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, 1998

[ ] 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
incorporation or organization)                             Identification No.)


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:

          Title Of Each Class                    Name Of Each Exchange
          -------------------                    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: $15,011,926

On March  25,  1999 the  aggregate  market  value of the  voting  stock  held by
non-affiliates  of the Registrant was  approximately  $4,947,704  based upon the
average of the  highest  and  lowest bid  quotations  for such  Common  Stock as
obtained from the Nasdaq Stock Market on March 25, 1999.  Solely for the purpose
of this  calculation,  shares held by directors  and officers of the  Registrant
have been excluded.  Such exclusion  should not be deemed a determination  or an
admission by Registrant that such  individuals  are, in fact,  affiliates of the
Registrant.

The  number of shares  outstanding  on March 25,  1999 was  2,492,581  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
                                                              ----     ----

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                                TABLE OF CONTENTS


                                                                            PAGE
                                                                            ----

PART I

Item 1      Business.........................................................1
Item 2      Properties...................................................... 9
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..........................................16
Item 11     Security Ownership of Certain Beneficial Owners
                 and Management ............................................20
Item 12     Certain Relationships and Related Transactions..................22
Item 13     Exhibits and Reports on Form 8-K................................23


Signatures..................................................................27

                                       ii

<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,  sportswear,  swimwear  and  coverups,  and,  as of
January  1,  1999,  the  design,  manufacture,   marketing  and  sale  of  men's
activewear, sportswear and outerwear featuring the widely-recognized Everlast(R)
trademark (the "Everlast Products").  The Company is also engaged in the design,
manufacture,  marketing and sale of women's  activewear,  sportswear  (excluding
footwear)  featuring the  Converse(R)  and Converse All Star(R)  trademarks (the
"Converse Products") and the design, manufacture,  marketing and sales of unisex
activewear  and  accessories  featuring  "MTV's THE GRIND"  and/or  "THE  GRIND"
trademarks (the "MTV Products").  Generally, the Company has the exclusive right
to  use  and  distribute  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  the Converse  Products in the United  States.  The
Company's exclusive license agreement for the Converse Products expires on March
31,  1999 and the  Company  has  decided  that it will  not  renew  the  license
agreement.  The Company did not design or produce a line of MTV  activewear  for
sale in 1999.  The Company is evaluating  the renewal of the MTV license,  which
expires on June 30, 1999. 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 and men's  activewear  and  sportswear.
Key elements of this strategy include:

     o    balancing and diversifying the Company's product  collections in terms
          of style and price range;

     o    maximizing  visibility  in  the  Company's  products  through  focused
          advertising and marketing programs;

     o    expanding  its  product  distribution  system by  establishing  better
          relationships with a broader network of retailers worldwide subject to
          distribution restrictions of the Everlast Product licenses;

     o    capitalizing on the Company's strengths through design and manufacture
          for private label activewear and sportswear customers.

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


PRODUCTS

     The Company's  product line  primarily  consists of the Everlast  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

                                       1
<PAGE>


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 line is primarily composed of
the Everlast Collection.

     THE EVERLAST COLLECTION. The Company sells a diverse collection of Everlast
Products  consisting of women's activewear,  sportswear,  swimwear and coverups,
and as of January 1, 1999, men's activewear,  sportswear and outerwear under the
Everlast trademark and logo. Since 1910, Everlast has gained wide recognition in
professional and amateur boxing. The Company believes that the Everlast name has
become synonymous with quality athletic products.  The Everlast Products seek to
continue this tradition, while recognizing that the active person has particular
demands regarding quality,  comfort and style in activewear and sportswear.  The
Everlast  Products consist of  approximately  80 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  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.


LICENSES

      EVERLAST WOMEN'S  LICENSE.  The Company obtained the license to market and
sell Everlast women's products ("Everlast License") in July 1992. Generally, the
Everlast  License  grants to the Company the exclusive  right and license to use
the Everlast  trademark in connection with the  manufacture,  advertisement  and
promotion,  packaging, sale and distribution of women's activewear,  sportswear,
swimwear  and  coverups 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  trademark  on products  other than women's
activewear,  sportswear,  swimwear  and  coverups  within the United  States and
Canada, including, until January 1, 1999, men's apparel, 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 Everlast 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 women's products of at least
$10,500,000,  and in Canada,  of at least  CN$2,500,000  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  CN$3,500,000  for the exercise of the second  option.
The Everlast  License may be terminated in whole, or only as to certain Everlast
women's  products,  if the Company fails to fulfill its material  obligations of
the Everlast  License  (including  payments of royalties or other  amounts due),
fails to use diligent efforts to promote, advertise,  manufacture,  sell or ship
any Everlast  Product,  or to fill accepted orders for Everlast women's products
to  financially  secure  purchasers.  See  "MANUFACTURING  AND  SUPPLIERS."  The
Everlast  License  may  also be  terminated  if net  sales of  Everlast  women's
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 amended,  of the Everlast
License.  The Company is also required to make  advertising  expenditures  of at

                                       2

<PAGE>


least 2.5% of net sales of Everlast women's products,  subject to annual minimum
expenditure  levels.  The minimum  annual  royalty  payments  under the Everlast
License for sales in the United States  (including  swimwear sales) are $555,000
and $630,000 for 1998 and 1999  (CN$150,000 and CN$168,000 with respect to sales
in Canada),  respectively.  The minimum annual advertising expenditures required
under the Everlast  License for sales in the United States  (including  swimwear
sales) are $231,250 and $262,500 for 1998 and 1999 (CN$62,500 and CN$70,000 with
respect to sales in Canada),  respectively.  To date,  all required  levels have
been met or exceeded.  Royalty  payments and  advertising  expenditures  are not
required  with respect to sales of Everlast  women's  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  women's
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  maintains.
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
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 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, or a cash deposit in varying  amounts.  The Company is in compliance  with
this requirement.

     EVERLAST  MEN'S  LICENSE.  The Company  obtained the license to market and
sell  Everlast  men's  products  ("Men's  License")  effective  January  1,1999.
Generally,  the Men's  License  grants to the  Company the  exclusive  right and
license  to use the  Everlast  trademark  in  connection  with the  manufacture,
advertisement  and  promotion,   packaging,   sale  and  distribution  of  men's
activewear,  sportswear,  swimwear and outerwear in the United States and Canada
during  the term of the Men's  License.  Everlast  reserved  the right to use or
license  the  Everlast  trademark  on  products  other  than  men's and  women's
activewear,  sportswear,  swimwear and men's outerwear  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, men'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 Men's  License ends on December 31, 2001,  but is renewable
at  the  option  of the  Company  for up to two  successive  five  year  periods
commencing January 1, 2002 and January 1, 2007, 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  men's  products of at least  $6,500,000,
and in Canada, of at least CN$3,300,000 for the exercise of the first option and
achieves net sales in the United States of at least  $9,317,000 and in Canada of
at least  CN$4,790,000 for the exercise of the second option.  The Men's License
may be terminated in whole, or only as to certain  Everlast men's  products,  if
the  Company  fails to fulfill its  material  obligations  of the Men's  License
(including  payments of royalties or other amounts  due),  fails to use diligent
efforts to promote,  advertise,  manufacture,  sell or ship any  Everlast  men's
product,  or to fill accepted  orders for Everlast men's products to financially
secure purchasers. See "MANUFACTURING AND SUPPLIERS." The Men's License may also
be  terminated  if net sales of Everlast  men's  products do not exceed  certain
minimum levels,  or if the Company  voluntarily or  involuntarily  enters into a
bankruptcy or similar proceeding.

