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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-K

                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 1998           Commission File No. 1-9502

                             STAGE II APPAREL CORP.
             (Exact name of registrant as specified in its charter)

              New York                                    13-3016967
   (State or other jurisdiction of                     (I.R.S. Employer
   incorporation or organization)                     Identification No.)

            1385 Broadway
         New York, New York                                  10018
(Address of principal executive offices)                  (Zip Code)

       Registrant's telephone number, including area code: (212) 840-0880

           Securities registered pursuant to Section 12(b) of the Act:

    Title of each class                Name of each exchange on which registered
Common Stock, $.01 par value                    American Stock Exchange

          Securities registered pursuant to Section 12(g) of the Act:

                                     None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X|  No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K under the Securities Exchange Act of 1934 is not contained
herein, and will not be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated in Part III of this Form
10-K or any amendments to this Form 10-K. |X|

As of March 25, 1999, 3,903,267 shares of Common Stock were outstanding, and the
aggregate market value of shares held by unaffiliated shareholders was
approximately $3,959,000.

                      DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Proxy Statement for the 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Report.

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<PAGE>

                                    PART I

Item 1. Business

Introduction

      General. Stage II Apparel Corp. (the "Company" or "Stage II") designs and
distributes an extensive range of casual apparel, activewear and collection
sportswear for men and boys. The Company markets its apparel to sporting goods,
specialty and department stores, mass merchandisers and wholesale membership
clubs under nationally recognized brand names as well as proprietary and private
labels. During the last three years, the Company has streamlined its operations
to focus on its most popular lines and has increased reliance on its proprietary
labels. The Company's products are produced to its specifications by various
independent manufacturers in Asia, Africa and Europe. Stage II also acts as
purchasing agent for various major retailing customers.

      Market Position. The Company believes it is a recognized supplier in its
market segment. This assessment is based on factors including merchandiser
recognition of the Company's licensed and proprietary brand names, its apparel
sales penetration in major chain stores and the fragmented nature of the
industry. During 1998, the Company had over 500 customers.

      Market Sector. Stage II has specialized in casual apparel and activewear
primarily for men and boys since its inception in 1980. The Company's products
offer customers a wide selection of apparel styles, fabrics and colors for
leisure and sports activities and are sold at "popular" and "moderate to better"
prices.

      Market Innovation. Stage II launched an innovative business-to-business
website on the Internet in March 1999 for sales of its licensed brandname
apparel lines to retailers in the United States and worldwide sales of its
proprietary lines. The facility is expected to enhance the Company's visibility
to the trade and provide a convenient sourcing tool to its customers. It could
also reduce Stage II's dependence on commissioned salesmen, resulting in higher
gross profit margins. The website is expected to begin adding to the Company's
revenues in the second quarter of 1999. See "Marketing."

      Product Innovation. In March 1999, Stage II agreed to acquire the Cross
Colours trademark, a pioneer brand in the early development of young men's urban
fashion. The brand was launched in 1989 and achieved rapid success in the early
1990s by creating a fresh new urban look in the young men's fashion forward
market. The Company plans to develop its own lines of Cross Colours streetwear
internally and license a wide variety of retail items externally to expand the
availability of these products in mainstream market segments. See
"Products--Cross Colours Trademark" below.

Redirection of Business

      Recurring Losses. In systematically reducing the scope of its business to
focus on its most popular apparel lines, the Company has experienced
difficulties in maintaining strong gross profit margins and cutting fixed costs.
This has resulted in substantial losses over the last five years, particularly
between 1995 and 1997. See "Management's Discussion and Analysis of Financial
Position and Results of Operations." In response to these developments, the
Company implemented a number of strategic changes in 1998 to reverse the decline
in its business. These efforts were undertaken with a view to increasing
shareholder values by bringing in a new management team, cutting expenses and
adding new apparel lines to the Company's reduced asset base.

      Change of Control. In May 1998, Stage II and three of its founders (the
"Founders") completed the transactions (the "Change of Control Transactions")
contemplated by a Stock Purchase Agreement with Richard Siskind, the principal
shareholder and CEO of several companies engaged in various segments of the
apparel industry. The Change of Control Transactions included the sale to Mr.
Siskind of 1.9 million shares (the "Control Shares") of the Company's common
stock ("SA Common Stock") held by the Founders, representing 48.7% of the


                                       1
<PAGE>

SA Common Stock outstanding as of the date of this Report. In consideration for
the Control Shares, Mr. Siskind arranged for the Founders' release from their
guarantees of the Company's indebtedness to its factor and their receipt of
options to reacquire a total of 1.5 million shares of SA Common Stock from Mr.
Siskind at exercise prices ranging from $.50 to $1.50 per share (the "Founders
Options"). Later in the year, Founder Options for 1.35 million Control Shares
were acquired from the Founders by Jon Siskind, an officer and director of the
Company.

      Other Change of Control Transactions. In addition to the sale of the
Control Shares, the Change of Control Transactions included (i) the Company's
issuance to Mr. Siskind of options to purchase up to 1.5 million shares of SA
Common Stock on the same terms as the Founders Options, exercisable only to the
extent the Founders Options are exercised, (ii) the reconstitution of the
Company's board of directors with designees of Mr. Siskind, (iii) the addition
of a new management team headed by Mr. Siskind and (iv) the arrangement by Mr.
Siskind of a new credit facility for the Company. In lieu of a market rate
salary, Mr. Siskind also received options to purchase 900,000 shares of SA
Common Stock at $.75 per share. The Company believes Mr. Siskind's experience,
industry contacts and successful track record will enable Stage II to complete
the turnaround started by its prior management.

Products

      General. The Company's product mix was historically based on the
perception that retail customers preferred quality brand name apparel over
comparable proprietary or private label products. Stage II implemented this
strategy by acquiring U.S. license rights to nationally recognized brand names,
expanding its product lines to accommodate as many as sixteen brand name
licenses by 1993. Over the past few years, in response to increased demand for
more moderately priced activewear for men and boys, the Company has consolidated
its branded apparel lines to concentrate on its most popular licenses. Stage II
has also placed greater emphasis on its own proprietary labels, primarily Timber
Run and, commencing in 1999, Cross Colours.

      Brand Name Licenses. During the course of its license acquisition program,
the Company has added and thereafter discontinued various brand name licenses in
favor of more advantageous arrangements for its current brand name and
proprietary lines. In 1998, Stage II made arrangements for relinquishing its
Dunlop license, with sales to continue through the end of 1999. During 1997, the
Company also terminated its license for the Spalding brand, ended its
manufacturing arrangements with a non-exclusive licensee of the NBA and NFL and
liquidated its Canadian subsidiary, Woody Sports Apparel, Inc. ("Woody Sports"),
which held Canadian activewear licenses from various sports associations. See
"Management's Discussion and Analysis of Financial Position and Results of
Operations--Discontinued Operations."

      New Adolfo License. In August 1998, the Company added exclusive Adolfo
licenses for two separate apparel lines. The first includes mens activewear and
leisure lifestyle apparel. The second features an upscale collection of mens
knitwear, sweaters and woven shirts. Both lines are targeted for department,
sporting goods and specialty stores. The licenses run for three-year terms with
extension rights through December 2009. The Adolfo Collection marks the
Company's initial success in trading up to more upscale brands identified with
higher quality markets, while the activewear license provides an opportunity to
expand recognition for this brand within the Company's existing customer base.
Stage II expects to allocate substantial resources to build the new lines and
believes the favorable terms of the license, coupled with the other components
of its turnaround strategy, will contribute to the planned rebuilding of its
core business. Sales of the new Adolfo lines will start for the Spring season,
adding to the Company's revenue base beginning in the first quarter of 1999.

      Licensed Brand Name Apparel Sales. The Company's licensed brand name
apparel generally sells at a higher price and with greater gross profit margins
than its comparable private and proprietary label apparel. During 1998, 1997 and
1996, sales of brand name apparel accounted for approximately 46%, 60% and 71%,
respectively, of the Company's net sales. The historical reduction in licensed
brand name apparel as a percentage of product mix reflects an increased reliance
on proprietary labels in response to greater demand for more moderately priced
men's and boys' activewear. The Company's new management team plans to reverse
this trend by adding apparel lines that retain the advantages of brand name
recognition without the high costs associated with Stage II's prior licenses.


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<PAGE>

      License Agreements. The Company's current license agreements require it to
make minimum annual royalty payments ranging from approximately $50,000 to
$75,000. These thresholds generally increase for each successive license year.
The license agreements also provide the licensor with a right of termination if
the Company defaults on these obligations or fails to maintain quality control.
Stage II is in compliance with the terms of each of its license agreements. The
agreements run for various periods and are generally renewable. Prior to
expiration of a profitable license, Stage II is usually able to obtain renewals
or replacements on comparable terms.

      In 1998, the Company's Dunlop line accounted for over 10% of net sales.
This line will be replaced by the Company's new Adolfo lines in 1999. The
Company's Spalding line accounted for over 10% of its net sales in 1997, and its
Spalding and Coleman lines each accounted for over 10% of net sales in 1996. The
license agreements with Spalding and Coleman were terminated by mutual consent
in 1997 and 1996, respectively. During the last two years, Stage II also
increased emphasis on its own Timber Run label, which accounted for
approximately 25% and 15% of its net sales in 1998 and 1997, respectively.

      Cross Colours Trademark. In March 1999, Stage II agreed to purchase the
Cross Colours trademark from a group including one of the Company's outside
directors in exchange for 200,000 shares of SA Common Stock. The Company plans
to leverage the brand's strong association with the early development of young
men's urban streetwear to capitalize on the growing popularity of this style in
young men's fashion. The Company's strategy is to develop its own lines of Cross
Colours products internally and license a wide variety of retail items to expand
the availability of lifestyle urban streetwear under this brand to a wider
audience, targeting mass merchandisers at price points below fashion forward
levels. The Company's planned licensing business will focus on kids' and
juniors' activewear, footwear, accessories and home products. The Cross Colours
licensing campaign is expected to begin in the second quarter of 1999.

Marketing and Distribution

      Marketing Strategy. The Company's marketing strategy focuses on multiple
product lines of quality casual apparel and activewear distinguished by design,
label and price. This permits Stage II to sell products to both discount and
full price operating divisions of major retailers. The Company's mix of brand
name and proprietary label apparel also enables it to deliver similar apparel
items under different labels to competing merchandising customers.

      Marketing Vehicles. Stage II sells its products through a sales force
consisting of five sales employees and nine sales agents located in New York
City and other domestic locations. The Company advertises its brand name
products through its catalogs distributed each season and magazines including
Discount Stores News, a trade periodical, and the Daily News Record. The Company
also displays its merchandise in showrooms at its New York City headquarters. In
addition, Stage II exhibits its apparel at the semi-annual trade shows produced
by the Men's Apparel Guild (MAGIC), a major men's and boys' apparel show, and
other trade shows, including the Atlanta Super Show and the BATMAN's show for
big and tall men's apparel.

      Internet Sales. In March 1999, the Company launched its new website
(Stageii.com) for transactions over the Internet between Stage II and retailers.
The website is designed to bring the Company's showroom to apparel retailers of
all sizes anywhere in the world. It covers the Company's entire product lines
and is periodically updated to add new designs as they are introduced. As a
result, for the first time, the Company's "new look" items can be conveniently
accessed at any time through E-commerce, potentially changing the way many
retailers will do business.

      Recognizing the impact of the Internet as a marketing tool in a
business-to-business environment, Stage II developed its new website
specifically for reaching out to its current and potential customer base,
including smaller retailers whose limited resources would otherwise restrict
their access to key apparel manufacturers. The Company believes the introduction
of its innovative website may eliminate this disadvantage, allowing retailers of
any size to gain instantaneous contact with Stage II to review the showroom and
immediately order current merchandise from inventory on a real-time basis. As a
result, the website gives the smaller retailer the same access to the Company's


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<PAGE>

latest apparel lines as the major nationwide retail chains. This not only
eliminates costly product review trips by customers but may also reduce the
Company's marketing expenses.

