SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
                                   (Mark One)
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

                   For the Fiscal Year Ended December 31, 1998

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

        For the transition period from _______________ to _______________

                           Commission File No. 1-2782


                          SIGNAL APPAREL COMPANY, INC.
             (Exact name of Registrant as specified in its charter)


                               Indiana 62-0641635
        (State of Incorporation) (I.R.S. Employer Identification Number)


                  34 Engelhard Avenue, Avenel, New Jersey 07001
              (Address of principal executive offices) (zip code)

        Registrant's telephone number, including area code (732) 382-2882

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

                              Name of each exchange
                     Title of each class on which registered
           Common Stock: Par value $.01 a share New York Stock Exchange

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
requirement 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 is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

State the aggregate  market value of the voting stock held by  nonaffiliates  of
the registrant: $4,442,459 calculated by using the closing price on the New York
Stock  Exchange on March 10, 1999 of the Company's  Common stock,  and excluding
common shares owned  beneficially by directors and officers of the Company,  and
by certain other entities, who may be deemed to be "affiliates", certain of whom
disclaim such status.

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.


                                                                    Page 1 of 49
<PAGE>

Class Outstanding as of March 10, 1999
--------------------------------------
Common Stock, $.01 par value 32,910,310 shares

                           DOCUMENTS INCORPORATED BY REFERENCE

Part of                     Documents from Which Portions are
Form 10-K                   Incorporated by Reference 
---------                   ------------------------- 

Part                        III Proxy  Statement  1999  for  Annual  Meeting  of
                            Shareholders' SIGNAL APPAREL COMPANY, INC.



                                                                    Page 2 of 49
<PAGE>


                                ANNUAL REPORT ON

                                    FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 1998

                                      INDEX


Item 

PART I

1.     Business                                                               4

2.     Properties                                                             8

3.     Legal Proceedings                                                      9

4.     Submission of Matters to a Vote of Security Holders                    9

PART II

5.     Market for the Registrant's Common Equity and
        Related Stockholder Matters                                          10

6.     Selected Financial Data                                               10

7.     Management's Discussion and Analysis of Financial
        Condition and Results of Operations                                  10

8.     Financial Statements and Supplementary Data                           17

9.     Disagreements on Accounting and Financial Disclosure                  42

PART III

10.     Directors and Executive Officers of the Registrant                   43

11.     Executive Compensation                                               43

12.     Security Ownership of Certain Beneficial Owners
          and Management                                                     43

13.     Certain Relationships and Related Transactions                       43

PART IV

14.     Exhibits, Financial Statement Schedules and
          Reports on Form 8-K                                                43



                                                                    Page 3 of 49
<PAGE>

                                     PART I

ITEM 1.      BUSINESS

(a)  Signal Apparel Company,  Inc. ("Signal" or the "Company") is engaged in the
     screenprinting and marketing of apparel within the following product lines:
     screenprinted  and embroidered  knit and woven activewear for men and boys,
     and screenprinted and embroidered  ladies' and girl's activewear,  bodywear
     and swimwear.

     The Company's wholly-owned  subsidiary,  GIDI Holdings, Inc. doing business
     as Grand Illusion  Sportswear,  Inc. ("Grand  Illusion"),  is a supplier of
     embellished  apparel  and other  activewear  primarily  to large  corporate
     accounts.

     The Company's wholly-owned subsidiary,  Big Ball Sports, Inc. ("Big Ball"),
     is a supplier of branded  knitwear  to the mass  market and to  department,
     sporting  goods,  and specialty  stores in the mid-tier and upstairs retail
     channels.

     In November 1998,  the Company  acquired the license and certain assets for
     the world  recognized  Umbro  Soccer  Brand in the  United  States  for the
     department, sporting goods and sports specialty store retail channels.

     As of January 1, 1999,  the  Company  sold the  business  and assets of its
     Heritage  Sportswear  division  which was  engaged in the  manufacture  and
     marketing of upscale knit apparel for the ladies' market.

     On March 22, 1999, the Company  purchased the business and assets of Tahiti
     Apparel,   Inc.  ("Tahiti"),   a  leading  supplier  of  ladies  and  girls
     activewear,  bodywear and swimwear  primarily to the mass market as well as
     to the  mid-tier  and  upstairs  retail  channels.  Tahiti's  products  are
     marketed  pursuant  to various  licensed  properties  and brands as well as
     proprietary brands of Tahiti.

     In  connection  with the  Company's  transition  to a sales  and  marketing
     orientation from its historical manufacturing structure, the Company closed
     its Chattanooga,  Tennessee printing and distribution  facility in December
     1998 and its Tazewell,  Tennessee  cut and sew facility in March 1999.  The
     Company also  consolidated  its  corporate  administrative  functions  into
     similar functions at Tahiti following  completion of the Tahiti acquisition
     on March 22, 1999.

(b)  The  Company  is  engaged  in  the  single  line  of  business  of  apparel
     manufacturing and marketing.

     For financial  information about the Company, see the information discussed
     in Item 8 below.

(c)  GENERAL

     Founded in 1891 as Wayne Knitting Mills, a women's hosiery company, in Fort
     Wayne,  Indiana,  the Company merged with the H. W. Gossard Co. of Chicago,
     Illinois in 1967 and became Wayne-Gossard  Corporation.  The Company's name
     was changed to Signal Apparel  Company,  Inc. in February 1987. As a result
     of a merger  in July  1991,  The Shirt  Shed,  Inc.  became a  wholly-owned
     subsidiary of the Company.  In November 1994, the Company  purchased all of
     the outstanding  capital stock of American Marketing Works Inc. (AMW) whose
     principal  business was the  marketing  of branded  licensed  apparel.  The
     outstanding  capital stock of Grand  Illusion and Big Ball was purchased in
     October  1997 and  November  1997,  respectively.  On March 22,  1999,  the
     Company purchased the business and assets of Tahiti.