     Under the Men's 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
<PAGE>

extended) of the Men's License. The Company is also required to make advertising
expenditures of at least 2.5% of net sales of Everlast men's  products,  subject
to annual minimum  expenditure levels. The minimum annual royalty payments under
the  Men's  License  for  sales  in the  United  States  are  $180,000  for 1999
(CN$72,000  with  respect to sales in Canada).  The minimum  annual  advertising
expenditures required under the Men's License for sales in the United States are
$75,000 for 1999. (CN$30,000 with respect to sales in Canada).  Royalty payments
and advertising  expenditures are not required with respect to sales of Everlast
men's 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
Men's  License  or the  manufacture,  promotion  or  sale of  such  products  in
violation of applicable laws or third-party  rights.  The Men's License requires
that the Company  secure and maintain  product  liability  insurance,  which the
Company maintains. Under and subject to the terms of the Men's License, Everlast
is required to indemnify the Company  against any losses  arising out of the use
of the Everlast trademark or the exercise by the Company of its rights under the
Men's  License.  Everlast is also required,  generally,  to defend the Company's
rights to use the Everlast trademark pursuant to the Men's License.

     The Men's  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 Men's  License  from time to
time, or a cash deposit in varying  amounts.  The Company is in compliance  with
this requirement.

     CONVERSE  LICENSE.  On March 10, 1999 the Company  decided not to renew its
Trademark  License  Agreement,  as amended  (the  "Converse  License")  which it
entered on May 20, 1994. The Converse  License granted the Company the exclusive
right to use the Converse(R) and Converse All Star 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.

     As amended,  the term of the Converse  License ends on March 31, 1999.  The
Company  believes that not renewing the license will not have a material adverse
effect on the Company's business,  financial condition or results of operations.
Under the Converse License, the Company was required to make royalty payments to
Converse of 7% of net sales through March 31, 1999.


     MTV LICENSE.  The Company and MTV Networks  ("MTVN") entered into a License
Agreement in March 1996 (the "MTV License").  Generally,  the MTV License grants
to the Company the  exclusive  right and license to use "MTV's THE GRIND" and/or
"THE GRIND"  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 MTVN's existing
license agreement with another licensee for such licensed products expires,  and
at such  time,  the MTV  License  will  become an  exclusive  license.  MTVN has
reserved  the right to use or license  the "MTV's THE GRIND"  and/or "THE GRIND"
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.

                                       4
<PAGE>

      The term of the MTV  License,  as  amended,  ends on June 30,  1999 and is
automatically  renewable,  at the  option  of  the  Company,  for an  additional
two-year  period through  January 31, 2001 if the Company sold $3,500,000 of MTV
Products  during the term of the MTV License and  provided  that the Company had
satisfactorily  performed its obligations under the MTV 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
to  perform,  in  all  material  respects,  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, as amended,  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 $183,750 with respect to
the contract term. The Company is also required to 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 currently maintains. To date, the Company has been
in compliance with the MTV License.

     The Company did not achieve sufficient net sales to automatically renew the
license  agreement.  If the MTV license is  canceled at the end of the term,  as
amended,  on June 30,  1999,  the  Company  believes it will not have a material
adverse  effect on the  Company's  business,  financial  condition or results of
operation. The Company is evaluating the MTV license for renewal.

     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.

     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.

                                       5
<PAGE>

MARKETING, ADVERTISING AND PROMOTIONS

     The Company  advertises  and promotes  its  products to different  consumer
segments  through a variety of trade and consumer print  advertising  campaigns,
generally in selected  magazines and other publications  (including  SPORTSTYLE,
WOMEN'S  WEAR DAILY,  SPORTING  GOODS  BUSINESS,  SELF AND SHAPE).  THE COMPANY'
ADVERTISING  AND  PROMOTION  PROGRAM WAS CREATED  AND  designed to achieve  high
visibility for its 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 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.  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 "The New York Race for the Cure" of
breast cancer, "The City of Hope Workout For Hope" for AIDS related research and
the  "Share-A-Walk"  New York Fundraiser to raise awareness in the fight against
cancer.  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,  WWDMAGIC and other appropriate trade
shows.

MANUFACTURING AND SUPPLIERS

     The Company does not manufacture any of its products, but uses third-party,
independent contractors for all its products. Approximately 80% of the Company's
products are supplied by  manufacturers in the United States while the remaining
20% are imported from manufacturers abroad,  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,  financial condition or results of operations.  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,
tee 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.

                                       6
<PAGE>

     On December 31, 1997,  the Company's  inventory was $3,847,556 on net sales
during the year ended  December 31, 1997 (Fiscal  1997) of  $16,687,271,  with a
backlog of orders for future  delivery of $3,290,333.  At December 31, 1998, the
Company's  inventory was  $3,026,241 on net sales during the year ended December
31,  1998  (Fiscal  1998) of  $15,011,926,  with a backlog  of orders for future
delivery  of  $4,019,603.   The  Company  has  implemented  an  Electronic  Data
Interchange (EDI) Quick Response  Replenishment  System by which customer orders
are  facilitated in seven working days.  Higher levels of inventory are required
to operate the EDI Quick Response  Replenishment System program.  Such levels of
inventory are needed as sales orders are generally received and shipped within a
seven day period.  Other than the 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 "just-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.

     As of December  31,  1998,  the  Company's  backlog of unfilled  orders was
$4,019,603  as  compared to  $3,290,333  as of December  31,  1997.  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.


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  and MTV  Products,  Canada.  The  Company's
products  are  sold by  retailers  such  as,  Sears,  Burdines,  Bloomingdale's,
Nordstrom, Modell's, Dillards, Oshmans, Gart's, Footlocker, The Sports Authority
and  the  Army  Air  Force  Exchange  and  through  catalog  operations  such as
Sears-Canada and Genesis Direct. In Canada,  the Company's  products are sold by
such retailers as The Bay,  Sears-Canada,  Superstar  Group and Champs.  For the
year ended December 31, 1997, four customers  accounted for approximately 47% of
sales,  and for the year ended  December 31, 1998 four  customers  accounted for
approximately  48% 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 six in-house sales  representatives  and fourteen
non  employee  sales  representatives.  George  Horowitz,  President  and  Chief
Executive  Officer,  and Rita Cinque  Kriss,  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.

                                       7
<PAGE>

     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 1997,  foreign sales  accounted for 8.0% of the Company's net
sales,  all of which  were in Canada,  and during  Fiscal  1998,  foreign  sales
accounted  for 8.9% of the  Company's  net sales,  the majority of which were 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,  although no  assurance  can be given that such
levels can be sustained.  In addition to returns,  customers deduct  chargebacks
from the purchase price with or without the Company's consent.  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 3.5% during 1998, which
is  consistent  with the  industry  norms  of 3% to 5%.  In  1997,  the  Company
experienced  chargeback levels of approximately  4.1%. No assurance can be given
that such levels can be maintained.