      The Company designed its website to be user friendly and convenient for
browsing throughout the Company's entire on-line showroom. Having identified a
customer need, the Company believes its website provides the solution for the
many retailers who can now buy apparel simply and directly through the Internet
on an "as needed" basis for new orders and reorders. Through its commitment to
helping its customers succeed, the Company has sought to add another major
component to its turnaround strategy.

      Customers. In 1998, the Company's products were sold to over 500 customers
operating national and regional chains of sporting goods, specialty and
department stores, mass merchandisers and wholesale membership clubs throughout
the United States, Canada and Mexico. The Company's ten largest customers during
1998 (measured by sales) were Ames Department Stores, Pamida, Academy, United
Merchandising, Modecraft Fashions, Wal-Mart Stores, Value City, Ann & Hope,
Mercantile Stores and General Textiles. Approximately 52% of the Company's 1998
net sales were made to these customers, of which Wal-Mart Stores, Inc. and Ames
Department Stores, Inc. accounted for approximately 4% and 16%, respectively,
compared to 1997 levels of 13% and 14%, respectively.

      Distribution. The Company's brand name and proprietary label products are
generally prepacked at the manufacturing site into cartons, shipped to an East
Coast warehouse and then shipped directly to the customer without repacking.
Products sold under retailers' own private labels are shipped directly to the
retailer.

Manufacturing

      Manufacturing Sources. Stage II does not own or operate any manufacturing
facilities. The Company's products are manufactured in accordance with its
designs, specifications and production schedules by approximately 50 independent
manufacturers located in over 16 countries in Asia, Africa and Europe. Stage II
determines its manufacturing requirements based on customer orders placed or
indicated approximately six months prior to shipment. Manufacturing is then
arranged on an order-by-order basis.

      While there are no long term contractual commitments between Stage II and
its manufacturers, management believes the Company can continue to meet its
manufacturing requirements from its current manufacturers and, if necessary,
from other foreign and domestic sources. The Company's management has extensive
experience in the apparel industry and has established long term relationships
with independent manufacturers over the years. Management believes that these
relationships facilitate its sourcing of manufacturing requirements. The Company
also believes that the number and geographical diversity of its manufacturing
sources minimize the potential risks of quota limitations on imports from
certain foreign countries and adverse consequences that would result from
termination of its relationship with any of its manufacturers. See "Imports and
Import Restrictions" below.

      Production Allocations. Stage II allocates production among its suppliers
based on a number of criteria, including quota considerations for foreign
suppliers, availability of production capability, quality, pricing and
flexibility in meeting changing production requirements on relatively short
notice.

      Quality Control. All finished products manufactured for the Company are
inspected by employees or agents of the Company prior to acceptance and payment
to ensure that they meet the Company's design, quality and other production
specifications. Employees or agents of the Company inspect initial product
samples provided by manufacturers for compliance with production specifications,
and production runs are not authorized until conforming samples have been
approved. Payment for each foreign manufacturing order is generally backed by an
irrevocable international letter of credit issued under the Company's credit
agreement approximately two to six months prior to shipment of the products. The
letters of credit may not be drawn until an authorized employee or agent of
Stage II issues an inspection certificate certifying that the products are in
compliance with the manufacturing order.


                                       4
<PAGE>

Sales Agency Operations

      Historically, the Company's Hong Kong subsidiary, Stage II Apparel Corp.
of Hong Kong, Ltd. ("Stage II HK"), provided sales agency services to Stage II
and acted as purchasing agent to certain major retailing customers of the
Company. These functions included monitoring the production and quality control
of garments manufactured for the Company in various foreign locations,
inspecting production facilities and evaluating potential future suppliers.
Stage II HK also assisted the Company's manufacturers in locating and purchasing
manufacturing machinery and raw materials when necessary to ensure timely
delivery of finished products to meet the Company's manufacturing orders. The
operations of Stage II HK were wound down during the fourth quarter of 1997,
with its monitoring functions being replaced by outside contractors as part of
the Company's cost cutting measures. Its sales agency business is currently
conducted directly by the Company.

      During 1998, Stage II acted as purchasing agent for approximately $2.4
million of apparel for third parties. These amounts are not included as net
sales of the Company. Instead, the fees for these services are reflected as
commission income. Information on the amounts of net sales and commission
income, operating profit and identifiable assets attributable to the Company's
operations in the United States and abroad is set forth in Note 2 of the Notes
to the Company's Consolidated Financial Statements included elsewhere in this
Report.

Imports and Import Restrictions

      Current Import Considerations. The Company imports substantially all of
its products from various foreign countries located in Asia, Africa and Europe.
Since 1963, imports of apparel products from these countries have been subject
to constraints imposed by multilateral textile agreements with the United States
applicable to specific product categories. As products in a certain product
category are imported from a country into the United States, that country's
quota for the product category is utilized. When an annual quota limit is
reached, no more products in the category may enter into the United States
during the year from that country. Stage II monitors the amount of unutilized
quota available for import of the Company's products on a weekly basis and
arranges its production schedules accordingly. The Company further minimizes its
potential exposure to quota risks through, among other things, geographical
diversification of its manufacturing sources and shifts of production among
countries and manufacturers. Stage II bases its choice of manufacturer, in part,
on quota considerations.

      Potential Future Restrictions. The Company's ability to obtain necessary
product requirements may be affected by additional bilateral agreements,
unilateral trade restrictions, substantial decreases in textile import quotas, a
significant drop in the value of the dollar against foreign currency, political
instability resulting in the disruption of trade from exporting countries or the
imposition of additional duties, taxes or other charges on imports. From time to
time, legislation has been introduced in both houses of Congress seeking to
limit the import of foreign goods, including cloth, clothes and shoes, to the
United States. The Company's management has substantial experience in developing
and maintaining sources of supply, foreign and domestic, and therefore believes
that Stage II will be able to adjust to any future import restrictions by
obtaining required quota rights or, when necessary, moving production to
countries in which applicable quotas remain unfilled or to countries in which no
quotas are imposed.

Backlog

      The Company's backlog of orders for garments at March 26, 1999 totaled
approximately $3.8 million, including 1999 sales through that date, representing
a decrease of $6.2 million from the comparable backlog of approximately $10
million at March 19, 1998, including sales through that date. Substantially all
of the orders at March 26, 1999 are scheduled for delivery by the end of the
year. Backlog represents orders placed by customers that are not yet due for
shipment. The amount of unfilled orders at a particular time is affected by a
number of factors including the scheduling of the manufacture and shipment of
the product, which in some instances is dependent on the desires of the
customer. Cancellations, rejections and returns can reduce the amount of net
sales resulting from the backlog of orders. Accordingly, a comparison of
unfilled orders from period to period is not necessarily meaningful or
indicative of subsequent actual shipments.


                                       5
<PAGE>

Competition

       The apparel business is highly competitive and consists of many
importers, distributors and manufacturers, none of which accounts for a
significant percentage of total industry sales, but some of which are larger and
have substantially greater resources than the Company. Stage II competes with
distributors that import apparel from abroad, with domestic retailers having
established foreign manufacturing relationships and with companies that produce
apparel domestically. The Company's sector of the apparel industry is highly
fragmented, and management believes that Stage II is a leading supplier of
casual apparel and activewear marketed to mass merchandisers under a number of
nationally recognized brand names and proprietary labels.

Employees

      As of December 31, 1998, the Company had 20 employees. None of the
Company's employees are represented by a union. Stage II considers its working
relationships with employees to be good and has never experienced an
interruption of its operations due to any kind of labor dispute.

Item 2. Properties

New York Office Headquarters

      In July 1998, Stage II obtained a cancellation of its office lease at 350
Fifth Avenue in New York City and relocated its administrative and sales offices
to 1385 Broadway, New York, New York. The cancelled lease covered 10,800 square
feet for a term through 2006 at an average annual rent of $343,000 plus
electricity, taxes and expense escalations. In the absence of the cancellation,
the Company's estimated future obligations under the lease would have aggregated
approximately $4 million. The lease cancellation required a fee of $325,000 and
was effective as of July 15, 1998. The fee and related relocation costs and
writeoffs of leasehold improvements aggregated $561,000 and were recognized in
the third quarter of 1998. The new lease arrangements cover 3,000 square feet
through 2003 at a total annual cost of approximately $80,000. This represents an
annual savings to the Company over $330,000.

Distribution Facilities

      During 1998, the Company distributed substantially all of its finished
garments in the United States from a public distribution facility located in the
New York metropolitan area, leased on a month-to-month basis. In 1998, and 1997,
the Company's aggregate warehouse and distribution costs were approximately
$140,000 and $164,000, respectively.

Item 3. Legal Proceedings

      The Company is a party to several legal proceedings incidental to its
business, none of which is considered to be material to its financial position,
results of operations or liquidity.

Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable.


                                       6
<PAGE>

                                    PART II

Item 5. Market for the Company's Common Stock and Related Shareholder Matters

Trading Market

      The SA Common Stock is listed for trading on the AMEX under the symbol SA.
The following table sets forth, for the periods indicated, the high and low
sales prices for the SA Common Stock as reported on the AMEX.

                                                     Market Prices           
                                                  --------------------
         1997:                                      High         Low
                                                  --------   ---------
         First quarter..........................  $ 2 1/8    $ 1 7/16
         Second quarter.........................    1 5/16     1 3/16
         Third quarter..........................    3            1/2
         Fourth Quarter.........................    2 1/16      13/16
         
         1998:
         
         First quarter..........................  $ 2 1/16   $   5/8
         Second quarter.........................    1            1/2
         Third quarter..........................    1 3/4        9/16
         Fourth quarter.........................    1 3/8       13/16
         
         1999:
         
         First quarter..........................  $ 3 13/16  $   7/8
         
Security Holders

      As of February 28, 1999, there were 119 holders of record of the SA Common
Stock. Stage II estimates that there are at least 750 beneficial owners of SA
Common Stock.

Dividends

       The Company has not paid any dividends on the SA Common Stock since 1994
and does not expect to consider reinstituting dividend payments in the
foreseeable future.

Item 6. Selected Financial Data

      The following table presents selected financial data of Stage II at and
for the year ended December 31 in each of the five years through 1998. The
selected financial data presented below has been derived from the Company's
audited consolidated financial statements, which have been restated for 1994 and
1995 to account for the operations of the Company's Canadian subsidiary as
discontinued operations in view of the Company's decision in 1996 to dispose of
its interest in the subsidiary. For each of the three years through December 31,
1998, the following financial information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations as well as the Consolidated Financial Statements of the Company and
related Notes included elsewhere in this Report.