     The Company  manufactures and markets activewear,  bodywear and swimwear in
     juvenile,  youth and adult size  ranges.  The  Company's  products are sold
     principally  to retail  accounts  under the Company's  proprietary  brands,
     licensed  character  brands,  licensed  sports  brands,  and other licensed
     brands.  The  Company's  principal  proprietary  brands  include  G.I.R.L.,
     Bermuda Beachwear, Big Ball and Signal Sport. Licensed brands include Hanes
     Sport, BUM Equipment,  Jones New York and Umbro.  Licensed character brands
     include Mickey  Unlimited,  Winnie the Pooh,  Looney Tunes,  Scooby-Doo and
     Sesame Street; and licensed sports brands include the logos of Major League
     Baseball,  the National  Basketball  Association,  and the National  Hockey
     League.  Currently,  a significant portion of the products  manufactured by
     the  Company  consists  of  products   generally   similar  in  design  and
     composition to 



                                                                    Page 4 of 49
<PAGE>

     those  produced by the Company's  competition.  The Company's  business is,
     therefore, highly subject to competitive pressures.

     During 1998 and the first  quarter of 1999,  the  Company  has  undergone a
     strategic change from a manufacturing  orientation to a sales and marketing
     focus and presently  operates under the following  strategic  business unit
     structure:

     TAHITI APPAREL BUSINESS UNIT:

     Tahiti Apparel designs and sells a range of women's and girls'  activewear,
     bodywear and swimwear  primarily to mass market retailers as well as to the
     mid-tier, specialty store and department store retail channels. This unit's
     products  are  sourced  from  various   suppliers  and   embellished   with
     silkscreened  and  embroidered  graphics in the Company's  facilities or by
     other suppliers.  Finished products are marketed under licenses from Warner
     Brothers,  Disney Enterprises,  B.U.M.  International,  Hanes and Jones New
     York among others, as well as under the proprietary brands Tahiti Swimwear,
     G.I.R.L. and Bermuda Beachwear.

     LICENSED SPORTS BUSINESS UNIT:

     The Licensed Sports Business Unit is engaged in selling embellished apparel
     to mid-tier and mass  merchants,  chain  stores,  sporting  goods and sport
     specialty  stores  and  department  stores  as a line of  popularly  priced
     activewear,  ranging from children's to adult sizes. This unit markets tops
     and bottoms sourced from various suppliers and embellished in the Company's
     facilities  or by  other  suppliers  with a  variety  of  silkscreened  and
     embroidered graphics derived under license from popular cartoons,  colleges
     and professional  sports leagues (MLB, NBA and NHL).  Finished products are
     generally sold under licensed brands such as Hank Aaron Originals and Magic
     Johnson Originals or the Company's Signal Sport brand.

     UMBRO AMERICA BUSINESS UNIT:

     The Umbro America Business Unit is engaged in selling to mid-tier, sporting
     goods,  sport  specialty and  department  stores within the United States a
     line of  athletic-oriented  activewear and footwear ranging from children's
     to adult sizes and soccer  hardgoods.  This unit's products,  featuring the
     world recognized Umbro Soccer Brand, are sourced from various suppliers and
     embellished  in  the  Company's  facilities  or  by  other  suppliers  with
     screenprinted  and  embroidered  graphics.  The Company began selling Umbro
     products in 1999.

     LICENSED BRANDS AND CHARACTER BUSINESS UNIT:

     The Licensed  Brands and  Character  Business Unit is engaged in selling to
     mid-tier and mass  merchants,  chain stores,  and specialty and  department
     stores a line of popularly  priced  activewear  ranging from  children's to
     adult  sizes.  This unit  utilizes  tops and bottoms  sourced  from various
     suppliers and embellished in the Company's facilities or by other suppliers
     with a variety of  silkscreened  and  embroidered  graphics  derived  under
     license from popular  cartoons,  movies,  and television  shows, as well as
     licensed brands and original  concepts  produced by the Company's  internal
     creative art staff.

     BIG BALL SPORTS BUSINESS UNIT:

     The Big Ball Sports Business Unit is engaged in selling to the mass market,
     mid-tier stores and upstairs department, sporting goods and specialty store
     accounts  a  line  of  popularly  priced   screenprinted   and  embroidered
     activewear  apparel  ranging  from  children's  to adult  sizes.  This unit
     markets  tops  and  bottoms  obtained  from  various  suppliers  which  are
     embellished  primarily in the Company's facilities with the proprietary "Is
     Life" and "Big  Ball  Sports"  trademarks  and  other  proprietary  graphic
     images.


                                                                    Page 5 of 49
<PAGE>

     GRAND ILLUSION SPORTSWEAR BUSINESS UNIT:

     The  Grand  Illusion   Sportswear  Business  Unit  is  engaged  in  selling
     screenprinted  and  embroidered  apparel to large  corporate  accounts  and
     distributors  servicing those accounts in children's,  youth and adult size
     ranges.  This unit obtains products from various suppliers and imprints the
     logos and other indicia of the unit's corporate accounts.

     SALES BY PRODUCT LINE

     The following table reflects the percentage of net sales contributed by the
     Company's product lines to net sales during 1998, 1997, and 1996:

                                                          Percentage of
       Product Line                                         Net Sales
                                                     ----------------------
                                                     1998     1997     1996
                                                     ----     ----     ----

     Active sportswear                                 2%       7%      18%

     Embellished (Licensed Sports,                    75%      66%      58%
     Licensed Character, Big Ball Sports
     & Grand Illusion)

     Women's knit apparel                             23%      27%      24%
     (Heritage Sportswear
     Division sold as of
     January 1, 1999)

     Sales to major  customers  for the years in the period  ended  December 31,
     1998, 1997 and 1996 were as follows:

     Wal-Mart - 19%, 20% and 14% of the  Company's  total  sales,  respectively.
     Kmart - 10%, 10% and 12% of the Company's total sales, respectively.