QUALITY CONTROL

     Because  the  Company  emphasizes  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 
                                       8
<PAGE>

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 men's and 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  men's and 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
men's and women's activewear and sportswear  industry are Nike,  Reebok,  Adidas
and Fila.  In  addition,  its  principal  competitors  in the brand name women's
activewear and sportswear industry are 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 that markets Everlast Products in Canada.
During Fiscal 1997,  net sales from  operations in Canada were U.S.  $1,328,319,
and during Fiscal 1998 such net sales were U.S.  $1,234,441.  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
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  25,  1999,  the  Company  had 29  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 has three  leases for  approximately  7,160  square feet for a
total  annual base rent of $166,629 at its  principal  executive  offices in New
York,  New York.  The  original  lease has an annual  base rent of  $93,672  and
expires 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  its  space  in New York by 2,523  square  feet to  establish
additional showroom space and to accommodate  additional  employees.  Such lease
provides  for an annual base rent of $57,902 and expires  January 31,  2000.  In
January 1996, the Company  increased its space in New York by 656 square feet to
accommodate additional employees. Such lease provides for an annual base rent of
$15,055 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 CN$18,000. The lease expires
in April 2000.

     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.

                                       9
<PAGE>

ITEM 3.   LEGAL PROCEEDINGS

     The Company is not a party to any material litigation. No legal proceedings
were terminated during the fiscal year ended December 31, 1998.

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 1998.


                                       10
<PAGE>
                                     PART II

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

MARKET INFORMATION

      The Company's  common stock had been quoted on the Nasdaq  National Market
from  August 14,  1996 until  December  8, 1998  under the  symbol  "AAGP."  The
Company's  common  stock has been  quoted on the Nasdaq  Small Cap Market  since
December  9,  1998,  and from May 4, 1995 until  August 14,  1996 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.  Quotations  reflect prices between
dealers,  do not reflect retail markups,  markdowns or commissions,  and may not
necessarily represent actual transactions.

                                             1997
                                       HIGH         LOW
                                       ----         ---

1st Quarter                          15 3/4       14 3/4
2nd Quarter                          15 3/4        4 7/8
3rd Quarter                           6 1/4        3 5/8
4th Quarter                           4 1/8        2 1/16

                                             1998
                                       HIGH         LOW
                                       ----         ---

1st Quarter                           3 1/2        2 1/8
2nd Quarter                           2 7/8        1 3/4
3rd Quarter                           2 3/8        11/16
4th Quarter                          25              1/2


HOLDERS

     The closing bid price of the Common Stock as of March 25, 1999 was 2 21/32.
There  were 102  record  holders of the  Company's  Common  Stock 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 600 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 and men's
activewear,   sportswear,  swimwear  and  accessories.  The  Company  sells  its
principal  product  collections  under the EVERLAST brand name 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.

     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 1998 COMPARED TO YEAR END 1997
     ---------------------------------------

     Net sales  decreased to  $15,011,926  for the year ended  December 31, 1998
from  $16,687,271 for the year ended December 31, 1997, a decrease of $1,675,345
or 10.0%.  This decrease was principally  attributable to decreased sales volume
of the Company's Converse and MTV licensed products.

     Gross profit  decreased to $5,528,335  for the year ended December 31, 1998
from  $6,355,284 for the year ended December 31, 1997, a decrease of $826,949 or
13.0%.  Gross profit decreased as a percentage of net sales to 36.8% from 38.1%.
This  decrease  was  primarily  due to the lower sales  prices  received for the
Converse and MTV licensed products.

     Selling and shipping  expenses  decreased to $3,637,729  for the year ended
December  31, 1998 from  $3,743,862  for the year ended  December  31,  1997,  a
decrease of $106,133 or 2.8%.  Selling and shipping  expenses as a percentage of
net sales  increased  to 24.2% from 22.4%.  This  increase was  attributable  to
greater sales sample  expense and an increase in salaries of employees  involved
in the sale, shipping and design of the Company's products.

     General and  administrative  expenses  increased to $1,911,621 for the year
ended December 31, 1998 from $1,850,203 for the year ended December 31, 1997, an
increase of $61,418 or 3.3%. General and administrative expenses as a percentage
of net  sales  increased  to  12.7%  from  11.1%.  The  increase  was  primarily
attributable to an increase in outside consulting expense.

                                       12
<PAGE>

     Financial  expenses  decreased to $413,713 for the year ended  December 31,
1998 from $417,159 for the year ended December 31, 1997, a decrease of $3,446 or
0.8%. This decrease was primarily  attributable to the decrease in the Company's
net borrowings from its factor for the year ended December 31, 1998,  versus the
year ended December 31, 1997 and offset by foreign currency  transaction  losses
in the  Canadian  branch.  Of the total  financial  expenses,  interest  expense
decreased to $120,950 for the year ended December 31, 1998 from $171,318 for the
year ended  December 31, 1997.  Such decrease  reflects the  decreased  level of
borrowings due to lower inventory levels.

     Operating  income  decreased  to a loss  of  $434,728  for the  year  ended
December  31, 1998 from a profit of  $344,060  for the year ended  December  31,
1997, a decrease of $778,788 for the reasons stated above. Operating income as a
percentage of net sales was negative  2.9% for the year ended  December 31, 1998
as compared to positive 2.1% for the year ended December 31, 1997.

     The  Company  recognized  a tax  benefit  of  $194,093  for the year  ended
December 31, 1998 as compared to a tax  provision of $132,575 for the year ended
December 31, 1997.  This income tax reduction is in proportion to the decline in
the Company's income.

     The Company had a net loss of $240,635 for the year ended December 31, 1998
as compared to net income of $211,485  for the year ended  December  31, 1997, a
decrease of $452,120.

     1999 MARKET OUTLOOK
     -------------------

     While the retail  environment  remains difficult,  management  believes the
Company  will  return to its  previous  pattern  of sales  growth,  although  no
assurance can be given that such growth will occur.

     The launching of the Everlast men's  activewear  and  sportswear  line, the
penetration of the European market as a designer and supplier for other Everlast
licensees,  the  expansion  of a field  sales force and the  introduction  of an
internet web site are all expected to add to the  Company's  distribution  base.
The Company  will now focus on its core  Everlast  brand and continue to explore
other opportunities for growth.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash provided by operating  activities  for the year ended December 31,
1998 was $202,937 compared to $49,058 for the year ended December 31, 1997. This
increase was primarily  attributable  to a decrease in inventory.  Net cash used
for  investing  activities  for the year ended  December  31,  1998 was  $79,414
compared to $223,757  for the year ended  December  31, 1997 due to a decline in
capital  expenditures.  Net cash provided by financing activities was $9,906 for
the year ended December 31, 1998 compared to $70,899 for the year ended December
31, 1997 due to a decline in the  proceeds  received  from the exercise of stock
options.

     During the year ended  December 31, 1998,  the  Company's  primary need for
funds was to finance working  capital due to 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, 1998,  working capital was $4,994,000
compared to  $5,187,272  at December  31,  1997,  a decrease of  $193,272.  This
decrease was primarily attributable to the Company's net loss for the year ended
December 31, 1998.

     Due from  factor  represents  the  amount  receivable  by the  Company  for
factored  receivables less the amount of outstanding advances made by the factor
to the Company  under the  factoring  agreement.  At 


<PAGE>

December 31, 1998 Due from Factor was  $1,887,245  as compared to  $1,656,283 at
December 31, 1997 The  Company's  inventory  decreased by 21.3% to $3,026,241 at
December 31, 1998 from $3,847,556 at December 31, 1997.