                                       7
<PAGE>

                    STAGE II APPAREL CORP. AND SUBSIDIARIES

                   (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                     --------------------------------------------------------------
                                                        1998         1997         1996         1995         1994
                                                     ---------    ---------     --------     --------     ---------
<S>                                                  <C>          <C>           <C>          <C>          <C>      
Income Statement Data:
Net sales........................................    $   9,867    $  16,547     $ 33,428     $ 60,177     $  59,560
Cost of goods sold...............................        7,859       14,234       28,016       48,357        46,778
                                                     ---------    ---------     --------     --------     ---------
   Gross profit..................................        2,008        2,313        5,412       11,820        12,782
Commission and other income......................          251          442          678        1,599           853
                                                     ---------    ---------    ---------     --------     ---------
                                                         2,259        2,755        6,090       13,419        13,635
Selling, general and administrative expenses.....        3,391        6,083        9,195       13,341        13,059
Loss on lease cancellation ......................          561          ---          ---          ---           ---
Impairment of prepaid salary and non-compete.....          ---          255          512          ---           ---
Impairment of goodwill...........................          ---        5,029          ---          ---           ---
Loss on sale of securities.......................          ---          285          ---          ---           ---
Loss (gain) on settlement of litigation .........          ---         (249)         (13)         577           ---
                                                     ---------    ---------    ---------     --------     ---------
   Operating profit (loss).......................       (1,693)      (8,648)      (3,604)        (499)          576
Interest expense, net............................          544          690        1,588        2,421         1,818
   Loss from continuing operations
     before income taxes (benefit)...............       (2,237)      (9,338)      (5,192)      (2,920)       (1,242)
Income taxes (benefit)...........................           81           74          (33)        (342)         (438)
                                                     ---------    ---------    ---------     --------     ---------
   Loss from continuing operations...............       (2,318)      (9,412)      (5,159)      (2,578)         (804)
                                                     ---------    ---------    ---------     --------     ---------
Discontinued operations:
   Loss from discontinued operations.............          ---          ---         (324)         (684)         (61)
   Gain (loss) on disposal of discontinued
     operations..................................          ---          163       (1,479)         ---           ---
                                                     ---------    ---------    ---------     --------     ---------
                                                           ---          163       (1,803)        (684)          (61)
                                                     ---------    ---------    ---------     --------     ---------
Net loss.........................................    $  (2,318)   $  (9,249)   $  (6,962)    $ (3,262)    $    (865)
                                                     =========    =========    =========     ========     =========
Net loss per common share:
   Loss from continuing operations...............    $    (.59)   $   (2.28)    $  (1.23)    $   (.60)    $    (.19)
   Income (loss) from discontinued operations....          ---          .04         (.43)        (.18)         (.02)
                                                     ---------    ---------    ---------     --------     ---------
                                                     $    (.59)   $   (2.24)   $   (1.66)    $   (.78)    $    (.21)
                                                     ==========   =========    =========     ========     =========
Weighted average common shares outstanding.......        3,904        4,128        4,196        4,195         4,161
                                                     ==========   =========    =========     ========     =========
</TABLE>

<TABLE>
<CAPTION>
                                                                           As of December 31,
                                                     --------------------------------------------------------------
                                                        1998         1997         1996         1995         1994
                                                     ---------    ---------     --------     --------     ---------
<S>                                                  <C>          <C>           <C>          <C>          <C>      
Summary Balance Sheet Data:
   Total assets..................................    $   6,800    $  11,178     $ 25,809     $ 39,536     $  41,126
   Due to factor.................................        2,331        4,650        7,174       11,658         9,630
   Long term debt, excluding current portion ....          ---          ---          699        1,295         1,465
   Shareholders' equity..........................        3,031        5,327       14,390       21,678        24,414
</TABLE>


                                       8
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

General

      The Company has historically developed its product lines primarily through
the acquisition of license rights to nationally recognized brand names for sales
of its apparel in the United States. During the last three years, the Company
streamlined its operations to focus on its most popular labels, relinquishing
its license rights for six brand name lines, liquidating its Canadian and Hong
Kong subsidiaries and discontinuing its arrangements with a licensee of NBA and
NFL brand sportswear. The relinquished lines have been replaced with a new
exclusive license for the Adolfo brand in 1998 and an increased emphasis on the
Company's own proprietary labels, primarily Timber Run and, commencing in 1999,
the Cross Colours trademark.

      In general, the Company's licensed brand name apparel sells at a higher
price and with greater gross profit margins than comparable non-branded apparel.
These advantages are partially offset by royalty and advertising expenses
incurred in accordance with the Company's license agreements. These costs are
included in selling, general and administrative ("SG&A") expenses. The Company's
new management team plans to add apparel lines that retain the advantages of
brand name recognition without the high costs associated with Stage II's prior
licenses.

      Difficulties in reducing SG&A expenses and maintaining strong gross profit
margins in the face of intensified competition, consolidation and overall
weakness in the retail apparel market contributed to the Company's net losses in
1997 and 1996 aggregating $9.2 million and $7.0 million, respectively. These
losses included noncash charges for asset writedowns aggregating $5.3 million in
1997 and $1.7 million in 1996. Although the Company reported an additional loss
of $2.3 million in 1998, the success of its cost cutting program by new
management contributed to a return to profitable operations in the last two
quarters of the year before giving effect to lease cancellation and relocation
expenses of $561,000, writeoffs of accounts receivable and other noncash or
nonrecurring items adding $209,000 to SG&A expenses in the third quarter and
$560,000 in the fourth quarter of 1998. See "Recent Developments--Office
Relocation."

Recent Developments

      Turnaround Strategy. Stage II has financed its losses over the last three
years with borrowings under its credit facility. This short term debt was
reduced from time to time primarily with repatriated earnings of Stage II HK
aggregating $9.4 million in 1997, of which $6.0 million was used to repay debt,
and $3.4 million in 1996, all of which was used for debt reduction. As part of
its strategy for returning to profitability, in addition to changing its
licensing arrangements, reducing the scope of its operations to concentrate on
its most successful products and cutting overhead expenses, the Company has
tightened its inventory control, improved its sourcing arrangements, added new
sales personnel and realigned management to focus on its core product lines.

      Change of Control. To implement its turnaround strategy, Stage II
completed the Change of Control Transactions in May 1998 with the Founders and
Richard Siskind. See "Business--Redirection of Business." The Change of Control
Transactions included the sale to Mr. Siskind of approximately 1.9 million
Control Shares held by the Founders in consideration for their release from
guarantees of the Company's indebtedness to its factor and their receipt of
Founders Options to reacquire a total of 1.5 million Control Shares from Mr.
Siskind at exercise prices ranging from $.50 to $1.50 per share. The Control
Shares represent 48.7% of the Common Stock outstanding as of the date of this
Report. In July 1998, Founder Options for 1.35 million Control Shares were
acquired from the Founders by Jon Siskind, an officer and director of the
Company.

      Office Relocation. In July 1998, Stage II obtained a cancellation of its
office lease at 350 Fifth Avenue in New York City and relocated its
administrative and sales offices to 1385 Broadway, New York, New York. The
cancelled lease covered 10,800 square feet for a term through 2006 at an average
annual rent of $343,000 plus electricity, taxes and expense escalations. In the
absence of the cancellation, the Company's estimated future obligations under
the lease would have aggregated approximately $4 million. The lease cancellation
required a fee


                                       9
<PAGE>

of $325,000 and was effective as of July 15, 1998. The fee and related
relocation costs and writeoffs of leasehold improvements aggregated $561,000 and
were recognized in the third quarter of 1998, contributing to the Company's
reported net loss for the quarter. The new lease arrangements cover 3,000 square
feet through 2003 at a total annual cost of approximately $80,000. This
represents an annual savings to the Company over $330,000 and positions Stage II
for an anticipated return to profitability in 1999.

      Internet Sales. In March 1999, Stage II launched a website on the Internet
for sales of its branded and proprietary apparel lines to retailers in the
United States. Over time, the facility is expected to enhance the Company's
visibility to the trade and provide a convenient sourcing tool to its customers.
If successful, it could also reduce the Company's dependence on commissioned
salesmen, resulting in higher gross profit margins. The website is expected to
begin adding to the Company's revenues in the second quarter of 1999.

Discontinued Operations

      During the third quarter of 1996, the Company finalized its plan to
liquidate the operations of Woody Sports and provided for a loss on disposal of
$1.5 million, comprised of a provision of $326,000 for operating losses during
the phase-out period, a noncash impairment charge of $1.1 million against
goodwill of the subsidiary and a $100,000 charge against prepaid salaries. The
Company's consolidated statement of operations for the year ended December 31,
1996 presents the operations of Woody Sports as discontinued operations in view
of the Company's decision to dispose of its interest in the subsidiary. The
liquidation of Woody Sports was completed in the third quarter of 1997.

Asset Writedowns

      In 1996, the Company implemented the Financial Accounting Standards
Board's Statement No. 121, Accounting for the Impairment Long Lived Assets to be
Disposed of ("FAS 121"). Under FAS 121, certain assets are required to be
reviewed periodically for impairment whenever circumstances indicate their
carrying amount exceed their fair value and may not be recoverable. At December
31, 1997, the Company recognized noncash impairment charges totaling $5.3
million, reflecting a $5.0 million writedown of goodwill attributable to a
planned reduction in emphasis on proprietary labels received in prior
acquisitions and a related $255,000 writedown of a former officer's prepaid
salary and non-compete covenant. In addition, in July 1996, as part of the plan
of liquidation for Woody Sports, the Company took noncash charges aggregating
$1.2 million against the assets of its Canadian subsidiary. See "Discontinued
Operations" above. The Company also took charges of $512,000 in 1996 for
writedowns of a former officer's prepaid salary and a non-compete covenant.

Results of Operations

      Seasonality. Stage II experiences some seasonal business fluctuations due
primarily to seasonal buying patterns for its product mix of casual apparel and
activewear. While sales of the Company's products are made throughout the year,
the largest sales volume has historically occurred in the third quarter. The
following table reflects these quarterly fluctuations, which have been restated
to account for the operations of Woody Sports as discontinued operations and
should not be construed as indicative of future net sales.

                               Quarterly Net Sales
                                 (In thousands)

                        First      Second       Third      Fourth
                       Quarter     Quarter     Quarter     Quarter      Total
                       -------     -------     -------     -------      -----

1998.................. $ 1,855     $ 1,653     $ 4,130     $ 2,229     $ 9,867
1997..................   4,067       2,348       5,718       4,414      16,547
1996..................   8,437       5,693      10,397       8,901      33,428


                                       10
<PAGE>

      The following tables present the Company's gross profit from continuing
operations, income (loss) from continuing operations and income (loss) per share
from continuing operations on a quarterly basis during the last three years. The
reduction in gross profit from continuing operations in the fourth quarters of
1998 and 1997 reflects the sell off of discontinued lines and an increase in
inventory markdowns. Amounts may not add across due to rounding.

                Quarterly Gross Profit from Continuing Operations
                                 (In thousands)

                         First      Second       Third      Fourth
                        Quarter     Quarter     Quarter     Quarter      Total
                        -------     -------     -------     -------      -----

1998................... $  418      $  434      $1,092      $   64      $2,008
1997...................    677         300       1,295          41       2,313
1996...................  1,647         811       2,126         828       5,412

               Quarterly Income (Loss) from Continuing Operations
                                 (In thousands)

                         First      Second       Third      Fourth
                        Quarter     Quarter     Quarter     Quarter      Total
                        -------     -------     -------     -------      -----

1998................... $ (692)     $ (632)     $ (472)     $ (522)     $(2,318)
1997................... (1,068)     (1,678)        133      (6,799)      (9,412)
1996................... (1,377)     (2,489)         12      (1,305)      (5,159)

          Quarterly Income (Loss) Per Share from Continuing Operations

                         First      Second       Third      Fourth
                        Quarter     Quarter     Quarter     Quarter      Total
                        -------     -------     -------     -------      -----

1998................... $ (.18)     $ (.16)     $ (.12)     $ (.13)     $ (.59)
1997...................   (.26)       (.40)        .03       (1.66)      (2.28)
1996...................   (.33)       (.59)        .00        (.31)      (1.23)


      1998 and 1997. Net sales of $9.9 million in 1998 decreased by 40.4% from
$16.5 million from continuing operations in 1997. The decrease primarily
reflects the termination of unprofitable apparel divisions as part of the
planned reduction in the scope of operations, as well as the elimination of
lower margin customer accounts with a longer term view of strengthening gross
profit margins. The decline was also influenced in the first half of 1998 by
temporary disruptions in the Company's factoring arrangements in connection with
the Change of Control Transactions. See "Recent Developments" above.

      Cost of goods sold as a percentage of sales decreased to 79.6% in 1998
compared to 86.0% in 1997. The decrease reflects improved arrangements with new
manufacturing sources, higher gross profit margins on the Company's revamped
apparel lines, greater concentration on core customer accounts and tighter
inventory controls.

      Commission and other income of $251,000 during 1998 decreased by 43.2%
from $442,000 in 1997, reflecting a reduction in the Company's sales agency
business in connection with the termination of its Hong Kong subsidiary.


                                       11
<PAGE>

      SG&A expenses of $3.4 million in 1998 decreased by 44.3% compared to $6.1
million in 1997, primarily attributable to a reduction in variable costs
associated with lower sales volumes and a cost cutting plan adopted as part of
the Company's redirection of its business. SG&A expenses for 1998 include
various nonrecurring or noncash items, primarily writedowns of accounts
receivable, totaling $769,000. Before accounting for these items, SG&A expenses
as a percentage of sales decreased to 34.3% compared to 36.8% in 1997. The
Company anticipates a continuation in this trend as a result of an estimated
$330,000 in annual savings from its office relocation in July 1998 and other
cost cutting measures adopted by new management following the Change of Control
Transactions.