     The above  numbers do not reflect  sales by the  Company's  Tahiti  Apparel
     division acquired in March 1999.

     DESCRIPTION OF OPERATIONS

     During  the  course  of 1998 and the first  quarter  of 1999,  the  Company
     completed its transition  from a manufacturer of garments to a purchaser of
     blank and  embellished  finished  garments  from a variety of domestic  and
     international suppliers.  Blank products are screenprinted in the Company's
     facilities or embroidered or screenprinted  by other suppliers.  The supply
     and price of  finished  products  is  dependent  upon a variety  of factors
     including demands from competitive companies, worldwide crop conditions and
     in the case of synthetic  products,  global petroleum  availability.  These
     factors  generally have had a greater impact on price than on availability.
     The Company also purchases inks, hangers,  cartons,  bags and ticketing for
     its products.

     Although the Company does not have formal arrangements extending beyond one
     year with its suppliers,  the Company has not  experienced  any significant
     difficulty  obtaining necessary blank or finished products from its current
     sources and believes that, in any event,  adequate  alternative sources are
     available.

     "Big Ball",  "...Is Life" and "Signal  Sport" are the principal  registered
     trademarks  of the  Company.  The Company  acquired the  trademarks  Tahiti
     Swimwear, Bermuda Beachwear and BodyMax among others in connection with its
     acquisition  of  Tahiti.  The  Company  and its  various  subsidiaries  are
     licensed  directly  or through  affiliates  of  well-known  athletes to use
     various  trademarks of the National  Basketball  Association,  Major League
     Baseball,  the National  Hockey  League and various  colleges in connection
     with collections of embellished activewear. The Company is also licensed by
     Warner  Brothers and other  companies to print various  cartoon,  movie and
     celebrity  characters  and other  graphics  on  garments.  The  Company  is
     licensed  by  affiliates  of well known  athletes  Magic 


                                                                    Page 6 of 49
<PAGE>

     Johnson (for NBA products)and  Hank Aaron (for MLB products) to produce and
     sell products  bearing labels with their  respective  names. The Company is
     also licensed for the Umbro Brand by Umbro International.

     The Company also acquired  various  licensed  rights in connection with its
     acquisition of Tahiti.  These licenses include Mickey  Unlimited,  Mickey's
     Stuff for Kids and Winnie the Pooh from Disney  Enterprises,  Looney  Tunes
     and  Scooby-Doo  from Warner  Brothers,  Sesame Street from the  Children's
     Television  Workshop as well as licenses for the brands  Hanes  Sport,  BUM
     Equipment and Jones New York.

     The  licenses  held by the Company  vary  significantly  in their terms and
     duration. The Company's licenses with the NBA, MLB and NHL, generally,  are
     renewed  for one to two-year  terms on an annual  basis.  Negotiations  for
     renewal of the Company's NBA license, presently scheduled to expire on July
     31,  1999,  typically  commence  during the  second  calendar  quarter.  An
     agreement  in  principle  has been  reached  to extend  the  Company's  MLB
     license, held through an affiliate of Hank Aaron, through at least December
     31, 1999 with an option to extend through  December 31, 2000. The Company's
     license  with the  National  Football  League  expired,  subject to certain
     sell-off rights, on March 31, 1999 and will not be renewed. During the year
     ended December 31, 1998,  licensed NFL product sales were approximately 15%
     of  consolidated  revenue.  The loss of this license  could also affect the
     Company's  ability  to  sell  other  professional  sports  apparel  to  its
     customers.

     The Company obtained the U.S. license for Umbro, a world recognized  soccer
     brand and will begin selling Umbro apparel, footwear and hardgoods in 1999.
     The  Company's  license for Umbro has a five year term  (subject to certain
     repurchase rights by the licensor).

     The licenses  acquired by the Company in connection with the acquisition of
     Tahiti  generally have two-year  terms. A number of the Tahiti licenses are
     scheduled  to expire on December  31,  1999,  and the  Company  anticipates
     renewal discussions to commence during the third quarter of 1999.

     The business of the Company tends to be seasonal with peak shipping  months
     varying  from  product  line to product  line.  To meet the demands of peak
     shipping months, it is necessary to build inventories of some products well
     in advance of expected shipping dates. The Company believes that its credit
     practices  and  merchandise  return  policy are  customary in the industry.
     Borrowings are used to the extent necessary to finance seasonal inventories
     and  receivables.  See  "Management's  Discussion and Analysis of Financial
     Condition and Results of Operations - Financial Condition".

     During  1998,  the  Company  sold its  products  to over  1,600  customers,
     including department stores, specialty stores, mass merchandisers and other
     retailers,  wholesalers,  and distributors.  Products are primarily shipped
     directly from the Company's  facilities  and warehouses or from third party
     screenprint or embroidery  locations.  The trend for the Company's sales to
     be  concentrated  on  a  few  large  customers  which  possess  significant
     negotiating  power with regard to the terms of sale and the possible return
     of certain merchandise continued in 1998.

     Signal's  scheduled  back orders at year-end,  as expressed in thousands of
     dollars approximated $5,000 in 1998; $5,300 in 1997 and $6,750 in 1996.

     Scheduled  order  backlogs  consist of orders  received from  customers and
     entered into the Company's  order entry  system,  at which point the orders
     are scheduled for production. The Company expects to ship substantially all
     of its December  31, 1998 backlog of unfilled  orders by December 31, 1999;
     however, orders are subject to cancellation by customers prior to shipment,
     generally  without  penalty  unless  specially  embellished  to order.  The
     Company's  backlog  of  orders  on  December  31,  1998 is not  necessarily
     indicative  of  actual  shipments  or  sales  for any  future  period,  and
     period-to-period comparisons from 1998 to 1997 may not be meaningful.

