  of  8%  of  net  sales  on  licensed
              merchandise sold in the U.S. and Canada, and to spend 2% of annual
              net sales on  advertising.  The  agreement  provides  for  minimum
              guaranteed payments annually.

              Future minimum guaranteed payments are as follows:

                  Twelve months ending December 31,  1997         $65,000
                                                     1998          65,000
                                                     1999          16,250

              Royalty expense for the years ended December 31, 1996 and 1995 was
              approximately $1,005,000 and $731,000, respectively.

        b.    Lease commitments:

              The Company has four leases for office and showroom  space,  three
              of which expire  January 31, 2000 and the fourth expires April 30,
              1997.

              At December 31, 1996,  future  minimum  rental  payments  required
              under the noncancelable leases are approximately as follows:

                  Twelve months ending December 31,  1997        $172,000
                                                     1998         167,000
                                                     1999         167,000
                                                     2000          14,000

              Rent  expense for the years ended  December  31, 1996 and 1995 was
              approximately $213,000 and $224,000, respectively.


<PAGE>
                                                                        Page 11f

                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995

8.      Commitments and contingencies: (Continued)

        c.    Employment agreements:

                i.    The Company has an employment agreement with its President
                      and Chief  Executive  Officer at an annual  base salary of
                      $250,000 ($265,000  effective January 1, 1997) through the
                      term (as  defined) of the  agreement.  The initial term of
                      the  agreement  expires  on July 31,  2000  but  continues
                      thereafter for additional  one-year  periods unless either
                      the President and Chief  Executive  Officer of the Company
                      or the Board of  Directors  gives the  other  ninety  days
                      prior written notice of  nonrenewal.  At the discretion of
                      the Board of Directors,  the Company may pay the President
                      and Chief Executive  Officer a bonus on or before December
                      31, of any year  during  the term.  On  November  7, 1996,
                      25,000  options  were granted to the  President  and Chief
                      Executive  Officer by the Board of  Directors  pursuant to
                      the 1993 stock option plan (note 10)

                      The  agreement  also  includes a  noncompete  clause for a
                      period   of  one  year   following   its   expiration   or
                      termination.

               ii.    The Company has an employment agreement with a Director of
                      the Company,  whereby the Company has agreed to employ her
                      as the Executive  Vice-President at an annual compensation
                      of $125,000 ($140,000 effective January 1, 1997).

                      The  agreement  with  the  Executive   Vice-President  has
                      restrictive  covenants  similar to those of the  President
                      and Chief Executive Officer.

              iii.    The Company executed an employment agreement with a Direc-
                      tor of the Company who is a brother of the  President  and
                      Chief Executive  Officer whereby the Company has agreed to
                      employ him as Legal Counsel to the Company  through August
                      31, 1997 with a total salary of $36,000. Effective January
                      1997, the Director is eligible to receive a grant of 3,200
                      stock options equal to the exercise price of options gran-
                      ted to  non-employee  members  of the  Board of  Directors
                      (note  10).  On August  9,  1996,  the Board of  Directors
                      approved  the new  employment  agreement  and  granted the
                      Director an additional 4,000 stock options  exercisable at
                      $14 for past services  rendered  through  August 31, 1996.
                      All  stock  options  were  granted  pursuant  to  the 1993
                      stock option plan (note 10).

<PAGE>

                                                                        Page 12f

                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995

8.      Commitments and contingencies: (Continued)

        d.    Consultant agreement:

              The Company entered into a consultant agreement with an individual
              (the  "Consultant")  effective  September 1, 1993 through December
              31, 1996, to direct the Company to sell, distribute and market its
              licensed products in Canada through its Canadian office.  Pursuant
              to a provision  in the  consulting  agreement,  the  contract  was
              automatically renewed for a one year period at December 31, 1996.