     1999 LIQUIDITY OUTLOOK
     ----------------------

     Management  anticipates  it will  maintain a net surplus  position with the
factor,  although no assurance to that effect can be given.  Positive cash flow,
if it occurs,  will provide for further reduction in net borrowings,  and create
additional  working  capital to fund the Company's  anticipated  growth over the
next 12 months.  If a positive  cash flow does not  occur,  borrowings  with the
factor will increase.


YEAR 2000 COMPLIANCE

     The Company began a Year 2000 compliance  project in June 1995 and believes
it currently  is Year 2000  compliant.  The project  encompassed  upgrading  the
server and all proprietary  software and non-proprietary  software.  The project
was completed September 1997.

     The Company is in the process of assessing  Year 2000 issues not related to
its  internal  systems,  including  issues  with  suppliers  and  customers  and
warehouse  communications.  Due to the  general  uncertainty  of the  Year  2000
readiness of suppliers and customers, the Company is unable to determine at this
time whether the  consequences of Year 2000 failures will have a material impact
on the Company's results of operations,  liquidity or financial  condition.  The
Company believes that interruptions of normal operations will not be affected.

     Total expenditures for the Year 2000 project were approximately $200,000 in
fiscal year 1997.  There were no Year 2000 related  costs in the current  fiscal
year.

     The company is currently  formulating  contingency  plans in the event of a
Year 2000 failure.  The Company expects that a contingency plan will be in place
by September 30, 1999.


ITEM 7.   FINANCIAL STATEMENTS.

                    SEE PAGE 1f


                                       14
<PAGE>


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

          None.

                                    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                   48                President;  Chief  Executive
                                                    Officer;   Chairman  of  the
                                                    Board;            Treasurer;
                                                    Director(1)
James Anderson                    62                Vice  Chairman of the Board;
                                                    Director(1)(2)
Rita Cinque Kriss                 33                Executive  Vice   President;
                                                    Secretary  of  the  Company;
                                                    Director(3)
Larry Kring                       58                Director(2)(3)
Edward Epstein                    59                Director(2)(3)
Angelo Giusti                     48                Director(2)


(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. an apparel  company in New
York City, where he served as Vice President-Operations. He is currently serving
on the Executive  Committee for the Sports Apparel Council of the Sporting Goods
Manufacturers Association.

     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. Since July 1987 he has
been 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 the Washington
Hospital Insurance Fund and the Washington Casualty Company.

     MS. CINQUE KRISS has been  Executive  Vice  President and a director of the
Company   since  May  
                                       15
<PAGE>
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
Kriss 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 created 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.  Since
August  1993,   Mr.  Kring  has  been  a  Group  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 30 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.  He has been Vice
President of  Operations  at the Company  since June 1997.  From 1984 until June
1997, Mr. Giusti was President of Universal  Business Forms, a printing  company
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 he has
remained  active in local  education  and in youth  sports  activities.  He is a
former President of the Holmdel (Jersey Shore) Pop Warner Football League.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

             Section 16(a) of the  Securities  Exchange Act of 1934, as amended,
requires  the  Company's  directors  and  executive  officers,  and  persons who
beneficially  own more than ten percent of the Company's  Common Stock,  to file
with the Securities and Exchange  Commission (the "SEC") reports of ownership of
Common Stock and other equity securities of the Company. Officers, directors and
more 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, 1998 all  required  Section
16(a) filings by beneficial  owners were complied  with,  except that on January
11, 1999 George Horowitz and Rita Cinque Kriss filed a Form 5 with respect to an
acquisition  of 15,000 shares and 7,500  respectively  on March 26, 1998, and on
January 11, 1999 Mr. Horowitz's December 1997 Form 5 was amended with respect to
an  acquisition of 4,000 shares on December 17, 1997. On January 11, 1999 Angelo
Giusti filed a Form 5 with respect to the  acquisition  of 2,500 options on June
5, 1998.

ITEM 10.  EXECUTIVE COMPENSATION

             The  following  Summary   Compensation  Table  sets  forth  certain
information  concerning total annual  
                                       16
<PAGE>
compensation paid to George Horowitz,  the Company's President,  Chief Executive
Officer and Treasurer, Rita Cinque Kriss, the Company's Executive Vice President
and  Secretary  and Angelo  Giusti,  Vice  President of  Operations  (the "Named
Executive  Officers"),  for services  rendered in all  capacities by them to the
Company during fiscal years 1998, 1997 and, 1996.

<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE


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

<S>                                                        <C>          <C>           <C>          <C>             <C>   
George Horowitz(1)                                         1998         265,000       12,000       19,534(3)       853(6)
   (President; Chief Executive Officer; Treasurer)         1997         265,000       18,000       17,257(4)       595(6)
                                                           1996         250,000       24,000       18,635(5)       560(6)
                                                                                                                 
Rita Cinque Kriss(1)                                       1998         140,000            0       20,308(7)         0
 (Executive Vice President; Secretary)                     1997         140,000       12,000(2)     9,565(8)         0
                                                           1996         125,000       16,000       12,155(9)         0
                                                                                                                 
Angelo Giusti(1)                                                                                                 
 (Vice President of Operations & Director)                 1998         110,000            0            0            0
                                                           1997          63,139(10)        0            0            0
                                                                                                             
</TABLE>

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

(1)   Other than George  Horowitz , Rita Cinque Kriss and Angelo Giusti no Named
      Executive  Officer of the  Company  was paid more than  $100,000  in total
      salary  and  bonus  for  Fiscal  1998,  and  accordingly,  no other  Named
      Executive 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 $19,534 paid to or on behalf of Mr.  Horowitz
      by the  Company  in  Fiscal  1998  in  connection  with  automobile  lease
      installment  payments  ($13,659),  related insurance premiums ($1,088) and
      parking expenses ($4,787).

(4)   Consists of an aggregate  of $17,257 paid to or on behalf of Mr.  Horowitz
      by the  Company  in  Fiscal  1997  in  connection  with  automobile  lease
      installment  payments  ($13,660),  related insurance premiums ($1,088) and
      parking expenses ($2,509).

(5)   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).

                                       17
<PAGE>

(6)   Represents  premiums paid by the Company in Fiscal 1998,  1997 and 1996 on
      term life insurance policies for the benefit of Mr. Horowitz.

(7)   Consists of an  aggregate  of $12,732  paid to or on behalf of Ms.  Cinque
      Kriss by the Company in Fiscal 1998 in connection  with  automobile  lease
      installment  payments  ($8,019),  related insurance  premiums ($3,806) and
      parking expenses ($907), and $7,576 for income taxes on 1997 bonus.

(8)   Consists  of an  aggregate  of $9,565  paid to or on behalf of Ms.  Cinque
      Kriss by the Company in Fiscal 1997 in connection  with  automobile  lease
      installment  payments  ($5,601),  related insurance  premiums ($1,846) and
      parking expenses ($2,118).

(9)   Consists of an  aggregate  of $12,155  paid to or on behalf of Ms.  Cinque
      Kriss 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).

(10)  Mr. Giusti has been an employee of the Company since June 1997.


LONG-TERM INCENTIVE AND PENSION PLANS

            The Company currently has no long-term  incentive or defined pension
plans.

OPTION GRANTS IN LAST FISCAL YEAR


                 Number of     Percent of
                Securities   Total Options
                Underlying     Granted To    Exercise Or
                 Options      Employees in    Base Price
     Name        Granted      Fiscal Year      ($/Sh)         Expiration Date
     ----        -------      -----------      ------         ---------------

Angelo Giusti    2,500           15.6%        $2 3/32             6/5/08

            There were no other option grants to Named Executive Officers during
the year ended December 31, 1998.