     The apparel industry as a whole, including the part of the industry engaged
     in by the Company,  is highly  competitive.  The Company  believes that the
     principal  methods of  competition  in the markets in which it competes are
     design and styling, price and quality. The licensed and branded markets are
     influenced  by fashion,  design,  color,  consistent  quality and  consumer
     loyalty.  Imports offer competition throughout the Company's product lines.
     The industry is very fragmented, and the Company's relative position in the
     industry is not known.


                                                                    Page 7 of 49
<PAGE>

     Compliance with federal, state and local provisions which have been enacted
     regulating  the discharge of materials into the  environment,  or otherwise
     relating to the  protection of the  environment,  have not had, and are not
     expected  to have,  any  material  effect  upon the  capital  expenditures,
     operating results, or the competitive position of the Company.

     The Company had approximately  146 employees at March 1, 1999,  compared to
     810 employees at March 1, 1998.

(d)  All of the  Company's  manufacturing  facilities  are located in the United
     States. Substantially all (over 95%) of the Company's sales are domestic.

ITEM 2. PROPERTIES

As of December  31,  1998,  the Company  operated  owned and leased  facilities,
aggregating  approximately  651,300  square feet of usable space.  However,  the
Company sold 249,500 square feet of manufacturing,  warehousing distribution and
office space utilized by its Heritage  Division  effective  January 1, 1999. The
following  table  sets  forth  certain  information  concerning  each  of  these
facilities (excluding the Heritage Division facilities sold):

<TABLE>
<CAPTION>
Facility                            Square                        Owned/                         Products/
Location                            Feet                          Leased                         Operations 
--------                            ----                          ------                         ---------- 
<S>                                 <C>                          <C>                             <C>
SIGNAL:

Chattanooga, TN                       92,500                     Leased                          Warehouse,
                                                                 (temporary)                     distribution and
                                                                                                 offices

New Tazewell, TN                      91,300                     Leased                          Apparel - cut and
                                                                 (temporary)                     sew, warehouse and
                                                                                                 distribution.
                                                                                                 (Idle except for
                                                                                                 warehousing as of
                                                                                                 March 8, 1999.)

New York,  NY                          1,400                     Leased                          Showroom


BIG BALL SPORTS:

Houston, TX                           62,700                     Leased                          Screen printing,
                                                                                                 warehouse,
                                                                                                 distribution and
                                                                                                 offices

GRAND ILLUSION SPORTSWEAR:

Schaumburg, IL                        28,200                     Leased                          Screenprinting, warehouse,
                                                                                                 distribution and office

IDLE FACILITIES:
 
Marion, SC                            29,200                     Owned                           Idle (for sale)

Wabash, IN                            69,000                     Owned                           Idle (for sale)
</TABLE>



                                                                    Page 8 of 49
<PAGE>

The buildings at all operating  facilities  set forth in the table above and the
machinery and equipment  contained  therein are well maintained and are suitable
for the  Company's  needs  (see later  paragraph  for a  discussion  of the idle
facilities).  Substantially  all of the  buildings  are  protected  by sprinkler
systems and automatic  alarm systems,  and all are insured for amounts which the
Company considers adequate.

The Company owns  facilities in Marion,  S.C. and Wabash,  Indiana,  aggregating
approximately  98,200 square feet,  which were idle at December 31, 1998. At the
present time, the Company intends to sell these facilities.

As part of its  strategic  plan,  the  Company  closed  250,000  square  feet of
screenprinting,  warehousing,  distribution  and  office  space in  Chattanooga,
Tennessee  and shifted  these  functions  into other  Company  facilities  or to
outside  contractors.  The Company  also closed its cut and sew  facility in New
Tazewell,  Tennessee in March, 1999 except for a temporary warehousing function.
The Company  also closed  approximately  12,100  square feet of office  space in
Chattanooga,  Tennessee during the first quarter of 1999 and consolidated  these
functions into similar functions at Tahiti. The Company's remaining  Chattanooga
facilities are under  month-to-month  leases and are planned to be closed during
the second quarter of 1999. Except for screen-printing at facilities in Houston,
Texas and  Schaumburg,  Illinois,  the Company uses  independent  contractors to
supplement the productive capabilities of its sown manufacturing facilities. The
Company  believes  the  production  of its own  facilities  plus the  contracted
production will support the expected level of business in 1999.

ITEM 3. LEGAL PROCEEDINGS

The  Company is unaware of any  material  pending  legal  proceeding  other than
ordinary, routine litigation incidental to its business, except as noted below.

On April 5,  1999,  litigation  was  commenced  against  the  Company  by former
employees of the Company's  LaGrange,  Georgia facility which the Company closed
in December 1996. The litigation complaint alleges that the Company violated the
provisions  of the  WARN Act in  connection  with the  closing  of the  LaGrange
facility. The Company intends to defend its position.

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

No matters were submitted to a vote of security holders in the fourth quarter of
1998.


                                                                    Page 9 of 49
<PAGE>

                                     PART II


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

MARKET PRICES AND DIVIDENDS

<TABLE>
<CAPTION>
                                                Quarter Ended

                          March 31          June 30        September 30     December 31
                        -------------    -------------    -------------    -------------
                        1998     1997    1998     1997    1998     1997    1998     1997
                        -------------    -------------    -------------    -------------
<S>                     <C>     <C>      <C>     <C>      <C>     <C>      <C>     <C>  
Common Stock:
High                    $1.94   $3.00    $3.25   $1.75    $3.13   $1.88    $2.25   $4.38
Low                      1.00    1.75      .75    1.00     1.63     .88     1.13    1.13
Cash dividends              0       0        0       0        0       0        0       0
</TABLE>

The Company's loan agreements  contain  provisions which currently  restrict the
Company's  ability  to pay  dividends  (see  Note  5 of  Notes  to  Consolidated
Financial  Statements).  No Common  Stock  dividends  were  declared  during the
five-year  period ended  December 31, 1998,  (See  Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations and Notes 5 and 13 of
Notes to Consolidated Financial Statements.)