      Stage II recognized a loss on lease cancellation totaling $561,000 in the
third quarter of 1998 resulting from a cancellation fee for the termination of
its prior office lease and related relocation expenses and writeoffs of
leasehold improvements. The Company expects to achieve long term benefits more
than offsetting these nonrecurring expenses from substantial saving over the
term of its new office lease. See "Recent Developments--Office Relocation"
above.

      Interest and factoring expenses aggregated $892,000 or 9.1% of sales in
1998 compared to $932,000 or 5.6% of sales in 1997. The decrease reflects lower
factoring expenses from more favorable factoring arrangements and a reduction in
amount of factored receivables during 1998. See "Liquidity and Capital
Resources" below.

      The Company recognized a net loss of $2.3 million or $.59 per share based
on 3,904,000 average common shares outstanding in 1998, compared to a net loss
from continuing operations of $9.4 million in 1997 or $2.28 per share, after
accounting for the disposal of the Company's discontinued subsidiary, based on
4,128,000 average common shares outstanding, reflecting the foregoing trends.
Operating results for 1998 were adversely affected by lease cancellation and
related relocation costs and writeoffs of leasehold improvements aggregating
$561,000 and various nonrecurring or noncash items, primarily writedowns of
accounts receivable, adding $769,000 to SG&A expenses for the year.

      1997 and 1996. Net sales of $16.5 million from continuing operations in
1997 decreased by 50.5% from $33.4 million in 1996. The decrease primarily
reflects the termination of certain brand name apparel licenses as part of the
planned reduction in the scope of the Company's operations. Sales of replacement
brand name and proprietary lines did not begin to offset the decline until the
third quarter of 1997.

      Cost of goods sold as a percentage of sales increased to 86.0% in 1997
from 83.8% in 1996. The increase reflects lower gross profit margins primarily
resulting from higher levels of promotional sales in response to the continuing
weak retail trade and the sell off of discontinued lines.

      Commission and other income decreased by approximately $.2 million during
1997 compared to the prior year, reflecting a decline in the Company's sales
agency business.

       SG&A expenses for 1997 decreased by 33.8% to $6.1 million compared to
$9.2 million for 1996, primarily from a reduction in variable costs associated
with lower sales volumes. SG&A expenses as a percentage of sales increased to
36.8% for 1997 compared to 27.5 % in 1996, reflecting a faster decline in sales
than the Company's ability to reduce SG&A expenses.

      Interest and factoring expenses decreased by $1.4 million or 60.1% for
1997 compared to 1996. The decrease resulted from a reduction of current debt
with repatriated earnings of Stage II HK and from a decline in volume of
factored receivables. During 1997, the Company realized interest income of
$242,000 and recognized a loss of $285,000 on the sale of marketable securities.

      The Company recognized noncash impairment charges aggregating $5.3 million
at December 31, 1997, reflecting a $5.0 million writedown of goodwill
attributable to prior acquisitions and a $255,000 writedown of a former
officer's prepaid salary and non-compete covenant. In 1997, the Company also
recognized a $249,000 gain relating to a litigation settlement. In 1996, the
Company recognized noncash charges of $1.2 million against the carrying value of
its Canadian subsidiary's assets and prepaid salaries plus $512,000 for
writedowns of a former officer's prepaid


                                       12
<PAGE>

salary and non-compete covenant. See "Asset Writedowns" and "Discontinued
Operations" above.

      The Company recognized losses from continuing operations before income tax
benefits of $9.3 million in 1997 and $5.2 million in 1996, reflecting the
foregoing developments. After accounting for the disposal of the Company's
discontinued subsidiary, the losses were $2.24 per share in 1997 based on
4,128,000 average common shares outstanding and $1.66 per share in 1996 based on
4,196,000 average common shares outstanding. See "Discontinued Operations"
above.

Liquidity and Capital Resources

      Liquidity. Net cash used by Stage II's operating activities during 1998
aggregated $964,000. The Company's cash position increased from $641,000 at
December 31, 1997 to $992,000 at December 31, 1998. The increase in liquidity
resulted primarily from the sale of marketable securities during 1998 netting
$3.0 million.

      Capital Resources. During 1997, the Company repatriated all of its Hong
Kong subsidiary's cash and marketable securities aggregating $9.3 million, of
which $6.0 million was used to reduce short term debt. The repatriation did not
trigger domestic taxes due to the availability of net operating losses to offset
the taxable income created. In 1998, the Company sold marketable securities
netting $3.0 million, all of which was used to reduce short term debt.

      Prior to the Change of Control Transactions, Stage II maintained a credit
facility (the "Prior Credit Facility") under a factoring agreement with Milberg
Factors Corp. The Prior Credit Facility provided for the factor to purchase the
Company's accounts receivable that it had preapproved, without recourse except
in cases of merchandise returns or billing or merchandise disputes in the normal
course of business. In addition, the factor was responsible for the accounting
and collection of all accounts receivable sold to it by the Company. The factor
received a commission under the Prior Credit Facility in an amount less than 1%
of the net receivables it purchased. The Prior Credit Facility also provided for
the issuance of letters of credit to fund the Company's foreign manufacturing
orders and for short term borrowings at a floating interest rate equal to 1/2%
above the prime rate. The Company's obligations under the Prior Credit Facility
were payable on demand and secured by its inventory, accounts receivable and
marketable securities. The aggregate amount of letters of credit and borrowings
available under the Prior Credit Facility were determined from time to time by
the factor based upon the Company's financing requirements and financial
performance.

      In connection with the Change of Control Transactions, Stage II obtained a
new factoring and credit facility arranged by Mr. Siskind with The CIT
Group/Commercial Services, Inc. (the "Credit Facility") to replace the Prior
Credit Facility. See "Recent Developments." The agreements covering the Credit
Facility provide for substantially the same terms and conditions as the Prior
Credit Facility. Those agreements may be terminated without penalty by the
Company on May 31, 2000 or the end of any subsequent contract year upon 60 days
notice. As of December 31, 1998, the Company's net direct borrowings under the
Credit Facility aggregated $2.3 million. This reflects a reduction of $4.7
million from mid-year debt levels. The reduction was primarily attributable to
debt repayments of $3 million from the sale of marketable securities and a
substantial reduction of inventory since the Change of Control Transactions.

      The Company believes that its internally generated funds and borrowings
available under its Credit Facility will be sufficient to meet its foreseeable
working capital requirements. Stage II may reborrow amounts repaid under its
Credit Agreement or seek other external means to finance its operations in the
future. As of December 31, 1998, the Company had no material capital expenditure
requirements.

      Inflation. The general level of inflation in domestic and foreign
economies has not had a material effect on the Company's operating results
during the last three years.

      New Accounting Pronouncement. In June 1998, the Financial Accounting
Standards Board issued Statement


                                       13
<PAGE>

of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). Effective for all fiscal
periods beginning after June 15, 1999, FAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether the derivative is designated as part
of a hedge transaction and, if it is, the type of hedge transaction. Management
anticipates that the adoption of FAS 133 will have no material impact on the
Company's financial position or results of operations due to its limited use of
derivative instruments.

      Year 2000 Compliance. The Company believes that it is year 2000 compliant
and does not currently anticipate any disruption in its operations as a result
of any compliance failure. Since the Company will begin booking orders in the
third quarter of 1999 for its Spring 2000 lines, it will have an opportunity at
that time to test its year 2000 compliance. This will provide Stage II with
substantial lead time to address any technical problems encountered.

      Stage II has received verbal compliance assurances from most of its major
suppliers and customers but has not yet received written confirmation of their
year 2000 compliance status.

Forward Looking Statements

      This Report includes forward looking statements within the meaning of
Section 21E of the Securities Exchange Act relating to matters such as
anticipated operating and financial performance, business prospects,
developments and results of the Company. Actual performance, prospects,
developments and results may differ materially from anticipated results due to
economic conditions and other risks, uncertainties and circumstances partly or
totally outside the control of the Company, including risks of inflation,
fluctuations in market demand for the Company's products and changes in the
level of future expenses for the manufacturing and distribution of those
products. Words such as "anticipated," "expect," "intend" and similar
expressions are intended to identify forward looking statements, all of which
are subject to these risks and uncertainties.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

      Stage II does not hold any derivative securities or other market rate
sensitive instruments. As of December 31, 1998, the Company held U.S. Treasury
Notes, Government National Mortgage Association bonds and corporate debt and
equity securities with an aggregate market value of $388,000. The Company
classifies these securities as available-for-sale and accounts for the
securities at fair value. Unrealized holding gains and losses on these
securities, net of the related tax effect, are excluded from earnings and
reported, until realized, as a component of accumulated other comprehensive
income in the equity section of the accompanying consolidated financial
statements. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis. A decline in the
market value of any available-for-sale security below cost that is deemed other
than temporary results in a reduction in carrying amount to fair value. The
impairment is charged to earnings, and a new cost basis for the security is
established. Dividend and interest income are recognized when earned.


                                       14
<PAGE>

Item 8. Financial Statements and Supplementary Data

                          Index to Financial Statements
                                                                            Page
                                                                            ----
Stage II Apparel Corp. and Subsidiaries:

  Independent Auditors' Reports............................................ F-1
  Consolidated Balance Sheets - December 31, 1998 and 1997................. F-3
  Consolidated Statements of Operations - For the years ended 
   December 31, 1998, 1997 and 1996........................................ F-4
  Consolidated Statements of Comprehensive Loss - For the years ended 
   December 31, 1998, 1997 and 1996........................................ F-5
  Consolidated Statements of Shareholders' Equity - For the years 
   ended December 31, 1998, 1997 and 1996.................................. F-6
  Consolidated Statements of Cash Flows - For the years ended 
   December 31, 1998, 1997 and 1996........................................ F-7
  Notes to Consolidated Financial Statements............................... F-8
  Schedule II -- Valuation and Qualifying Accounts......................... F-20

Item 9. Changes in and Disagreements with Accountants in Accounting and
        Financial Disclosure

      On July 25, 1997, the Company dismissed KPMG LLP ("KPMG") as its
independent accountants. On the same date, the Company engaged Mahoney Cohen &
Company, CPA, P.C. ("MC&C") as its independent accountants. The change in
accountants was approved by the Audit Committee of the Board. KPMG's report on
the Company's financial statements for the year ended December 31, 1996 did not
contain an adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles. During the
last year and the interim period prior to the change in accountants, (i) the
Company had no disagreements with KPMG on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, (ii)
KPMG did not advise the Company of any "reportable event" as defined in
Regulation S-K under the Securities Exchange Act of 1934 and (iii) the Company
did not consult with MC&C on any accounting, auditing, financial reporting or
any other matters.

                                    PART III

Item 10. Executive Officers of the Company

      The executive officers of the Company are as follows:

                                                                     Officer of
                                                                      Stage II
      Name              Age                Position                     Since
      ----              ---  -------------------------------------   -----------
      Richard Siskind . 52   President and Chief Executive Officer       1998
      Beverly Roseman . 40   Vice President                              1998
      Jon Siskind ..... 30   Vice President                              1998
      Leonard Plavin .. 40   Chief Financial Officer                     1998

      A summary of the business experience and background of the Company's
officers is set forth below.

      Richard Siskind joined the Company as President, Chief Executive Officer
and a director in May 1998 in connection with the Change of Control
Transactions. He has been in the apparel business for over 30 years, serving in
a variety of roles and positions. By 1977, Mr. Siskind had assumed the position
of president of David Small Industries, Inc. In 1982, he co-founded Apparel
Exchange, Inc., an affiliated company. Both companies sold off-price men's,
women's and children's apparel and reached sales aggregating over $100 million
by 1989. Mr. Siskind sold


                                       15
<PAGE>

both companies in 1989. In 1991, he founded R. Siskind and Company ("RSC"). He
is a director, sole shareholder and chief executive officer of RSC, which is in
the business of purchasing top brand name men's and women's apparel and
accessories, and redistributing it to a global clientele of upscale off-price
retailers.