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,  

                                       18

<PAGE>

second and third anniversaries of the date of grant.  Effective January 1, 1998,
each  non-employee  director  was to  receive  an annual  fee of $6,000  payable
quarterly  at the end of each  quarter.  As of  December  31,  1998,  Mr.  James
Anderson, Mr. Edward Epstein and Mr. Larry King each received $4,500.  Directors
also receive  reimbursement  of expenses  incurred by them in  performing  their
duties and in attending  Board  meetings,  provided such expenses are reasonable
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 "for 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.  The Company is the beneficiary of  "key-executive"  life insurance
policies on George Horowitz in the amount of $5,000,000.

RITA  CINQUE  KRISS.  The  Company  and Rita  Cinque  Kriss  are  parties  to an
employment  agreement,  dated as of August 1, 1994, pursuant to which Ms. Cinque
Kriss serves as Executive  Vice  President of the Company,  for which Ms. Cinque
Kriss 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  

                                       19
<PAGE>

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
expired on July 31, 1997 but was and will continue to be renewed for  additional
one-year  periods  unless either Ms. Cinque Kriss 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
Ms.  Cinque  Kriss 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
Kriss 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 Kriss is also entitled to receive  reimbursement for all
reasonable out-of-pocket expenses that she incurs relating to her services under
such  agreement.  The  Company  is the  beneficiary  of a  "key-executive"  life
insurance policy on Rita Cinque Kriss in the amounts of $1,000,000.


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 and Class A Common Stock as
of March  25,  1999 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:

                                       20

<PAGE>
<TABLE>
<CAPTION>
                                                                 Beneficial Ownership
                                                                     Common, and
                                                                  Class A Common (1)


                                                                                      Percentage Of
    Name And Address Of                                                                 Outstanding
    Beneficial Owner                                    Number (2)                       Stock
    ----------------                                    ----------                       -----

    <S>                                                  <C>                              <C>  
    George Q. Horowitz                                   611,794(3)                       21.8%
          c/o Active Apparel Group, Inc.
          1350 Broadway, Suite 2300
          New York, NY 10018
    James K. Anderson                                    118,708(4)                        4.2%
          4903 163rd Ave., N.E.
          Redmond, WA 98052
    Rita Cinque Kriss                                     96,700(5)                        3.4%
          c/o Active Apparel Group, Inc.
          1350 Broadway, Suite 2300
          New York, NY 10018
    Larry Kring                                           29,742(6)                        1.1%
          3265 126th Ave., N.E.
          Bellevue, WA 98005
    Edward R. Epstein                                      6,000(7)                          *
          915 Middle River Drive
          Suite 419
          Fort Lauderdale, FL 33304
    Angelo Giusti                                          2,700(8)                          *
          19 Deer Path
          Holmdel, NJ 07733

    All directors and                                    865,644(3) (4)                   30.9%
    executive officers as a group (6 persons)           (5) (6) (7) (8)


</TABLE>
------------------
(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.

(2)     As of March 25, 1999, there were outstanding  2,492,581 shares of Common
        Stock and  100,000  shares of 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. Thus, while there
        are 2,592,581  total shares  outstanding  (not including any unexercised
        options) this represents 2,992,581 votes.

(3)     Consists of (i) 478,128  shares of Common  Stock (500 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 and (iii) 33,666  shares of Common Stock
        issuable  upon  exercise of options  exercisable  currently or within 60
        days,  including  (A)  options to purchase  2,000  shares at an exercise
        price of $6.25 per share granted by Donald Horowitz,  George  Horowitz's
        brother,  which expire on December 31, 1999, and (B) options to purchase
        15,000 shares  granted by the Company at the exercise price of 11.75 per
        share,  which  expire on November  3, 2005,  and (C) options to purchase
        16,666  shares at an exercise  price $ 14.25 per share,  which expire 

                                       21
<PAGE>
        on November 7, 2006.

(4)     Consists of (i) 86,350 shares of Common Stock of which Mr. Anderson owns
        80,000 shares of Common Stock with his wife, as joint tenants,  and (ii)
        32,358  shares  of  Common  Stock  issuable  upon  exercise  of  options
        excercisable currently or within 60 days, including

               (A)        839 shares @ $  1.75 expires December 31, 2004
               (B)        839 shares @ $  3.00 expires December 31, 2004
               (C)        839 shares @ $  5.00 expires December 31, 2004
               (D)        839 shares @ $  6.25 expires December 31, 2004
               (E)      4,706 shares @ $  0.85 expires December 31, 2003
               (F)     11,630 shares @ $  3.30 expires June 30, 1999
               (G)      4,200 shares @ $  5.50 expires December 31, 1999
               (H)      3,200 shares @ $ 11.75 expires November 3, 2002
               (I)      3,200 shares @ $ 12.50 expires January 2, 2003
               (J)      2,066 shares @ $ 14.75 expires January 3, 2004

(5)     Consists of (i) 76,200  shares of Common Stock and (ii) 20,500 shares of
        Common Stock issuable upon exercise of options exercisable  currently or
        within 60 days including (A) options to purchase 10,500 shares of Common
        Stock at an exercise price of $11.75 per share, which expire on November
        3, 2005 and (B) 10,000  shares of Common  Stock at an exercise  price of
        $14.75 per share, which expire on December 13, 2006.

(6)     Consists of (i) 10,388  shares of Common Stock and (ii) 19,354 shares of
        Common Stock issuable upon the exercise of options currently exercisable
        or within 60 days,  including  (A)  3,100  shares of Common  Stock at an
        exercise  price of $11.75 per share,  which  expire on November 3, 2002,
        (B) 3,100  shares of Common  Stock at $12.50 per share,  which expire on
        January 2, 2003, and (C) options to purchase 2,066 shares at an exercise
        price of $14.75 per  share,  which  expire on  January 3, 2004.  (D) 839
        shares @ $ 1.75  expires  December  31,  2004,  (E) 839  shares @ $ 3.00
        expires  December 31, 2004, (F) 839 shares @ $ 5.00 expires December 31,
        2004,  (G) 839 shares @ $ 6.25  expires  December  31,  2004,  (H) 3,762
        shares @ $ 0.85 expires  December  31,  2003,  (I) 3,970 shares @ $ 3.30
        expires June 30, 1999

(7)     Consists of (i) 1,000  shares of Common  Stock and (ii) 5,000  shares of
        Common Stock issuable upon exercise of options exercisable  currently or
        within 60 days, including (A) options to purchase 3,000 shares of Common
        Stock at an exercise price of $12.50 per share,  which expire on January
        2, 2003 and (B) options to purchase  2,000  shares of Common Stock at an
        exercise price of $14.75 per share, which expire on January 3, 2004.

(8)     Consists  of (i) 700  shares of Common  Stock and (ii)  2,000  shares of
        Common Stock issuable upon exercise of options exercisable  currently or
        within 60 days at an exercise  price of $14.75 per share which expire on
        January 3, 2004.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Edward R. Epstein,  a Director,  was paid $67,736 for legal services for
the year ending December 31, 1998.

                                       22
<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits
         --------
<TABLE>
<CAPTION>

Exhibit                                              Filed            Incorporated By
Index        Description Of Document                 Herewith         Reference To:
-----        -----------------------                 --------         -------------

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

3.2          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                                 Registration Statement
             Converse Inc. and the Company.