Shareholders of record as of March 23, 1999: Common 990

The  Company's  Common Stock is listed on the New York Stock  Exchange.  (Symbol
"SIA")

ITEM 6. SELECTED FINANCIAL DATA

SUMMARY OF SELECTED FINANCIAL DATA
Dollars in Thousands (Except Per Share Data)

<TABLE>
<CAPTION>
                           1998        1997(b)     1996        1995      1994(a)
                         --------------------------------------------------------
<S>                      <C>         <C>         <C>         <C>         <C>     
Net sales                $ 50,076    $ 44,616    $ 58,808    $ 89,883    $ 95,818

Net loss                  (35,607)    (30,345)    (33,696)    (39,959)    (53,304)

Basic/diluted net loss
     per common share       (1.22)      (2.39)      (2.91)      (3.80)      (6.88)

Total assets               18,464      26,722      26,167      43,229      69,448

Long-term obligations      70,728      60,147      66,423      57,243      49,258
</TABLE>

(a)  The data includes amounts  applicable to American Marketing Works from date
     of acquisition, November 22, 1994.

(b)  The data includes amounts  applicable to Grand Illusion and Big Ball Sports
     from the dates of  acquisition,  October  1,  1997 and  November  5,  1997,
     respectively.

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS

1998 COMPARED WITH 1997

Net sales of $50.1 million for 1998 represent an increase of 12% or $5.5 million
when  compared  to the $44.6  million in net sales for 1997.  This  increase  is
comprised of an $8.0 million increase for screenprinted and embellished products
offset by decreases of $2.2 million in undecorated activewear and a $0.3 million
decrease for women's fashion knitwear.

                                                                   Page 10 of 49
<PAGE>

Gross profit was $7.1  million  (14% of sales) in 1998  compared to $5.3 million
(12% of sales) in 1997.  The $1.8  million  increase in gross profit in 1998 was
the result of increased  first quality sales and other  efficiencies  as well as
improved margins on first quality sales due to sales mix and decreased  closeout
sales.

Royalty expense related to licensed  product sales was 8% and 12% of total sales
for 1998 and 1997, respectively. The decrease in royalty expense percentage from
1997 is the result of  increased  sales of licensed  products  relative to total
sales.  The additional  licensed sales achieved more revenues,  thereby covering
the minimum royalty  obligations and resulting in a lower  percentage of cost of
sales.

Selling,  general and administrative ("SG&A") expenses were 46% and 31% of sales
for the years  ended  December  31,  1998 and 1997,  respectively.  Actual  SG&A
expense  increased $8.9 million to $22.8 million  principally  due to additional
costs associated with Big Ball and Grand Illusion.

The primary  element  making up the 1998 other income  (expense)  amount of $1.3
million is a gain on the disposal of certain fixed assets.

The  nonrecurring  charge of $3.8  million in 1998 was the result of the Company
reevaluating its business strategy.  The reevaluation  resulted in a change from
the Company  being  primarily a  manufacturer  of products to primarily a sales,
marketing,  merchandising  and  distribution  company for  activewear  and other
clothing.  As a result,  the  Company has  reviewed  the  carrying  value of all
abandoned  facilities  and the related  equipment  and wrote said assets down by
$1.4 million to the estimated net realizable value based on current  conditions.
In  addition,  the Company has accrued $1.4  million for costs  associated  with
plant closings and the reorganization of administrative functions. Also included
in the nonrecurring  charge is a dispute regarding raw material purchases from a
third party vendor. The Company anticipates  incurring existing costs associated
with this third party vendor of approximately $1,000,000.

As a result of the  restructuring and change in business  strategy,  the Company
wrote off the goodwill  associated  with the  acquisition  of Big Ball and Grand
Illusion.

1997 COMPARED WITH 1996

Net sales of $44.6  million for 1997  represent  a decrease of $14.2  million or
24.1% from the $58.8  million in net sales for 1996.  This decrease is comprised
of a $6.6 million reduction in decorated products,  and a $7.4 million reduction
in  undecorated  activewear,  and a $1.9 million  reduction  in women's  fashion
knitwear,  partially offset by screenprinted sales of $1.7 million for the newly
acquired Big Ball Sports and Grand Illusion business units.

Sales of decorated products were $27.8 million for 1997 versus $34.4 million for
1996. Reduced unit volume accounted for a $5.0 million decrease in sales while a
decrease in average selling price accounted for a $1.6 million sales  reduction.
The decrease in average  selling price was due to a  combination  of product mix
and unit  selling  price  changes.  The Company is  focusing  its efforts on the
recovery of lost volume in this core area of the business.

Sales of undecorated activewear products were $3.1 million for 1997 versus $10.5
million  for 1996.  The  Company  is  concentrating  its  marketing  efforts  on
decorated  products  in an effort to  produce  higher  margin  sales than can be
achieved with sales of undecorated activewear. As a result of this decision, the
Company's sales of undecorated  activewear have continued to decline during 1997
and no longer represent a significant portion of the Company's total sales.

Sales of women's  fashion  knitwear  were $12.0  million for 1997 as compared to
$13.9 million for 1996.  Average  selling  price per unit  decreased 59% but was
offset by a 213% increase in unit volume. The reduction in average selling price
was due to a  combination  of product mix and unit selling  price  changes.  The
reduced  average selling price was the prime reason for the increased unit sales
volume.