      Beverly Roseman joined the Company as a Vice President and director in May
1998 in connection with the Change of Control Transactions. She joined RSC in
1992 as the Merchandise Manager. In 1995, Mrs. Roseman was appointed as RSC's
Vice President of Buying, Merchandising and Operations. Mrs. Roseman also
oversees the Human Resources, MIS and Operational divisions of RSC. From 1975 to
1980, Mrs. Roseman worked for R.H. Macy's, first as trainee and then as a buyer.
She was employed from 1980 to 1982 as a buyer for The Broadway Department Stores
in California, from 1982 to 1988 as a buyer for Marshall's Inc. and from 1988 to
1992 as a Senior Buyer for T.J. Maxx. Mrs. Roseman is a graduate of Adelphi
University.

      Jon Siskind joined the Company as a Vice President and director in May
1998 in connection with the Change of Control Transactions. He graduated from
the University of Hartford in 1991, where he received his B.A. in Economics. He
joined RSC in the same year as an account executive handling the Northeast and
Mid West territories. In 1994, he was appointed National Sales Manager and given
the additional responsibility for overseeing all sales and distribution. In
1995, he was appointed as RSC's Vice President of Sales. Jon Siskind is the son
of Richard Siskind.

      Leonard Plavin joined the Company as Chief Financial Officer in September
1998. He is also employed as Controller of RSC, which he joined in April 1998.
Since 1995, Mr. Plavin was the Controller of Sweatshirt Apparel Corp., a Guess
licensee, prior to which he served for four years as Controller of BRB
Industries, Inc., a manufacturer of clothing accessories. He received a B.S.
Degree in Accounting from Brooklyn College in 1980.


      The balance of Part III to this Report is incorporated by reference to the
Company's definitive Proxy Statement for its 1999 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission on or before April 30,
1999.

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

      (a)   Financial Statements and Schedules:

      (1)   Financial Statements: The financial statements listed in the Index
            under Item 8 are included at the end of this Report.

      (2)   Schedules: Other than Schedule II -- Valuation and Qualifying
            Accounts, all schedules for which provision is made in applicable
            accounting regulations of the SEC have been omitted as the schedules
            are either not required under the related instructions, are not
            applicable or the information required thereby is set forth in the
            Company's Consolidated Financial Statements or the Notes thereto.


                                       16
<PAGE>

      (3)   Exhibits:

   Exhibit
   Number:     Exhibit
   -------     -------

     2.1*      Amended and Restated Certificate of Incorporation of the Company
     3.2*      By-Laws of the Company
     4.1*      Form of Stock Certificate
    10.1*      1987 Incentive Stock Option Plan
    10.2       1998 Incentive Stock Option Plan
    10.3       1998 Nonqualified Stock Option Plan--A (incorporated by reference
               to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
               (File No. 1-9502) for the quarter ended March 31, 1998)
    10.4       1998 Nonqualified Stock Option Plan--B (incorporated by reference
               to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
               (File No. 1-9502) for the quarter ended March 31, 1998)
    10.5       License agreement dated March 14, 1996 between Dunlop Slazenger
               Corporation and the Company (incorporated by reference to Exhibit
               10.6 to the Company's Annual Report on Form 10-K (File No.
               1-9502) for the year ended December 31, 1995).
    10.6       Stock Purchase Agreement dated as of February 26, 1998 among the
               Company, Jack Clark, Robert Plotkin, Steven R. Clark and Richard
               Siskind (incorporated by reference to Exhibit 10.1 to the
               Company's Current Report on Form 8-K (File No. 1-9502) filed on
               March 2, 1998).
    10.7       Management Agreement dated as of February 26, 1998 between the
               Company and Richard Siskind (incorporated by reference to Exhibit
               10.2 to the Company's Current Report on Form 8-K (File No.
               1-9502) filed on March 2, 1998).
    21.1       Subsidiaries of the Company (incorporated by reference to Exhibit
               21.1 to the Company's Annual Report on Form 10-K (File No.
               1-9502) for the year ended December 31, 1994).
    24.1       Power of Attorney of Richard Siskind, Robert Greenberg, Barry 
               Fertel, Beverly Roseman and Jon Siskind.
    27.1       Financial Data Schedule

----------
*     Incorporated by reference to the corresponding Exhibit filed with the
      Company's Registration Statement on Form S-1, as amended (Reg. No.
      33-12959).

      (b)   Reports on Form 8-K:

      None.


                                       17
<PAGE>

                                   SIGNATURES


      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, this 26th day of
March, 1999.

                             STAGE II APPAREL CORP.


By:       /s/ Leonard Plavin            By:       /s/ Richard Siskind
   ---------------------------------      --------------------------------------
            Leonard Plavin                         Richard Siskind
       Chief Financial Officer            President and Chief Executive Officer
       (Principal Financial                  (Principal Executive Officer)
      and Accounting Officer)


      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacity and on the date
indicated.




                                          Title                       Date
                                          -----                       ----

Richard Siskind, Robert Greenberg,      Directors
Barry Fertel, Beverly Roseman and
Jon Siskind*


By:         /s/ Richard Siskind                                  March 26, 1999
   ------------------------------------
   *Richard Siskind as attorney-in-fact


                                       18
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Shareholders of Stage II Apparel Corp.:



We have audited the accompanying consolidated balance sheets of Stage II Apparel
Corp. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive loss, shareholders' equity
and cash flows and the related Schedule II for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stage II Apparel
Corp. and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.



                                          MAHONEY COHEN & COMPANY, CPA, P.C.

New York, New York
March 12, 1999


                                      F-1
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Shareholders of Stage II Apparel Corp.:



We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Stage II Apparel Corp. and subsidiaries
for the year ended December 31, 1996, before the reclassification described
under the caption "Comprehensive Income" in Note 1 of the accompanying
consolidated financial statements . These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated 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 audit provide a reasonable basis for our
opinion.

In our opinion, the 1996 consolidated financial statements (before
reclassification) referred to above present fairly, in all material respects,
the results of operations and cash flows of Stage II Apparel Corp. and
subsidiaries for the year ended December 31, 1996 in conformity with generally
accepted accounting principles.



                                                KPMG LLP

New York, New York
March 31, 1997


                                      F-2
<PAGE>

                     STAGE II APPAREL CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                          -------------------------
                                                                                             1998           1997
                                                                                          ---------       ---------
<S>                                                                                       <C>             <C>      
ASSETS:
  Current assets:
   Cash and cash equivalents..........................................................    $     992       $     641
   Restricted cash (note 3)...........................................................          ---             679
   Accounts receivable (notes 3 and 5)................................................          103             496
   Finished goods inventory (notes 3 and 6)...........................................        2,855           2,496
   Prepaid expenses...................................................................           54             214
   Prepaid income taxes and refunds receivable........................................          ---              30
                                                                                          ---------       ---------
     Total current assets.............................................................        4,004           4,556
   Property and equipment, at cost, less accumulated depreciation (note 7) ...........           86             500
   Marketable securities (notes 3 and 8)..............................................          388           3,325
   Goodwill, less accumulated amortization and impairment of $7,821 and
     $7,654 at December 31, 1998 and 1997, respectively...............................        1,793           1,960
   Other assets.......................................................................          529             837
                                                                                          ---------       ---------
     TOTAL ASSETS.....................................................................    $   6,800       $  11,178
                                                                                          =========       =========
LIABILITIES:
   Current liabilities:
     Due to factor (note 3)...........................................................    $   2,331       $   4,650
     Accounts payable.................................................................        1,031             850
     Due to affiliate (note 13).......................................................           26             ---
     Accrued royalties................................................................           80              78
     Other current liabilities (note 12)..............................................          301             273
                                                                                          ---------       ---------
       TOTAL LIABILITIES..............................................................        3,769           5,851
SHAREHOLDERS' EQUITY (notes 16 and 17):
   Preferred stock, $.01 par value, 1,000 shares authorized;
     none issued and outstanding                                                                ---             ---
   Common stock, $.01 par value, 9,000 shares authorized; 4,993 shares
     issued and 3,904 shares outstanding at December 31, 1998 and 1997................           50              50
   Additional paid-in capital.........................................................        7,502           7,502
   Retained earnings (deficit)........................................................       (2,221)             97
                                                                                          ---------       ---------
                                                                                              5,331           7,649
   Less treasury stock, at cost; 1,089 shares at December 31, 1998 and 1997...........       (2,302)         (2,302)
   Accumulated other comprehensive income.............................................            2             (20)
                                                                                          ---------       ---------
     TOTAL SHAREHOLDERS' EQUITY.......................................................        3,031           5,327
                                                                                          ---------       ---------

   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.........................................    $   6,800       $  11,178
                                                                                          =========       =========
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-3
<PAGE>

                     STAGE II APPAREL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                           ----------------------------------------
                                                                              1998           1997           1996
                                                                           ---------      ---------       ---------
<S>                                                                        <C>            <C>             <C>      
Net sales..............................................................    $   9,867      $  16,547       $  33,428
Cost of goods sold (note 6)............................................        7,859         14,234          28,016
                                                                           ---------      ---------       ---------

Gross profit...........................................................        2,008          2,313           5,412
Commission and other income............................................          251            442             678
                                                                           ---------      ---------       ---------
                                                                               2,259          2,755           6,090

Selling, general and administrative expenses (notes 12, 15 & 17).......        3,391          6,083           9,195
Loss on lease cancellation (note 12)...................................          561            ---             ---
Impairment of prepaid salary and non-compete...........................          ---            255             512
Impairment of goodwill.................................................          ---          5,029             ---
Loss on sale of marketable securities..................................          ---            285             ---
Gain on settlement of litigation (notes 9, 10 and 15) .................          ---           (249)            (13)
                                                                           ---------      ---------       ---------

Operating loss.........................................................       (1,693)        (8,648)         (3,604)

Other income (expenses):
   Interest income.....................................................          348            242             748
   Interest and factoring expenses.....................................         (892)          (932)         (2,336)
                                                                           ---------      ---------       ---------

Loss from continuing operations before income taxes (benefit)..........       (2,237)        (9,338)         (5,192)

Income taxes (benefit) (note 14).......................................           81             74             (33)
                                                                           ---------      ---------       ---------
Loss from continuing operations........................................       (2,318)        (9,412)         (5,159)
                                                                           ---------      ---------       ---------

Discontinued operations:
   Loss from discontinued operations...................................          ---            ---            (324)
   Gain (loss) on disposal of discontinued operations .................          ---            163          (1,479)
                                                                           ---------      ---------       ---------
                                                                                 ---            163          (1,803)
                                                                           ---------      ---------       ---------
Net loss...............................................................    $  (2,318)     $  (9,249)      $  (6,962)
                                                                           =========      =========       =========

Basic and dilutive net loss per common share:
   Loss from continuing operations.....................................    $    (.59)     $   (2.28)      $   (1.23)
   Gain (loss) from discontinued operations ...........................          ---            .04            (.43)
                                                                           ---------      ---------       ---------
                                                                           $    (.59)     $   (2.24)      $   (1.66)
                                                                           =========      =========       =========

Weighted average common shares outstanding ............................        3,904          4,128           4,196
                                                                           =========      =========       =========
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-4
<PAGE>

                     STAGE II APPAREL CORP. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                           ----------------------------------------
                                                                              1998           1997           1996
                                                                           ---------      ---------       ---------
<S>                                                                        <C>            <C>             <C>       
Net loss...............................................................    $  (2,318)     $  (9,249)      $  (6,962)

Other comprehensive income (loss):
   Foreign currency translation adjustments ...........................          ---             87               3
   Unrealized gains (losses) on securities:
     Unrealized holding gains (losses) arising during the period ......           22             24            (329)
     Less: reclassification adjustment for losses included in net loss           ---            285             ---
                                                                           ---------      ---------       ---------
                                                                                  22            396            (326)
                                                                           ---------      ---------       ---------

Comprehensive loss.....................................................    $  (2,296)     $  (8,853)      $  (7,288)
                                                                           =========      =========       =========
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-5
<PAGE>