              Pursuant to the agreement, the Company pays the Consultant $60,000
              a year plus  business  expenses and a commission  in U.S.  dollars
              equal  to the sum of 5% of the  Company's  Canadian  net  sales in
              excess  of  $850,000  plus 5% of the  Company's  Canadian  pre-tax
              profit.  Consulting  expense for the years ended December 31, 1996
              and 1995 was approximately $86,000 and $88,000, respectively.

9.      Stockholders' equity:

        The Company's Certificate of Incorporation, was amended by a vote of the
        Company's stockholders on June 7, 1996 for the following:

        a.    To eliminate authorization for the issuance of 9% cumulative
              redeemable convertible preferred stock, par value $.25.

              As of  December  31,  1996,  599,000  preferred  shares  had  been
              converted to common stock and the remaining  1,000 shares had been
              redeemed at the Company's  option.  All the preferred  shares were
              canceled and  stockholders  who converted their  preferred  shares
              relinquished  their claim to accumulated  and unpaid  dividends on
              the preferred stock.

        b.    Increase  common  stock,  par value  $.002 from  3,750,000  shares
              authorized to 10,000,000 shares authorized.

        The holder of the Class A common  stock is entitled to five votes on all
        matters  upon which each  holder of common  stock is  entitled  to vote.
        After the effective  date of the initial  public  offering (see note 2),
        the Board of Directors issued 100,000 shares of the Class A common stock
        exclusively  to the  President and Chief  Executive  Officer in order to
        permit him to maintain  approximately  the same  voting  power after the
        initial public  offering as held prior to the offering.  In exchange for
        the shares of Class A common stock issued to him, he surrendered 112,500
        shares of common stock.


<PAGE>
                                                                        Page 13f

                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995


10.     Stock options:

        The Company has three stock option  plans;  the stock  option plan,  the
        1993 stock option plan and the 1995  non-employee  director stock option
        plan.  Pursuant to the stock option plan, grants were awarded in 1993 to
        four individuals for services  performed  regarding the private offering
        of preferred stock. These options are exercisable at $.375 for a term of
        five years through September 30, 1998. Under the 1993 stock option plan,
        a maximum of 443,900  shares may be granted by the  Company.  The option
        price of shares  designated as  nonqualified  shall be determined by the
        Board  of  Directors  each  year for the  following  year at 85% of fair
        market value and in the case of incentive  stock options will be no less
        than the fair market value of the shares on the date of the grant.

        On October 6, 1995,  the  stockholders  approved  the 1995  non-employee
        director  stock option plan.  The plan provides for automatic  grants of
        options  to  purchase  3,000  shares  and  thereafter  yearly  grants to
        purchase 3,000 shares of common stock to each active director serving on
        the Board at the time of the grant who is not an officer or  employee of
        the Company.  The Director Plan provides additional grants of options to
        non-employee  directors of 100 shares to the Chairman of a committee and
        200 shares to the Chairman and Secretary of the Board of Directors.

        The exercise  price for options  granted is the fair market value of the
        shares of common stock on the date of the grant. The term of each option
        is seven years from the date of the grant.

        Outstanding  options  pursuant to these three  plans are  summarized  as
        follows:
<TABLE>
<CAPTION>

                           S  H  A  R  E  S
                     ---------------------------
                                                     1995
                                   1993          Non-employee
                      Stock        stock           director                             Option
                      option      option         stock option                          exercise
            1996       plan        plan              plan           total               prices
            ----      ------      -------        ------------      -------          ----------

<S>                   <C>         <C>              <C>             <C>              <C>      <C>
  Granted               -          62,200         12,300            74,500          $12.50 - $14.75
  Exercised            5,300         -              -                5,300                   $0.375
  Outstanding at
   December 31,       54,700      271,705         21,700           348,105          $0.375 - $14.75
                      ======      =======         ======           =======
  Exercisable at
   December 31,       54,700      176,172          3,133           234,005          $0.375 - $11.75
                      ======      =======         ======           =======
</TABLE>