Gross profit was $5.3 million (11.9% of sales) for 1997 compared to $3.8 million
(6.5% of sales) for 1996. The primary components of the $1.5 million improvement
in margin are lower  manufacturing  costs ($6.2  million)  offset by lower sales
($3.2 million) and a lower standard margin ($1.5 million).  Manufacturing  costs
were  improved as a result of the closing of the  LaGrange,  Georgia  knitting &
dying plant, and reduced overhead costs.



                                                                   Page 11 of 49
<PAGE>

Royalty  expense  related to licensed  product sales was 12.3% of sales for 1997
and 8.2% for 1996.  This increase was caused by an increase in the percentage of
licensed versus  non-licensed  product sales and by additional expenses to cover
guarantees  where  sales  levels  are not  expected  to  cover  minimum  royalty
requirements.  Selling,  general and administrative (SG&A) expenses were 31% and
30% of sales for 1997 and 1996, respectively. Actual SG&A expense decreased $3.8
million due to the Company's aggressive cost reduction efforts.

The primary elements making up the 1997 other expense amount of $1.6 million are
a $0.8 million write down of property,  plant and equipment, a $0.3 million bank
charge for failing to reach the minimum sales  requirements  under its factoring
agreement,  a $0.1  million in  additional  amortization  of  goodwill  and $0.1
million in factor charges for customer late payments.

The primary elements making up the 1996 other expense amount of $4.1 million are
a $3.1 million write-down of property, plant and equipment which have been idled
and/or  held for  resale,  $0.2  million in factor  charges  for  customer  late
payments and $0.2 million accrued severance.

FINANCIAL CONDITION

Additional  working  capital was required in 1998 to fund the  continued  losses
incurred by the Company.  Such  working  capital was  provided  through  several
transactions with the Company's principal shareholders and its senior lender. In
1998,  the Company  received  $8.25  million  from WGI,  LLC, and certain of its
affiliates (collectively "WGI"), a principal shareholder, bringing the Company's
total  subordinated  indebtedness  to WGI to $19.46  million as of December  31,
1998.  During 1998, the terms of this indebtedness were redocumented in the form
of a new Credit  Agreement  effective  May 8, 1998.  See Note 5. At December 31,
1998,   the  Company  had   borrowings  in  excess  of  its  borrowing  base  of
approximately  $8.2 million with its senior lender  compared to $21.0 million at
December  31,  1997.  (See  Notes  5 and  13 to  the  accompanying  Consolidated
Financial  Statements  of the  Company  for a more  detailed  discussion  of the
discretionary over-advance facilities with the Company's senior lender).

The working  capital  deficit at December 31, 1998 increased  $14.0 million from
the prior year. The increase in the working capital deficit was primarily due to
a decrease in  receivables  ($2.6  million),  a decrease in the note  receivable
($0.2 million),  an increase in the revolving advance account ($3.6 million) and
an  increase in  accounts  payable,  accrued  liabilities  and accrued  interest
(aggregating  $10.1  million).  These were offset by an increase in  inventories
($2.3 million), and a decrease in the current maturities of long term debt ($0.7
million).

Accounts  receivable  decreased  $2.6 million or 64% compared to the prior year.
The decrease was partially due to management aggressively pursuing collection of
outstanding  accounts as well as an  extensive  review of charge backs and other
pending credits and evaluating the collectivity thereof.

Inventories increased by $2.3 million or 22% compared to last year.  Inventories
increased as a result of the Company's  sourcing of more products from overseas,
thus  requiring  additional  inventory  levels  in  order to meet  safety  stock
requirements.  Days sales in inventory increased from 84 days in 1997 to 90 days
of sales in 1998. In addition,  in  anticipation  of the closing of the Tazewell
cut-and-sew facility in 1999, management pursued an aggressive conversion of all
raw material on hand into  finished  blank  garments  during the last quarter of
1998.

Accounts  payable,  accrued  liabilities  and accrued  interest  increased $10.1
million or 87% over prior year-end.  This was a result of the Company's cash and
borrowing position  deteriorating due to losses incurred in fiscal 1998, thereby
slowing payments to all vendors.

Cash used in  operations  was $16.2  million in 1998,  compared to $20.8 million
used in  operating  activities  in 1997.  The net loss of $35.6  million  and an
increase in  inventories  ($2.3 million) were the primary uses of funds in 1998.
These  items  were  partially  offset by  depreciation  and  amortization  ($3.9
million),  write-downs and  restructuring  costs ($3.8  million),  significantly
lower  receivable  levels ($2.6 million),  and an increase in accounts  payable,
accrued liabilities and accrued interest ($8.1 million).



                                                                   Page 12 of 49
<PAGE>

Cash provided by investing  activities of $1.6 million  resulted  primarily from
sales of  property  and  equipment.  There were no  outstanding  commitments  to
purchase  equipment  at December 31,  1998.  During  1999,  the Company does not
anticipate any significant capital expenditures.

Cash  provided by  financing  activities  was $14.7  million in 1998 The Company
received  proceeds  of $4.6  million  from the sale of its  Series G1  Preferred
Stock.  In addition it borrowed an  additional  $8.2 million from WGI as well as
$3.6 million under its revolving  advance account.  This was partially offset by
principal payments on borrowings of $3.3 million.

The  revolving  advance  account  increased  $3.6 million from $40.5  million at
year-end  1997 to $44.0  million at  December  31,  1998.  Under the amended and
restated factoring agreement, the Company's total outstanding obligations to the
Senior lender  cannot  exceed the lower of $55 million or the borrowing  base as
defined.  At  year-end,   the  borrowing  base  was  $9.2  million.   Therefore,
approximately  $34.8  million  was over  advanced  under the  revolving  advance
account.  The  over-advance  is secured by treasury bills pledged by a principal
shareholder, and in part, by the guarantee of two principal shareholders.