10.2         License Agreement, dated as of                           Exhibit 10.2 of the 1995
             June 1, 1992 ("Everlast License"),                       Registration Statement
             between 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                            Registration Statement
             June 1, 1992, between Everlast
             and Total Impact.

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

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

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

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

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

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

                                       23

<PAGE>
<TABLE>
<CAPTION>

Exhibit                                              Filed            Incorporated By
Index        Description Of Document                 Herewith         Reference To:
-----        -----------------------                 --------         -------------

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

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

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

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

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

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

10.16        Memorandum of Agreement of                               Exhibit 10.16 of the 1995 
             Lease, 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                                   Registration Statement
             August 20, 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                                   Registration Statement
             August 20, 1992,
             between the Company and the 
             holders of Common Stock.

10.21        Form of Senior Subordinated Notes                        Exhibit 10.21 of the 1995 
             of 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                          Registration Statement
             due May 31, 1995.

                                       24
</TABLE>


<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                              Registration Statement
             Company 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                              Registration Statement
             Company and Rita Cinque Kriss.

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

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 Company.                   Exhibit 10.28 of the 1995 
                                                                      Registration Statement

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

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

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

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

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

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

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

                                       25

<PAGE>

<TABLE>
<CAPTION>
Exhibit                                              Filed            Incorporated By
Index        Description Of Document                 Herewith         Reference To:
-----        -----------------------                 --------         -------------

<S>          <C>                                                      <C> 
10.36        Third Amendment to the Trademark                         Exhibit 10.36 of the 1997 
             License Agreement, dated as of                           Form 10-KSB for the year ended
             January 7, 1997 between the Company                      December 31, 1996
             and Converse Inc.

10.37        Fourth Amendment to the                                  Exhibit 10.37 of the 1997 Form 10-KSB 
             Trademark License Agreement,                             for the year ended December 31, 1996
             dated as of January 22, 1997 between
             the Company and Converse Inc.

10.38        Employment Agreement, dated as of                        Exhibit 10.38 of the 1997 
             September 1, 1996 between the                            Form 10-KSB for the year ended
             Company and Donald Horowitz                              December 31, 1996

10.39        Amendment to Employment Agreement,                       Exhibit 10.39 of the 1997 
             dated as of August 9, 1996                               Form 10-KSB for the year ended
             between the Company and George Horowitz                  December 31, 1996

10.40        Fifth Amendment to the Trademark             X
             License Agreement, dated as of
             September 19, 1997 between 
             the Company and Converse Inc.

10.41        Sixth Amendment to the Trademark             X
             License Agreement, dated as of
             April 15, 1998 between the Company 
             and Converse Inc.

10.42        Amendment to MTV License agreement                       Exhibit 10.1 of the Form 10-QSB
             dated as of May 26, 1998                                 for the Quarter ended
             between the Company and MTV Networks                     September 30, 1998

10.43        Amendment to MTV License agreement           X
             dated as of October 22, 1998
             between the Company and MTV Networks

10.44        License Agreement, dated as of               X
             October 23, 1998 ("Men's License"),
             between Everlast World's Boxing
             Headquarters Corp. ("Everlast") 
             and the Company

10.45        License Agreement, dated as                  
             of October 23, 1998 ("Men's
             License-Canada"), between 
             Everlast World's Boxing
             Headquarters Corp. ("Everlast") and the      X
             Company

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 1998.

                                       26
<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 29, 1999

             In  accordance  with the  Exchange  Act 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 29, 1999                  /S/ George Horowitz
                                    --------------------------------
                                    George Horowitz (Chairman; Chief
                                    Executive Officer;  Chief Financial  
                                    Officer; principal executive officer, and
                                    principal accounting officer)
    March 29, 1999
                                    /S/ James Anderson
                                    --------------------------------
                                    James Anderson (Director)

    March 29, 1999                  /S/ Rita Cinque Kriss
                                    --------------------------------
                                    Rita Cinque Kriss 
                                    (Executive Vice President and Director)

    March 29, 1999                  /S/ Larry Kring
                                    --------------------------------
                                    Larry Kring (Director)

    March 29, 1999                  /S/ Edward Epstein
                                    --------------------------------
                                    Edward Epstein (Director)

    March 29, 1999                  /S/ Angelo Giusti
                                    --------------------------------
                                    Angelo Giusti (Director)
<PAGE>
                          ACTIVE APPAREL GROUP, INC.


                             FINANCIAL STATEMENTS


                               DECEMBER 31, 1998


<PAGE>
ITEM 7:  FINANCIAL STATEMENTS




                           ACTIVE APPAREL GROUP, INC.


                                TABLE OF CONTENTS


                                                                            PAGE

Independent Auditors' Report                                                1f


Balance Sheet                                                               2f


Statements of Operations                                                    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,  1998,  and the related  statements  of  operations,  changes in
stockholders'  equity,  and cash flows for the years ended December 31, 1998 and
1997.  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 audits 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, 1998 and the results of its  operations  and its cash flows for
the years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.


Berenson & Company LLP


New York, NY
January 29, 1999
<PAGE>
                                                                         Page 2f
                           ACTIVE APPAREL GROUP, INC.

                                  BALANCE SHEET

                                DECEMBER 31, 1998

                                   A S S E T S
Current assets:
    Cash and cash equivalents                                         $  192,870
    Refundable income taxes                                              284,478
    Due from factor                                                    1,887,245
    Inventory                                                          3,026,241
    Prepaid expenses and other current assets                            354,822
    Deferred tax asset                                                   106,130
                                                                      ----------
              Total current assets                                     5,851,786

Note receivable, officer                                                 120,000
Property and equipment, net                                              360,233
Security deposits and other assets                                       270,343
                                                                      ----------

                                                                      $6,602,362
                                                                      ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                     822,119
    Accrued expenses and other current liabilities                        35,667
                                                                      ----------
              Total liabilities, all current                             857,786

Commitments and contingencies

Stockholders' equity:
    Common stock, par value $.002; 10,000,000 shares
      authorized; 2,666,581 issued; 2,492,581
      outstanding                                                          5,333
    Class A common stock, par value $.01; 100,000 shares
      authorized; 100,000 shares issued and outstanding                    1,000
    Paid-in capital                                                    6,136,341
    Retained earnings                                                    329,121
                                                                      ----------
                                                                       6,471,795
    Less treasury stock, at cost (174,000 common shares)                 727,219
                                                                      ----------
                                                                       5,744,576

                                                                      $6,602,362
                                                                      ==========

    The accompanying notes are an integral part of the financial statements.
<PAGE>
                                                                         Page 3f
                           ACTIVE APPAREL GROUP, INC.