<PAGE>


                                                                        Page 14f

                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995

10.     Stock options: (Continued)
<TABLE>
<CAPTION>

                                                  S  H  A  R  E  S
                                             ---------------------------------------
                                                                            1995
                                                          1993          Non-employee
                                             Stock        stock           director                            Option
                                             option      option         stock option                         exercise
            1995                             plan         plan               plan         Total               prices
            ----                             ------      ------         ------------      -----            ------------

<S>                                          <C>         <C>             <C>             <C>               <C>      <C>
        Outstanding at
         January 1,                          60,000      159,505           -              219,505          $0.375 - $ 6.25
        Granted                                -          50,000          9,400            59,400                   $11.75
        Exercised                              -            -              -                 -                    -
        Outstanding at
         December 31,                        60,000      209,505          9,400           278,905          $0.375 - $11.75
                                             ======      =======          =====           =======
        Exercisable at
         December 31,                        60,000       84,505           -              144,505          $0.375 - $ 6.25
                                             ======       ======          =====           =======
</TABLE>

11.     Other income:

        Other  income is comprised  of the  following  items for the years ended
        December 31, 1996 and 1995:
                                                    1 9 9 6         1 9 9 5
                                                    -------         -------

           Insurance claim on stolen merchandise     $  -            $ 94,924
           Interest income                            21,367           16,241
           Other                                        -              23,974
                                                     -------         --------

                                                     $21,367         $135,139
                                                     =======         ========
12.     Income taxes:

        For the years  ended  December  31,  1996 and 1995,  the  Company  had a
        provision for income taxes consisting of the following:

                                                    1 9 9 6           1 9 9 5
                                                    --------          -------
              Current tax provision:
                Federal                             $376,201          $289,000
                State and local                      127,782            93,393
                Foreign                                8,996              -
                Utilization of net operating
                 loss carryforward                  (154,798)         (343,000)
                                                    --------          --------

                                                     358,181            39,393
              Deferred tax provision (recovery):
                Federal                               31,614           (54,114)
                State and local                        2,050            (9,550)
                                                    --------          --------

              Income tax provision (recovery)       $391,845          $(24,271)
                                                    ========          ========

<PAGE>

                                                                        Page 15f
                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995


12.     Income taxes: (Continued)

        The difference  between the statutory Federal income tax rate of 34% and
        effective  income tax rates of 36% and (3%) for the years ended December
        31, 1996 and 1995,  respectively is due to state and local income taxes,
        net of  applicable  Federal  tax  benefits,  temporary  differences  and
        utilization of net operating loss carryforwards.

13.     Major customers:

        For the years ended December 31, 1996 and 1995, two customers  accounted
        for approximately 24% and 28% of sales.


14.     Primary earnings per share:

        Primary  earnings per share  amounts are computed  based on the weighted
        average number of shares actually outstanding plus the shares that would
        be outstanding  assuming the exercise of dilutive stock options,  all of
        which are  considered  to be common  stock  equivalents.  The  number of
        shares that would be issued from the exercise of stock  options has been
        reduced by the number of shares that could have been  purchased from the
        proceeds at the average market price of the convertible preferred stock.
        The  number  of  shares  used  in the  computation  were  2,703,310  and
        2,032,789 at December 31, 1996 and 1995, respectively.


15.     Fully diluted earnings per share:

        Fully  diluted  earnings  per share  amounts  are based on an  increased
        number  of shares  that  would be  outstanding  assuming  conversion  of
        convertible  preferred stock and convertible notes payable. For purposes
        of the fully  diluted  computation,  the number of shares  that would be
        issued from the exercise of stock options has been reduced by the number
        of shares  which  could have been  purchased  from the  proceeds  at the
        market  price of the  Company's  stock  on  December  31,  1996 and 1995
        because  those prices were higher than the average  market prices during
        the period.  Net income has been adjusted for  dividends on  convertible
        preferred stock and interest expense on convertible  debt. The number of
        shares used in the  computation of fully diluted  earnings per share was
        2,710,679 and 2,490,016 at December 31, 1996 and 1995, respectively.