Effective March 22, 1999, pursuant to a Revolving Credit, Term Loan and Security
Agreement dated March 12, 1999 ( the "Credit Agreement") the Company completed a
new financing  arrangement with its senior lender, BNY Financial Corporation (in
its own behalf and as agent for other participating  lenders).  This arrangement
provides the Company with funding of up to  $98,000,000  (the "Maximum  Facility
Amount")  under a  combined  facility  that  includes  a  $50,000,000  Term Loan
(supported in part by $25,500,000 of collateral  pledged by an affiliate of WGI,
LLC, the Company's  principal  shareholder) and a Revolving Credit Line of up to
$48,000,000 (the "Maximum  Revolving Advance  Amount").  Subject to the lenders'
approval and to continued  compliance  with the terms of the original  facility,
the Company may elect to increase  the  Maximum  Revolving  Advance  Amount from
$48,000,000 up to $65,000,000,  in increments of not less than $5,000,000. In no
event, however, can the Maximum Facility Amount (after taking such increase into
account) exceed $115,000,000.

The Term Loan  portion of the new  facility is divided  into two  segments  with
differing  payment  schedules:  (i)  $27,500,000  ("Term Loan A") payable,  with
respect  to  principal,  in a  single  installment  on March  12,  2004 and (ii)
$22,500,000  ("Term  Loan  B")  payable,  with  respect  to  principal,   in  47
consecutive  monthly  installments  on the  first  business  day of  each  month
commencing  April 1, 2000, with the first 46  installments to equal  $267,857.14
and the final  installment to equal the remaining unpaid balance of Term Loan B.
The Credit  Agreement allows the Company to prepay either term loan, in whole or
in part, without premium or penalty.

In connection with the Revolving Credit Line, the Credit Agreement also provides
(subject to certain  conditions)  that the senior  lender will issue  Letters of
Credit on behalf of the Company,  subject to a maximum L/C amount of $40,000,000
and further  subject to the  requirement  that the sum of all advances under the
revolving credit line (including any outstanding L/Cs) may not exceed the lesser
of the Maximum  Revolving  Advance  Amount or an amount (the  "Formula  Amount")
equal to the sum of:

     (1)  up to 85% of Eligible Receivables, as defined, plus 

     (2)  up to 50% of the value of Eligible  Inventory,  as defined  (excluding
          L/C inventory and subject to a cap of $30,000,000 availability), plus

     (3)  up to 60% of the first cost of  Eligible  L/C  Inventory,  as defined,
          plus 

     (4)  100% of the value of  collateral  and letters of credit  posted by the
          Company's principal shareholders, minus 

     (5)  the aggregate undrawn amount of outstanding Letters of Credit, minus

     (6)  Reserves (as defined).

In addition to the secured revolving advances represented by the Formula Amount,
and subject to the overall  limitation of 


                                                                   Page 13 of 49
<PAGE>

the Maximum Revolving Advance Amount, the agreement provides the Company with an
additional,  unsecured  Overformula  Facility of  $17,000,000  (the  outstanding
balance of which must be reduced to not more than  $10,000,000  for at least one
business  day during a five  business  day cleanup  period  each month)  through
December 31, 2000.  Between December 31, 2000 and June 1, 2001, both the maximum
overall balance and the maximum  "cleanup period" balance under this Overformula
Facility are gradually reduced to zero in six equal monthly increments.  Subject
to the  limitations  of the  Maximum  Revolving  Advance  Amount and the Formula
Amount, as well as the Maximum Facility Amount, the agreement also provides that
the senior lender (in its individual capacity) may make Swingline Loans of up to
$5,000,000  to the Company for periods not to exceed  seven (7) days for any one
such loan.

Interest on all amounts advanced under the facility (pursuant to the either Term
Loan or Revolving  Advances  (including any  outstanding  Letters of Credit)) is
payable  in  arrears  on the last day of each  month.  The  facility  allows the
Company  to  select  (separately)  interest  rates  for both  the Term  Loan and
Revolving  Advances  based  on  either a  Domestic  Rate or a  Eurodollar  Rate.
Interest on Domestic Rate Loans is payable at a fluctuating  Alternate Base Rate
equal to the higher of the prime rate (as  defined)  or the  federal  funds rate
plus 0.5%, plus the Applicable Margin (as defined).  Interest on Eurodollar Rate
Loans is payable at a fluctuating  Eurodollar Rate equal to the daily average of
the 30-day London Interbank Offered Rate as published in The Wall Street Journal
(calculated  as prescribed in the  agreement),  plus the  Applicable  Margin (as
defined). The Applicable Margin for both Domestic Rate Loans and Eurodollar Rate
Loans is tied to the  Company's  ratio of Funded Debt to Free Cash Flow (each as
defined in the  agreement),  and ranges (A) in the case of Domestic  Rate Loans,
from zero for a ratio  less than or equal to 1.0:1 to 1.25% for a ratio  greater
than 5.0:1 and (B) in the case of  Domestic  Rate  Loans,  from 1.5% for a ratio
less than or equal to 1.0:1 to 3.5% for a ratio greater than 5.0:1.

Notwithstanding  the foregoing,  the Credit Agreement provides that (x) from and
after the  Closing  Date  through  and  including  the  earlier of (i) the first
anniversary  of the  Closing  Date and (ii) the date on which the senior  lender
receives the Company's 1999 annual audited financial statements as required, the
Applicable Margin shall be 1.25% for Domestic Rate Loans and 3.5% for Eurodollar
Rate Loans, and (y) from and after the date that the Company repays in full Term
Loan B and (ii) the date at which  advances  are no longer  permitted  under the
Overformula Facility, the Applicable Margin in effect from time to time for both
Domestic Rate Loans and Eurodollar Rate Loans shall be increased by .50%.