                     STAGE II APPAREL CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                         Common                                         Accumulated
                                          Stock   Additional     Retained   Treasury       Other           Total
                                           Par      Paid In      Earnings     Stock    Comprehensive   Shareholders'
                                          Value     Capital      (Deficit)    Cost        Income          Equity
                                          -----     -------      ---------    ----        ------          ------
<S>                                      <C>        <C>         <C>        <C>           <C>              <C>     
Balance at December 31, 1995 ..........  $   50     $ 7,502     $ 16,308   $ (2,092)     $   (90)         $ 21,678

Foreign currency translation adjustment     ---         ---          ---        ---            3                 3
Unrealized losses on securities .......     ---         ---          ---        ---         (329)             (329)
Net loss...............................     ---         ---       (6,962)       ---          ---            (6,962)
                                         ------     -------     --------   --------      -------          --------

Balance at December 31, 1996 ..........      50       7,502        9,346     (2,092)        (416)           14,390

Purchase of treasury stock in settlement 
  (note 10) ...........................     ---         ---          ---       (210)         ---              (210)
Foreign currency translation adjustment     ---         ---          ---        ---           87                87
Unrealized gain on securities, net of
   reclassification adjustment ........     ---         ---          ---        ---          309               309
Net loss...............................     ---         ---       (9,249)       ---          ---            (9,249)
                                         ------     -------     --------   --------      -------          --------

Balance at December 31, 1997 ..........      50       7,502           97     (2,302)         (20)            5,327

Unrealized gains on securities, net of
   reclassification adjustment ........     ---         ---          ---        ---           22                22
Net loss...............................     ---         ---       (2,318)       ---          ---            (2,318)
                                         ------     -------     --------   --------      -------          --------

Balance at December 31, 1998 ..........  $   50     $ 7,502     $ (2,221)  $ (2,302)     $     2          $  3,031
                                         ======     =======     ========   ========      =======          ========
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-6
<PAGE>

                     STAGE II APPAREL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                           ----------------------------------------
                                                                              1998           1997           1996
                                                                           ---------      ---------       ---------
<S>                                                                        <C>            <C>             <C>       
Operating Activities:
Net loss...............................................................    $  (2,318)     $  (9,249)      $  (6,962)
Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
  Provision for discontinued operations................................          ---            ---           1,187
  Depreciation and amortization of property and equipment..............          115            124             171
  Amortization and impairment of goodwill and non-compete covenant ....          175          5,908           1,032
  Gain on settlement of litigation.....................................          ---           (249)            ---
  Loss on sale of marketable securities................................          ---            285             ---
  Loss on sale or abandonment of property and equipment ...............          561            ---              26
  Changes in assets and liabilities:
    Accounts receivable................................................          393            838             670
    Finished goods inventory...........................................         (359)         2,634           7,354
    Prepaid expenses...................................................          160            160             554
    Prepaid income taxes and refunds receivable .......................           30            100             613
    Other assets.......................................................          300            467             (27)
    Accounts payable...................................................          181           (988)           (807)
    Due to affiliate...................................................           26            ---             ---
    Income taxes payable...............................................          ---             (8)            (42)
    Accrued royalties..................................................            2           (104)           (466)
    Other current liabilities..........................................         (230)          (215)             75
                                                                           ---------      ---------       ---------
Net cash provided by (used in) operating activities....................         (964)          (297)          3,378
                                                                           ---------      ---------       ---------
Investing Activities:
  Purchase of property and equipment, net..............................           (4)           (39)             (9)
  Sale or redemption of available for sale marketable securities ......        3,170          6,259           2,139
  Purchase of available for sale marketable securities ................         (211)          (905)            ---
                                                                           ---------      ---------       ---------
  Net cash provided by investing activities............................        2,955          5,315           2,130
                                                                           ---------      ---------       ---------
Financing Activities:
  Payments of notes payable............................................          ---         (1,046)           (171)
  Borrowings from factor...............................................       10,527         19,731          29,847
  Repayments to factor.................................................      (12,846)       (22,255)        (34,332)
  Decrease (increase) in restricted cash...............................          679           (679)            ---
  Borrowings from bank.................................................          ---            ---           2,862
  Repayments to bank...................................................          ---           (434)         (3,439)
  Treasury stock transactions, net.....................................          ---           (210)            ---
                                                                           ---------      ---------       ---------
Net cash provided by (used in) financing activities....................       (1,640)        (4,893)         (5,233)
                                                                           ---------      ---------       ---------
Effects of exchange rate changes on cash ..............................          ---             87               3
                                                                           ---------      ---------       ---------
Net increase in cash and cash equivalents..............................          351            212             278
Cash and cash equivalents at beginning of year.........................          641            429             151
                                                                           ---------      ---------       ---------
Cash and cash equivalents at end of year...............................    $     992      $     641       $     429
                                                                           =========      =========       =========
Supplemental disclosures of cash flow information:
  Cash paid for income taxes...........................................    $      51      $       2       $      16
                                                                           =========      =========       =========
  Cash paid for interest, excluding factoring fees ....................    $     646      $     642       $   1,680
                                                                           =========      =========       =========
Supplemental schedule of noncash investing and financing activities:
  Increase (decrease) in allowance for decline in market value of
      available for sale securities....................................    $      22      $    (309)      $     329
                                                                           =========      =========       =========
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-7
<PAGE>

                     STAGE II APPAREL CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

      Principles of Consolidation. The consolidated financial statements include
the accounts of Stage II Apparel Corp. and its subsidiaries (the "Company" or
"Stage II"). Each subsidiary is wholly owned other than a majority owned
Canadian subsidiary that was liquidated during 1997. All significant
intercompany balances and transactions have been eliminated in consolidation.

      Business Activity. The Company designs, arranges for the manufacture and
markets an extensive range of sports and casual apparel. Products are marketed
under exclusive and non-exclusive brand name licenses as well as proprietary and
private labels. None of the Company's license agreements requires more than
$10,000 in up-front payments. See Note 15--Commitments and Contingencies. Stage
II also acts as purchasing agent for various major retailing customers.

      Revenue Recognition. Stage II recognizes revenue from all categories of
apparel sales at the time merchandise is shipped. Commissions from sales agency
operations are recognized when invoiced to customers.

      Goodwill. The Company's goodwill, representing the excess of purchase
price over fair value of net assets acquired, is amortized on a straight-line
basis over 15 years, the expected periods to be benefitted. Stage II assesses
the recoverability of goodwill by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired products, customers and operations.

      Asset Impairment under FAS 121. On January 1, 1996, the Company adopted
the Financial Accounting Standards Board's Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of ("FAS
121"). FAS 121 requires long-lived assets and certain identifiable intangibles
to be reviewed for impairment whenever changes in circumstances such as
significant declines in sales, earnings or cash flows or material changes in the
business climate indicate that their carrying amount may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the asset to future net cash flows expected to be generated
by the asset. If the asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less cost to sell. See Note 4--
Discontinued Operations and Note 10--Settlement of Townsley Litigation.

      Cash Equivalents. The Company considers all highly liquid debt instruments
with original maturities of three months or less to be cash equivalents.

      Marketable Securities. The Company maintains an account with a brokerage
firm containing a money market fund and marketable securities, with balances
insured against the brokerage firm's failure for up to $500,000 ($100,000 for
cash) by the Securities Investor Protection Corporation. Marketable securities
at December 31, 1998 and 1997 consist of U.S. Treasury Notes, Government
National Mortgage Association ("GNMA") bonds and corporate equity and debt
securities. The Company classifies its debt and equity securities as
available-for-sale and records the securities at fair value. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported, until realized, as a
component of accumulated other comprehensive income in the equity section of the
accompanying consolidated financial statements. Realized gains and losses from
the sale of available-for-sale securities are determined on a specific
identification basis. A decline in the market value of any available-for-sale
security below cost that is deemed other than temporary results in a reduction
in carrying amount to fair value. The impairment is charged to earnings, and a
new cost basis for the security is established. Dividend and interest income are
recognized when earned.


                                      F-8
<PAGE>

      Finished Goods Inventory. Finished goods inventory is stated at the lower
of cost (first-in, first-out method) or market.

      Property and Equipment. Property and equipment are recorded at cost.
Depreciation and amortization are computed on both the straight-line and
accelerated methods, at rates based upon estimated useful lives of 3 to 7 years
for furniture, fixtures and equipment and the shorter of the lease term or life
of the leasehold improvements. When assets are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts, and
any resulting gain or loss is reflected in operations. The cost of maintenance
and repairs is charged to income as incurred, and significant renewals and
betterments are capitalized.

      Income Taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are projected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

      Earnings (Loss) per Share. The Company has adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("FAS 128"). Under FAS 128,
companies that are publicly held or have complex capital structures are required
to present basic and diluted earnings per share ("EPS") on the face of the
income statement. FAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS and, if applicable, diluted EPS. Basic EPS excludes
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted and the resulting
additional shares are dilutive because their inclusion decreases the amount of
EPS. The effect on earnings (loss) per share of the Company's outstanding stock
options is antidilutive and therefore not included in the calculation of the
weighted average number of common shares outstanding.

      Stock Based Compensation. The Company has adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("FAS
123"). Under FAS 123, companies can elect to account for stock based
compensation plans using a fair value based method or continue measuring
compensation expense for those plans using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), and related interpretations. The Company has elected to
continue using the intrinsic value method to account for its stock based
compensation plans. See Note 16--Stock Option Plans.

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

      Foreign Currency Translation. The assets and liabilities of Woody Sports
Apparel, Inc., a majority owned Canadian subsidiary liquidated in 1997 ("Woody
Sports"), are translated at prevailing year-end rates of exchange, and its
income and expense accounts are translated at the weighted average rates for the
period presented. Prior to the liquidation of Woody Sports in 1997, foreign
exchange translation gains or losses were recorded as a component of accumulated
other comprehensive income in the equity section of the accompanying
consolidated financial statements. Upon the liquidation of Woody Sports,
translation gains or losses were included in the determination of net loss.

      Comprehensive Income. Effective January 1, 1998, the Company adopted
Financial Accounting Standards Board issued Statement No. 130, Reporting
Comprehensive Income ("FAS 130"). FAS 130 establishes standards for reporting
and display of comprehensive income and its components in financial statements.
Appropriate items


                                      F-9
<PAGE>

in the accompanying consolidated financial statements for the years ended
December 31, 1997 and 1996 have been reclassified to conform to the provisions
of FAS 130.

      New Accounting Pronouncement. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133").
Effective for all fiscal periods beginning after June 15, 1999, FAS 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether the derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. Management anticipates that the adoption of FAS 133 will have no
material impact on the Company's financial position or results of operations due
to its limited use of derivative instruments.

Note 2. Major Customers and Geographic Area Data

      Stage II operates in one industry segment. The Company's apparel sales are
made primarily in the United States. Its customers are generally comprised of
sporting goods and specialty store chains, mass merchandisers and various
wholesale membership clubs. During 1998, 1997 and 1996, approximately 16%, 14%
and 14% of net sales were made to Ames Department Stores, Inc. During 1997 and
1996, approximately 13% and 17%, respectively, of net sales were made to
Wal-Mart Stores, Inc.

      Information regarding the Company's geographic operations is set forth
below. Identifiable assets of the Company's discontinued Canadian subsidiary
aggregating $769,000 at December 31, 1996 are included in identifiable assets in
the United States. See Note 4--Discontinued Operations.