                            STATEMENTS OF OPERATIONS





                                                             Years ended
                                                             December 31,
                                                   -----------------------------
                                                     1 9 9 8            1 9 9 7
                                                   ------------      -----------

Net sales                                          $ 15,011,926      $16,687,271

Cost of goods sold                                    9,483,591       10,331,987
                                                   ------------      -----------

Gross profit                                          5,528,335        6,355,284
                                                   ------------      -----------

Operating expenses:
    Selling and shipping                              3,637,729        3,743,862
    General and administrative                        1,911,621        1,850,203
    Financial expenses                                  413,713          417,159
                                                   ------------      -----------
                                                      5,963,063        6,011,224
                                                   ------------      -----------

Income (loss) before provision
  for (recovery of ) income taxes                      (434,728)         344,060

Provision for (recovery of) income taxes               (194,093)         132,575
                                                   ------------      -----------

Net income (loss)                                  $   (240,635)     $   211,485
                                                   ============      ===========


Basic earnings per share                           $       (.09)     $       .08
                                                   ============      ===========


    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, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                      Class A
                                                       Common Stock                common stock
                                                       ------------                ------------
                                                  Shares         Amount       Shares          Amount
                                                  ------         ------       ------          ------

<S>                                              <C>             <C>           <C>           <C>   
Balance, January 1, 1997                         2,447,737       $5,240        100,000       $1,000

Stock options exercised                             21,638           43           -            -

Net income, year ended December 31, 1997              -            -              -            -
                                                 ---------       ------        -------       -----

Balance, December 31, 1997                       2,469,375        5,283        100,000        1,000

Stock options exercised                             24,706           50           -            -

Purchase of treasury stock                          (1,500)        -              -            -

Net loss, year ended December 31, 1998                -            -              -            -
                                                 ---------       ------        -------       -----

                                                 2,492,581       $5,333        100,000       $1,000
                                                 =========       ======        =======       ======

</TABLE>
    The accompanying notes are an integral part of the financial statements.
<PAGE>
                                                                         Page 4f
<TABLE>
<CAPTION>
                                                                                               Treasury Stock
                                                         Paid-in          Retained             --------------
                                                         Capital          Earnings         Shares        Amount         Total    
                                                         -------          --------         ------        ------         -----    
                                                                                                                                 
<S>                                                   <C>             <C>                  <C>          <C>             <C>        
Balance, January 1, 1997                              $ 6,054,035     $   358,271          172,500      $  (725,625)    $ 5,692,921
                                                      -----------     -----------          -------      -----------     -----------

Stock options exercised                                    70,856            --               --               --            70,899

Net income, year ended December 31, 1997                     --           211,485             --               --           211,485
                                                      -----------     -----------          -------      -----------      ----------

Balance, December 31, 1997                              6,124,891         569,756          172,500         (725,625)      5,975,305

Stock options exercised                                    11,450            --               --               --            11,500

Purchase of treasury stock                                   --              --              1,500           (1,594)         (1,594)

Net loss, year ended December 31, 1998                       --          (240,635)            --               --          (240,635)
                                                      -----------     -----------          -------      -----------      -----------

                                                      $ 6,136,341     $   329,121          174,000      $  (727,219)    $ 5,744,576
                                                      ===========     ===========      ===========      ===========     ===========
</TABLE>
<PAGE>
                                                                         Page 5f
                           ACTIVE APPAREL GROUP, INC.

                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                   Years ended
                                                                                                   December 31,
                                                                                          ------------------------------
                                                                                             1 9 9 8           1 9 9 7
                                                                                          -----------        -----------
<S>                                                                                       <C>                <C>        
Cash flows from operating activities:
    Net income (loss)                                                                     $  (240,635)       $   211,485
    Adjustments to reconcile net income (loss)
      to net cash provided operating activities:
       Depreciation                                                                           125,873            109,842
       Changes in assets (increase) decrease:
          Refundable income taxes                                                            (130,978)          (153,500)
          Due from factor                                                                    (230,962)         1,239,990
          Inventory                                                                           821,315         (1,089,856)
          Prepaid expenses and other current assets                                            (3,849)          (206,706)
          Deferred tax asset                                                                  (18,077)           (57,000)
          Security deposits and other assets                                                   (9,002)            78,627
       Changes in liabilities increase (decrease):
          Accounts payable and accrued expenses and
            other current liabilities                                                        (110,748)           (83,824)
                                                                                          -----------        -----------
              Net cash provided by operating activities                                       202,937             49,058
                                                                                          -----------        -----------

Cash flows used by investing activities:
    Acquisition of property and equipment                                                     (79,414)          (223,757)
                                                                                          -----------        -----------

Cash flows from financing activities:
    Purchase of treasury stock                                                                 (1,594)              --
    Proceeds from stock options exercised                                                      11,500             70,899
                                                                                          -----------        -----------
              Net cash provided by financing activities                                         9,906             70,899
                                                                                          -----------        -----------

Net increase (decrease) in cash and cash equivalents                                          133,429           (103,800)

Cash and cash equivalents, beginning of year                                                   59,441            163,241
                                                                                          -----------        -----------

Cash and cash equivalents, end of year                                                    $   192,870        $    59,441
                                                                                          ===========        ===========

Supplemental  disclosures  of cash flow  information:  
   Cash paid during the year for:
       Interest                                                                           $   120,950        $   171,318
       Income taxes                                                                            88,584            653,761
</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, 1998 AND 1997


1.    Nature of business:

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

      Commencing  January 1, 1999,  the Company  will also be a  distributor  of
      men's outerwear, activewear, swimwear and casualwear (note 6).

2. 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  amount  reflected in the balance sheet for cash and
               cash  equivalents,  none of which are held for trading  purposes,
               approximates  fair  value  due to the  short  maturity  of  these
               instruments.
<PAGE>
                                                                         Page 7f
                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997


2.    Significant accounting policies: (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, 1998 and 1997, the Company had incurred advertising
          and promotional expenses of $657,505 and $905,918, 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  year.  Actual results could differ
          from those estimates.

      g. Accounting for stock based compensation:

          The  Company  applies APB  Opinion 25 to account  for  employee  stock
          option  plans (note 8).  Accordingly,  no  compensation  cost has been
          recognized in 1998 and 1997. Had compensation  cost been determined on
          the basis of FASB  Statement  123, net income  (loss) and earnings per
          share would have been reduced as follows:

                                                  1 9 9 8          1 9 9 7
                                                 ----------      ---------
                   Net income (loss):
                        As reported               $(240,635)       $211,485
                                                  =========        ========

                        Pro forma                 $(297,068)       $156,713
                                                  =========        ========

                   Basic earnings per share:
                        As reported               $(.09)             $.08
                                                  =====              ====

                        Pro forma                 $(.12)             $.06
                                                  =====              ====
<PAGE>
                                                                         Page 8f
                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997



2.    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:

          o    the  exercise  price and  expected  life of the option
          o    the current price of the stock and its expected volatility
          o    expected  dividends, if any
          o    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

3. 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
      $50,983 at December 31, 1998. Interest is charged at 1 1/2% above prime on
      advances.  This factoring  arrangement is  collateralized by the Company's
      accounts receivable.

4. Property and equipment:

                   Furniture and fixtures                             $129,409
                   Machinery and equipment                             525,943
                   Leasehold improvements                               52,564
                                                                    ----------
                                                                       707,916
                   Less accumulated depreciation
                     and amortization                                  347,683

                                                                      $360,233
                                                                      ========

5. 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.
<PAGE>
                                                                         Page 9f
                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997



6. Commitments and contingencies:

      a.  License agreements:

          Revenues  are  generated   principally   from  the  sale  of  licensed
          merchandise.  The  Company is the  licensee  on six  agreements  which
          provide for certain royalty payments and charges.  Pursuant to four 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 two 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.  Effective  January 1, 1999,  the  Company
          entered into two new agreements with this licensor covering the period
          January  1,  1999 to  December  31,  2001 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, 1999    $  810,000    $338,000   $159,000  $ 66,000
                           2000       980,000     408,000    279,000    91,000
                           2001     1,149,000     479,000    279,000   116,000
                           2002       779,000     325,000    147,000    61,000

          The  amounts  for Canada are  presented  in U.S.  dollars  assuming an
          exchange rate of $.6634. 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, 1998 is  $555,000,  based on minimum  royalties  due for
          1998.