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                       Geographic Areas
                                    ------------------------------------------------------------------------------
                                               United States                               International
                                    -----------------------------------         ----------------------------------
                                      1998         1997         1996              1998         1997         1996
                                    --------     ---------    ---------         --------     --------     --------

<S>                                 <C>          <C>          <C>               <C>          <C>          <C>     
Revenues.......................     $ 10,118     $  16,565    $  33,430         $    ---     $    424     $    676
Operating profit (loss) .......       (1,693)       (7,448)      (4,684)             ---       (1,200)       1,080
Identifiable assets ...........        6,800        11,138        6,249              ---           40       19,560
Depreciation and amortization .          175           616          694              ---          130          139
Capital spending...............            4            39            9              ---          ---          ---
</TABLE>

Note 3. Due to Factor

      Prior to May 1998, Stage II maintained a factoring and credit facility
(the "Prior Credit Facility") under a factoring agreement with a financial
institution, providing for the factor to purchase the Company's accounts
receivable that it had preapproved, without recourse except in cases of
merchandise returns or billing or merchandise disputes in the normal course of
business. In addition, the factor was responsible for the accounting and
collection of all accounts receivable sold to it by the Company. The factor
received a commission under the Prior Credit Facility in an amount less than 1%
of the net receivables it purchased. The Prior Credit Facility also provided for
the issuance of letters of credit to fund the Company's foreign manufacturing
orders and for short term borrowings at a floating interest rate equal to 1/2%
above the prime rate. The Company's obligations under the Prior Credit Facility
were payable on demand and secured by its inventory, accounts receivable,
marketable securities and collateral pledged under shareholder guarantees.

      In May 1998, Stage II replaced the Prior Credit Facility with a new
factoring and credit facility from a different financial institution (the
"Credit Facility"). The agreements covering the Credit Facility provide for


                                      F-10
<PAGE>

substantially the same terms and conditions as the Prior Credit Facility. The
aggregate amount of letters of credit and borrowings available under the Credit
Facility are determined from time to time by the factor based upon the Company's
financing requirements and financial performance. The Credit Facility may be
terminated without penalty by the Company on May 31, 2000 or the end of any
subsequent contract year by either party upon 60 days notice.

      In 1997 and 1996, borrowings under the Prior Credit Agreement were reduced
by $6.0 million and $3.4 million, respectively, from repatriated earnings of the
Company's Hong Kong subsidiary ("Stage II HK"). The Company was indebted to the
factor under the Credit Facility at December 31, 1998 and under the Prior Credit
Facility at December 31, 1997 as follows:

                                (In thousands)

                                                                December 31,
                                                              ----------------
                                                               1998      1997
                                                              ------    ------

      Factor advances......................................   $3,624    $8,042
      Accounts receivable..................................   (1,293)   (3,392)
                                                              ------    ------
      Net due to factor....................................   $2,331    $4,650
                                                              ======    ======

Note 4. Discontinued Operations

      In July 1996, the Company finalized its plan to liquidate the operations
of Woody Sports, its 80% owned Canadian subsidiary. The operations of Woody
Sports were accounted for as discontinued operations because the subsidiary
dealt with a separate and distinct class of customers from those of the
Company's continuing operations. As a result, Stage II provided for an estimated
loss on disposal of $1.5 million at December 31, 1996, consisting of a provision
of $326,000 for operating losses during the phase-out period and noncash charges
aggregating $1.2 million against goodwill and prepaid salaries of the
subsidiary.

      During 1996, Woody Sports maintained a line of credit secured by an
assignment of its accounts receivable and inventories, a general security
agreement and an assignment and postponement of intercompany notes and
receivables. The credit facility provided for borrowings at a floating interest
rate equal to 1/2% above the lender's prime rate. On March 31, 1997, all of the
subsidiary's obligations under the facility were repaid, and the facility was
terminated in connection with the liquidation of Woody Sports.

Note 5. Accounts Receivable

      Accounts receivable, less allowances for returns, discounts and bad debts
aggregating $56,000 and $432,000 at December 31, 1998 and 1997, respectively,
consist primarily of non-factored receivables and other amounts due from
customers for domestic shipments and overseas commissions. During the fourth
quarter of 1998, the Company wrote off $387,000 of accounts receivable.
Substantially all of the Company's receivables have been pledged to secure the
Company's obligations under the Credit Facility. See Note 3--Due to Factor.

Note 6. Finished Goods Inventory

      Inventory, consisting primarily of finished goods, is classified as
follows:


                                      F-11
<PAGE>

                                (In thousands)

                                                                December 31,
                                                              ----------------
                                                               1998      1997
                                                              ------    ------

      Landed...............................................   $2,705    $1,848
      In transit...........................................      150       648
                                                              ------    ------
      Total................................................   $2,855    $2,496
                                                              ======    ======

      The finished goods inventory has been pledged to secure the Company's
obligations under the Credit Facility. See Note 3--Due to Factor. For the years
ended December 31, 1998, 1997 and 1996, general and administrative costs charged
to cost of goods sold amounted to $47,000, $139,000 and $711,000, respectively.
General and administrative overhead costs capitalized in inventory at December
31, 1998 and 1997 were $38,000 and $47,000, respectively.

Note 7. Property and Equipment

      The major classes of property and equipment are as follows:

                                (In thousands)

                                                                December 31,
                                                              ----------------
                                                               1998      1997
                                                              ------    ------

      Furniture, fixtures and equipment....................   $  583    $  583
      Leasehold improvements...............................        4       807
                                                              ------    ------
                                                                 587     1,390
      Less accumulated depreciation and amortization ......      501       890
                                                              ------    ------
      Total................................................   $   86    $  500
                                                              ======    ======

Note 8. Marketable Securities

      The following table sets forth the amortized cost, gross unrealized
holding gains, gross unrealized holding losses and fair value for
available-for-sale securities by major security type at December 31, 1998 and
1997. During 1998 and 1997, the Company sold marketable securities held by Stage
II or Stage II HK netting $3.2 million and $6.3 million, respectively. The
balance of these securities remain pledged to secure the Company's obligations
under the Credit Facility. See Note 3--Due to Factor.


                                      F-12
<PAGE>

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                              Gross          Gross
                                                                           Unrealized     Unrealized
                                                            Amortized        Holding        Holding          Fair
                                                              Cost            Gains         Losses           Value
                                                              ----            -----         ------           -----
<S>                                                         <C>             <C>             <C>            <C>     
Year ended December 31, 1998:
   Corporate debt securities maturing 2014 - 2029 ......    $   275         $     6         $   (4)        $    277
   U.S. Treasury securities maturing 2027 ..............         35             ---            ---               35
   GNMAs maturing 2023..................................         76             ---            ---               76
                                                            -------         -------         ------         --------
Total...................................................    $   386         $     6         $   (4)        $    388
                                                            =======         =======         ======         ========

Year ended December 31, 1997:
   U.S. Treasury securities maturing:
     2000 - 2007........................................    $ 2,732         $    19         $  ---         $  2,751
     2012 - 2027........................................        434              21            ---              455
   GNMAs maturing 2023..................................        147             ---            (40)             107
   Equity securities....................................         32             ---            (20)              12
                                                            -------         -------         ------         --------
Total...................................................    $ 3,345         $    40         $  (60)        $  3,325
                                                            =======         =======         ======         ========
</TABLE>

Note 9. Gain on Settlement of Notes Payable

      In 1997, the Company paid $340,000 in full settlement of notes in the
outstanding principal amount of $384,000 assumed in a 1994 acquisition,
resulting in a $44,000 gain on settlement.

Note 10. Settlement of Townsley Litigation

      In 1996, the Company and Stage II HK commenced a lawsuit in the Supreme
Court of the State of New York against Townsley, Ltd. ("Townsley") and its
principal shareholder, Stuart Goldman, to recoup damages incurred in connection
with their October 1994 acquisition of substantially all the assets and related
liabilities of Townsley, the purchase of all the capital stock of Townsley's
Hong Kong subsidiary and the related employment and subsequent termination of
Mr. Goldman as President of the Company and Stage II HK. Mr. Goldman responded
with various counterclaims. During 1997, the parties agreed to settle the
lawsuit for a payment from the Company of approximately $1.15 million. In
addition, Mr. Goldman relinquished 292,135 shares of the Company's Common Stock
issued to him as part of the purchase price for the Townsley assets.

      The settlement payments and stock repurchase were completed by the Company
in November 1997 and had the effects of extinguishing all obligations from the
Company to Mr. Goldman and generating a settlement gain of $205,000. At December
31, 1997, the Company recognized noncash impairment charges totaling $5.3
million, reflecting a $5.0 million writedown of goodwill attributable to a
planned reduction in emphasis on proprietary labels received in the Townsley
acquisition and a prior acquisition as well as a related $255,000 writedown of
Mr. Goldman's prepaid salary and non-compete covenant.

Note 11. Fair Value of Financial Instruments

      The carrying amounts of financial instruments approximate their fair
values as of December 31, 1998 and 1997. The methods and assumptions used to
estimate the fair values of the financial instruments vary among the types of
instruments. For cash, accounts receivable, due to factor, accounts payable, due
to affiliate, accrued royalties and other current liabilities, the short
maturity of the instruments and obligations supports their fair values at their
respective carrying amounts. For marketable securities, fair values are based on
quoted market prices at the reporting date for these or similar investments.


                                      F-13
<PAGE>

Note 12. Leases

      The Company leases showroom and office space under an operating lease
expiring in 2004. The lease includes escalation clauses based upon the cost of
living, as defined. For the years ended December 31, 1998, 1997 and 1996, rent
expense charged to operations, including variable storage charges at a public
warehouse utilized on a month-to-month basis, aggregated approximately $271,000,
$567,000 and $874,000, respectively.

      In July 1998, the Company obtained a cancellation of its office lease at
350 Fifth Avenue in New York City, which covered 10,800 square feet for a term
through 2006 at an average annual rent of $343,000 plus electricity, taxes and
expense escalations. The lease cancellation was effective as of July 15, 1998,
subject to payment of a $325,000 cancellation fee in four installments through
October 1, 1998. In connection with the cancellation, the Company relocated its
administrative and sales offices to 1385 Broadway, New York, New York, where it
obtained a lease for 3,000 square feet through 2004 at a total annual cost of
approximately $80,000. The loss on the lease cancellation was approximately
$561,000. At December 31, 1998, approximately $244,000 of the cancellation fee
was outstanding and is included in other current liabilities in the accompanying
consolidated balance sheets.

      At December 31, 1998, future minimum annual rentals under the
noncancellable operating lease (excluding variable storage charges at a public
warehouse that may be utilized on a month-to-month basis) are as follows:

                                (In thousands)

      Year ending
     December 31,
     ------------

         1999...................................................   $  69
         2000...................................................      76
         2001...................................................      79
         2002...................................................      79
         2003...................................................      79
         2004...................................................      13
                                                                   -----
         Total..................................................   $ 395
                                                                   =====

Note 13. Related Party Transactions

      Shareholders Agreement. In January 1992, Stage II entered into an
agreement with two former principal stockholders, directors and executive
officers of the Company, providing for the Company's repurchase of the shares of
its Common Stock held by the estate of the first of these principals to die. The
Company initially purchased insurance policies on the lives of these individuals
covering $6 million of its total repurchase commitment under the agreement at
premiums aggregating approximately $2.5 million over a period of seven years,
with corresponding cash surrender values estimated to reach approximately $2.1
million by the end of that period. Upon the retirement of one of the executive
officers in December 1994, the agreement was modified to cover only the
remaining officer, and the insurance benefit was reduced to $5.4 million,
resulting in reductions of approximately $228,000 and $137,000 in the premium
obligations and cash surrender value, respectively. Although the agreement was
cancelled in connection with the retirement of the other executive officer in
1998, the Company has elected to maintain the insurance to maximize its cash
surrender value.

      Services by Affiliate. In May 1998, Richard Siskind, the President, Chief
Executive Officer and a director of the Company, acquired 1.9 million shares of
the Company's Common Stock from three of its founders. See Note 16-- Stock
Option Plans. During 1998, a company controlled by Mr. Siskind (the "affiliate")
opened letters of credit of approximately $2.1 million for the purchase of
merchandise by the Company. During the year, certain employees of the Affiliate
also performed services for the Company at no charge, and the Company shared
certain office and warehouse space of the Affiliate at no charge. At December
31, 1998, the Company was indebted to the Affiliate


                                      F-14
<PAGE>

in the amount of $26,000.

      Lease from Affiliate. In 1998, the Company entered into an operating lease
for showroom space with a company owned by Jon Siskind, an officer and director
of the Company and the son of Richard Siskind. See Note 12--Leases. Rent expense
charged to operations for this lease was approximately $12,000 for the year
ended December 31, 1998.