          The fifth license  agreement  expires March 31, 1999. The Company does
          not  intend to renew  this  agreement.  The  license  fee is 7% of net
          sales.   The  Company  is  required  to  spend  2%  of  net  sales  on
          advertising.  The Company has prepaid a royalty of $8,750 covering the
          remaining term of this agreement.
<PAGE>
                                                                        Page 10f
                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997



6.    Commitments and contingencies: (Continued)

      a.  License agreements: (Continued)

          The sixth license  agreement expires on June 30, 1999. The Company has
          the option to renew the agreement  for an additional  two years if net
          sales  during  the term of the  agreement  exceed  $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.

          Royalty  expense  for the years ended  December  31, 1998 and 1997 was
          approximately $809,000 and $1,028,000, 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, 2000.

          At December 31, 1998,  future minimum rental  payments  required under
          the noncancelable leases are approximately as follows:

             Twelve months ending December 31, 1999        $180,000
                                               2000          18,000

          Rent  expense  for the  years  ended  December  31,  1998 and 1997 was
          approximately $197,000 and $201,000, respectively.

      c. Employment agreements:

          i.   The Company has an  employment  agreement  with its President and
               Chief  Executive  Officer at an annual  base  salary of  $265,000
               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.
<PAGE>
                                                                        Page 11f
                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997



6.    Commitments and contingencies: (Continued)

          i.   (Continued)

               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 $140,000.

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

7. Class A common stock:

      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,  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.

8. 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.
<PAGE>
                                                                        Page 12f
                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997



8.    Stock options (Continued):

      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.

      Effective August 22, 1997, the Company granted 23,199 nonqualified options
      pursuant  to the 1993 stock  option  plan to certain  key  employees.  The
      options were granted in exchange for the  employees'  cancelling  the same
      number of previously  granted  options which had a higher  exercise price.
      The options granted have an effective  exercise price of $5.38 (one dollar
      above the stock price on August 22, 1997).

      The exercise price for options granted (except for the August,  1997 grant
      noted above) 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.
<TABLE>
<CAPTION>
                                                                                S H A R E S
                                                         1993           1995
                                             Stock      stock        Non-employee
                                             option     option       director stock                     Option exercise
                1 9 9 8                      Plan        Plan         Option Plan       Total              Prices
          -------------------              --------   ----------    ---------------    ---------  -----------------------

<S>                                          <C>         <C>           <C>              <C>          <C>
      Outstanding at January 1,              48,700      243,187       27,800           319,687      $  .375 -    $14.75
      Granted                                -            16,000        7,900            23,900      $ 2.094 -    $3.590

      Cancelled                              28,700       58,502         -               87,202      $  .375 -    $5.375

      Exercised                              20,000        4,706         -               24,706      $  .375 -   $  .850
                                             ------     --------       ------          --------

      Outstanding at December 31,              -         195,979       35,700           231,679      $  .850 -    $14.75
                                            =======      =======       ======           =======

      Exercisable at December 31,              -         165,647       16,567           182,214      $  .850 -    $14.75
                                            =======      =======       ======           =======
</TABLE>
<PAGE>
                                                                        Page 13f
                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997



8.    Stock options: (Continued)
<TABLE>
<CAPTION>
                                                                           S H A R E S
                                                         1993            1995
                                              Stock     stock         Non-employee
                                              option    option       director stock                     Option exercise
                1 9 9 7                       Plan      Plan          Option Plan       Total              Prices
          -------------------               --------  ----------    ----------------   ---------  ----------------------
<S>                                           <C>        <C>            <C>             <C>        <C>            <C>   
      Outstanding at January 1,               54,700     271,705        21,700          348,105    $    .375 -    $14.75
      Granted                                 -           26,399        12,200           38,599    $    5.38 -    $14.75

      Cancelled                               -           43,829         1,550           45,379      $11.750 -    $14.75

      Exercised                                6,000      11,088         4,550           21,638     $   .375 -    $12.50
                                             -------     -------        ------          -------

      Outstanding at December 31,             48,700     243,187        27,800          319,687     $   .375 -    $14.75
                                              ======     =======        ======          =======

      Exercisable at December 31,             48,700     196,657         7,304          252,661     $   .375 -    $12.50
                                              ======     =======        ======          =======
</TABLE>
9. Income taxes:

      For the year ended December 31, 1998 and 1997, the Company had a provision
      for (recovery of) income taxes consisting of the following:

                                                     1 9 9 8          1 9 9 7
                                                   -----------       --------
               Current tax provision (recovery):
                   Federal                           $(123,815)        $136,580
                   State and local                     (53,891)          46,723
                   Foreign                               1,690            6,272
                                                   -----------       ----------

                                                      (176,016)         189,575
               Deferred tax benefit:
                   Federal                             (13,015)         (42,544)
                   State and local                      (5,062)         (14,456)
                                                   -----------        ---------

               Income tax provision (recovery)       $(194,093)        $132,575
                                                     =========         ========
<PAGE>
                                                                        Page 14f
                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997


9.    Income taxes (Continued):

      The  difference  between the statutory  Federal income tax rate of 34% and
      effective income tax rates of 45% and 39% for the years ended December 31,
      1998 and 1997, respectively, is presented below as a percentage of pre-tax
      income:
                                                               1998        1997
                                                               ----        ----

                   Federal statutory rate                       34%        34%
                   Increases (reductions) in taxes
                     resulting from:
                        State and local income tax (net
                          of federal tax benefit)               13         10
                        Foreign tax                              1          2
                        Temporary differences                   (6)       (11)
                        Permanent differences                    3          4
                                                               ---       ----

                   Effective rate                               45%        39%
                                                               ===         ==


10. Economic dependency:

          For the  years  ended  December  31,  1998  and  1997  four  customers
          accounted for approximately 48% and 47% of sales, respectively.

11. Geographic data:

          Geographic information for net sales is as follows:

                                       1998                 1997
                                       ----                 ----
          U.S.                     $13,503,023         $15,452,830
          Canada                     1,328,819           1,234,441
          Other foreign countries      180,584                   -
                                   -----------         -----------
                                   $15,011,926         $16,687,271
                                   ===========         ===========
12. Earnings per share:

      Basic  earnings  per share  amounts  are  computed  based on the  weighted
      average number of shares actually outstanding during the year.
<PAGE>
                                                                        Page 15f
                           ACTIVE APPAREL GROUP, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997



12.   Earnings per share (Continued):

      Diluted  earnings per share is not presented for December 31, 1998 because
      it is  anti-dilutive.  Diluted  earnings  per share is not  presented  for
      December 31, 1997 because it is not materially dilutive.
<TABLE>
<CAPTION>
                                                                      1 9 9 8         1 9 9 7
                                                                    -----------    ------------
<S>                                                                 <C>             <C>
          Basic earnings per share:
               Net income (loss) available for common stock         $ (240,635)     $   211,485
                                                                    ==========      ===========

          Weighted average common stock outstanding                  2,592,155        2,564,106
                                                                    ==========      ===========

          Basic earnings per share                                   $(.09)             $.08
                                                                     =====              ====
</TABLE>
13. Financial expenses:

      Included  in  financial  expenses  is  interest  expense of  $120,950  and
      $171,318 for the years ended December 31, 1998 and 1997, respectively.