Note 14. Income Taxes

      The provision (benefit) for income taxes consists of the following:

                                 (In thousands)

                                                     Year Ended December 31,
                                                   ---------------------------
                                                    1998       1997      1996
                                                  -------    -------   -------
Loss before provision (benefit) for income taxes, 
  including discontinued operations:
  Domestic......................................  $(2,318)   $(7,863)  $(6,995)
  Foreign.......................................      ---     (1,312)      ---
                                                  -------    -------   -------
                                                   (2,318)    (9,175)   (6,995)
Provision (benefit) for income taxes:
  Domestic:
   Current:
     Federal....................................       79         74       (36)
     State......................................        2        ---         3
                                                  -------    -------   -------
                                                  $    81    $    74   $   (33)
                                                  =======    =======   ======= 

      The total provision for income taxes for the years ended December 31,
1998, 1997 and 1996 varied from the United States federal amounts computed by
applying the US statutory rate of 34% to pre-tax income (loss) as a result of
the following:

                       (In thousands, except percentages)

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                    --------------------------------------------------------------
                                                      1998      Rate          1997     Rate          1996     Rate
                                                    ---------   ----       ---------   ----       ---------   ----
<S>                                                 <C>          <C>       <C>         <C>        <C>        <C>  
Computed expected tax benefit.....................  $    (788)   34.0%     $  (3,120)  34.0%      $  (2,378) 34.0%
Repatriated earnings..............................        ---     N/A          2,040  (22.2)            ---    N/A
Limitation on NOL due to change of control .......      1,088   (47.0)           ---    N/A             ---    N/A
State and local income taxes (benefit), net
   of federal income tax benefit .................          1     ---            (90)   1.0               2    ---
Change in valuation allowance ....................       (348)   15.0            597   (6.5)          2,220  (31.8)
Alternative minimum tax...........................         49    (2.1)           ---    N/A             ---    N/A
Amortization and impairment of
   nondeductible goodwill.........................        ---     N/A            572   (6.3)             37    (.5)
Adjustment of previously recorded tax benefit ....         30    (1.3)            74    (.8)            ---    N/A
Nondeductible expenses for income tax purposes ...         11     (.5)           ---    N/A              57    (.8)
Other.............................................         38    (1.6)             1    N/A              29    (.4)
                                                    ---------   -----      ---------   ----       ---------   ----
                                                    $      81   (3.5)%     $      74   (.8)%      $     (33)    .5%
                                                    =========   =====      =========   ====       =========   ====
</TABLE>


                                      F-15
<PAGE>

      The tax effects of temporary differences that gave rise to a significant
portion of the deferred tax assets and liabilities at December 31, 1998 and 1997
are as follows:

                                (In thousands)
                                                                December 31,
                                                              ----------------
                                                               1998      1997
                                                              ------    ------
Current deferred tax assets:
  Inventory tax basis greater than financial 
   statement basis ........................................   $   61    $   76
  Allowance for decline in market value of securities .....      ---         8
                                                              ------    ------
   Total gross current deferred tax assets.................       61        84
  Less valuation allowance.................................      (61)      (84)
                                                              ------    ------
  Net current deferred tax assets..........................   $  ---    $  ---
                                                              ======    ======

Long term deferred tax assets:
  Net operating loss carryforward..........................   $1,779    $1,576
  Amortization of goodwill and covenant not to compete ....      916     1,454
                                                              ------    ------
   Total long term deferred tax assets.....................    2,695     3,030
Less valuation allowance...................................   (2,695)   (3,020)
                                                              ------    ------
  Net long term deferred tax assets........................      ---        10
                                                              ------    ------
Long term deferred tax liability:
  Property and equipment depreciation......................      ---        10
                                                              ------    ------
   Total gross long term deferred tax liability............      ---        10
                                                              ------    ------
Net long term deferred assets..............................   $  ---    $  ---
                                                              ======    ======

      For the years ended December 31, 1998, 1997 and 1996, the Company recorded
net increases (decreases) in the total valuation allowance of $(348,000),
$597,000 and $2.2 million, respectively. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. As of December 31, 1998, the Company had net operating
loss carryforwards for income tax purposes of approximately $4.2 million
expiring through 2013.

      Prior to 1997, United States income taxes have not been provided on the
unremitted earnings of foreign subsidiaries, since the undistributed earnings
were expected to be indefinitely reinvested or sheltered by available net
operating loss carryforwards. Retained foreign earnings totaling $6.0 million
were repatriated during 1997, and there were no unremitted foreign earnings at
December 31, 1998.

Note 15. Commitments and Contingencies

      Outstanding Letters of Credit. At December 31, 1998, the Company was
contingently liable on outstanding letters of credit issued under its Credit
Agreement in the aggregate amount of $.9 million. See Note 3---Due to Factor.

      License Agreements. The Company's license agreements generally require
minimum royalty payments and advertising expenditures, as well as providing for
maintenance of quality control. Royalty expense for the years ended December 31,
1998, 1997 and 1996 aggregated approximately $.2 million, $.8 million and $1.8
million, respectively. The license agreements for the Company's Spalding and
Coleman licenses provided for minimum annual royalty payments of $600,000 and
$175,000, respectively, and were terminated by mutual consent during 1997 and
1996, respectively. The agreement for the Company's Dunlop license requires
minimum annual royalty payments of $150,000 and will terminate by mutual consent
in 1999. The license agreements for the Company's


                                      F-16
<PAGE>

Adolfo lines require minimum royalty payments aggregating $125,000 for the
period from July 1, 1998 through December 31, 1999 and annual minimum royalties
aggregating $150,000 in 2000 and $175,000 in 2001. The Adolfo licenses may be
extended by the Company through December 2009 and terminated by the licensor
under certain circumstances.

      During 1997 and 1996, net sales under the Company's license agreement for
the Spalding brand were approximately $5.3 million and $11.5 Million,
respectively. During 1996, net sales under the Company's license agreement for
the Coleman brand were approximately $7.5 million.

      Miscellaneous Claims. Various miscellaneous claims and suits arising in
the ordinary course of business have been filed against the Company. In the
opinion of management, none of these matters will have a material adverse effect
on the results of operations or the financial position of the Company.

Note 16. Stock Option Plans

      The Company maintains Incentive Stock Option Plans (the "Plans") adopted
in 1998 and 1994 providing for the grant of options to purchase up to 1,000,000
shares and 300,000 shares, respectively, of Common Stock to key employees of
Stage II. Prior to its termination in 1997, the Company also maintained a 1987
Plan for options on up to 200,000 shares of Common Stock. The purchase price per
share of Common Stock issuable upon the exercise of options granted under the
Plans is fixed by a Compensation Committee of the Board of Directors in an
amount equal to at least 100% of the market price of the Common Stock on the
date of the grant or 110% of the market price for any grantee of an incentive
stock option who directly or indirectly possess more than 10% of the total
combined voting power of all classes of the stock of the Company or any parent
or subsidiary thereof. Each option granted under the Plans is exercisable for
periods of up to ten years from the date of grant.

      Stock option activity under the Plans for each of the three years ended
December 31, 1998 is summarized below:

                                                                Weighted Average
                                               Shares Subject    Exercise Price
                                                 to Options         Per Share
                                                 ----------         ---------

Balance at December 31, 1995.....................  148,000            4 1/4
Options granted..................................   60,000            2 7/8
Options exercised................................      ---              ---
Options canceled.................................   68,000            4 3/8
                                                   -------            -----

Balance at December 31, 1996.....................  140,000            3 3/8
Options granted..................................      ---              ---
Options exercised................................      ---              ---
Options canceled.................................   85,000            3 5/8
                                                   -------            -----

Balance at December 31, 1997.....................   55,000            3 1/4
                                                   -------            -----

Options granted..................................  917,500              3/4
Options exercised................................      ---              ---
Options canceled.................................   65,000            3 1/4
                                                   -------            -----

Balance at December 31, 1998.....................  907,500              3/4
                                                   =======            =====


                                      F-17
<PAGE>

Option Exercisable and Available for Grant

Exercisable at December 31,
1996.............................................  140,000
1997.............................................   55,000
1998.............................................  907,500

Available for grant at December 31,
1996.............................................  360,000
1997.............................................  445,000
1998.............................................  392,500

Weighted average fair value of options granted
  during 1998 ...................................  $  9/16

Weighted average remaining contractual rights 
  (in months) at December 31, 1998...............    59.46

      In May 1998, the Company consummated the transactions contemplated by a
Stock Purchase Agreement and Management Agreement with Richard Siskind,
providing for (i) the sale to Mr. Siskind of 1.9 million shares of the Company's
Common Stock (the "Control Shares") held by three principal shareholders (the
"Founders") in consideration for their release from guarantees of the Company's
indebtedness to its factor and their receipt of options to reacquire a total of
1.5 million Control Shares from Mr. Siskind at exercise prices ranging from $.50
to $1.50 per share (the "Founders Options"), (ii) the Company's issuance to Mr.
Siskind of options to purchase up to 1.5 million shares of Common Stock on the
same terms as the Founders Options, exercisable only to the extent the Founders
Options are exercised, (iii) the arrangement by Mr. Siskind of the Credit
Facility for the Company, (iv) the reconstitution of the Company's board of
directors with designees of Mr. Siskind, (v) the addition of a new management
team headed by Mr. Siskind and (vi) the Company's issuance to Mr. Siskind of
options to purchase up to 900,000 shares of Common Stock at an exercise price of
$.75 per share, exercisable in one-third cumulative annual installments,
commencing in May 1999. All of the options issued to Siskind were approved by
the shareholders of Stage II at its 1998 annual meeting of shareholders. In July
1998, Founder Options for 1.35 million Control Shares were acquired from the
Founders by Jon Siskind, an officer and director of the Company.

      The Company has adopted the disclosure-only provision of FAS 123 and, as
described in Note 1, will continue to apply APB 25 to account for stock options.
If the Company had elected to determine compensation expense as provided in FAS
123, the pro forma effect would have been as follows:

                                                               Year ended
                                                            December 31, 1998
                                                            -----------------

      Net loss -- as reported..................................  $(2,318)
      Net loss -- pro forma....................................   (2,984)
      Loss per share -- as reported............................     (.59)
      Loss per share -- pro forma..............................     (.76)

      The pro forma effect of compensation expense determined as provided in FAS
123 for the years ended December 31, 1997 and 1996 after accounting for options
issued in 1996 would have been immaterial.


                                      F-18
<PAGE>

Note 17. Employee Stock Ownership and Salary Deferral Plan

      In 1994, Stage II converted its Profit Sharing Plan into an Employee Stock
Ownership and Salary Deferral Plan (the "Savings Plan"). Under the Savings Plan,
for each dollar contributed by electing employees to a retirement savings
account up to 12% of their annual compensation, the Company may contribute up to
$.40, subject to certain limitations under Section 401(k) of the Internal
Revenue Code (the "Code"). The Company's expense for these contributions in
1998, 1997 and 1996 aggregated $0, $16,000 and $38,000, respectively. The Saving
Plan was terminated in 1998.

Note 18. License Acquisition

      In March 1999, the Company agreed to acquire the Cross Colours trademark
from a group including one of the Company's outside directors in exchange for
200,000 shares of the Company's Common Stock.


                                      F-19
<PAGE>

                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS


                     STAGE II APPAREL CORP. AND SUBSIDIARIES

                                 (In thousands)

<TABLE>
<CAPTION>
Column A                                Column B                Column C             Column D          Column E
--------                                --------               Additions             --------          --------
                                                        ------------------------

                                        Balance at      Charged to    Charged to
                                        Beginning       Costs and        Other                         Balance at
                                        of Period       Expenses       Accounts     Deductions       End of Period
                                        ---------       --------       --------     ----------       -------------
<S>                                       <C>             <C>             <C>        <C>                  <C> 
Allowance for returns, discounts
   and bad debts:

Year ended December 31, 1998 ......       $432            $208            ---        $(584)(1)            $ 56

Year ended December 31, 1997 ......        486             642            ---         (696)(1)             432
</TABLE>

----------
      (1) Writeoff of uncollectible accounts.


                                      F-20