In addition to the amounts due for  interest,  the Company is  obligated to pay:
(i) a monthly unused  facility fee,  computed at the rate of 0.25% per annum, on
the  difference  between the Maximum  Revolving  Advance  Amount and the average
daily balance of  outstanding  Revolving  Advances  (plus the aggregate  undrawn
amount of outstanding  Letters of Credit) during that month;  (ii) a monthly fee
computed  at the rate of 0.25% per annum on the  outstanding  face amount of any
Letters of Credit (plus certain  customary  fees charged by The Bank of New York
in connection with issuing letters of credit); and (iii) certain  administrative
fees payable to the senior lender under a fee letter executed in connection with
the agreement.

The Credit Agreement requires, among other things, maintenance by the Company of
prescribed  minimum  amounts of tangible net worth,  ratios of current assets to
current  liabilities,  working  capital  and net  operating  results  (excluding
extraordinary  items). The Credit Agreement also limits the Company's ability to
pay  dividends,  the Company's  future  capital  expenditures  and the amount of
indebtedness the Company may incur, and effectively prohibits future acquisition
or  business  combination  transactions  by the  Company  without  the  lenders'
consent.  As the  Company  has not yet closed its books on the first  quarter of
Fiscal 1999,  the Company at present is not able to determine  whether it was in
compliance with all of the applicable covenants under the Credit Agreement as of
the end of such quarter.

In  consideration  of the  provision of the  additional,  unsecured  Overadvance
Facility prescribed in the agreement, the Company permitted the senior lender to
purchase a total of 1,791,667  shares of the  Company's  Common Stock at the par
value of $.01 per share  (the  "Issued  Shares")  under the terms of a  separate
Subscription  and Stock  Purchase  Agreement  executed in  conjunction  with the
Credit  Agreement.  The Company  also  issued to the senior  lender a Warrant to
purchase  up to  375,000  additional  shares of its Common  Stock (the  "Warrant
Shares")  at  an  exercise  price  of  $1.50  per  share.   Subject  to  certain
requirements  for  advance  notice to the  Company by the holder  regarding  the
number of Warrant  Shares  which the holder  intends to  purchase,  the  Warrant
becomes  exercisable over a three-year  period beginning  December 31, 1999 with
respect to a maximum of 125,000  shares per year.  The agreement  also gives the
senior  lender the right to have both the Issued  Shares and the Warrant  Shares
registered   for  resale  under  the   Securities  Act  of  1933  in  prescribed
installments  over a staggered  period of time, and provides  certain  customary
antidilution  protections  with  respect to the  Warrant  Shares and the 625,000
Issued Shares for which resale registration is delayed.



                                                                   Page 14 of 49
<PAGE>

The Subscription and Stock Purchase  Agreement also provides for certain put and
call options with respect to the Issued Shares. Under the put option, the senior
lender will have the right (upon  specified  advance  written  notice) once each
calendar  year for three years,  beginning  December  31,  1999,  to require the
Company to purchase  up to 388,889 of the Issued  Shares at a price of $1.50 per
share. This right will only be exercisable,  however, if the average closing bid
price of the Company's  Common Stock for the five trading days prior to the date
of the exercise of the put option is less than $1.50. Under the call option, the
Company has the right (but not the  obligation),  exercisable  at any time while
the senior lender holds the 1,166,667  issued shares for which  registration  is
not delayed under the  agreement,  to purchase all or any of the portion of such
shares at $3.00 per share.

Interest  expense was $8.6  million in 1998  compared to $14.7  million in 1997.
Total outstanding debt averaged $65.437 million and $63.285 million for 1998 and
1997,  respectively,  with average  interest  rates of 10.0% and 20.3%.  Average
outstanding debt increased as a result of continuing losses. The decrease in the
average  interest rate was attributable to interest rates for debt with WGI, LLC
being  reduced from 25% to 10%.  Included in interest  expense is  $1,672,000 of
amortization of debt issuance costs which increased the effective  interest rate
of the  Company  from 10% to 14% per annum.  The Company has been unable to fund
its cash needs from operating  activities.  The Company's  liquidity  shortfalls
were primarily  funded through the additional  advances from its primary lending
sources and the sale of certain convertible preferred securities.

The Company  also uses letters of credit to support  some  domestic  sourcing of
inventory and certain other obligations. Outstanding letters of credit were $2.0
million at December 31, 1998  (excluding  collateral of $2.0 million  pledged to
the senior lender in the form of a standby letter of credit).

Total  shareholders'  deficit  increased by $39.7  million  compared to year-end
1997, primarily as a result of losses of $35.6 million during the year.

YEAR 2000

The Company  recognizes the need to ensure its operations  will not be adversely
impacted by year 2000  software  failures.  Software  failures due to processing
errors  potentially  arising  from  calculations  using the year 2000 date are a
known risk.  The Company is in the  process of  developing  a plan to ensure its
systems are compliant with the requirements to process  transactions in the year
2000.  The  following is a status  report of the  Company's  efforts to date for
fulfilling those compliance requirements:

The Company is in the process of updating its current  software,  developed  for
the apparel industry,  which will make the information technology ("IT") systems
year 2000 compliant.  This software  modification,  purchased from a third party
vendor, is expected to be installed, tested and completed on or before September
30,  1999,  giving the  Company  additional  time to test the  integrity  of the
system.

Although the Company  believes that the  modification to the software which runs
its core operations is year 2000 compliant, the Company does utilize other third
party equipment and software that may not be year 2000 compliant. If any of this
software or equipment does not operate properly in the year 2000 and thereafter,
the Company  could be forced to make  unanticipated  expenditures  to cure these
problems, which could adversely affect the Company's business.

The total cost of the new software and  implementation  necessary to upgrade the
Company's current IT system plus address the year 2000 issues is estimated to be
approximately  $100,000.  Planned  costs  have been  budgeted  in the  Company's
operating  budget.  The projected costs are based on management's best estimates
and actual results could differ as the new system is implemented.  Approximately
$20,000 has been expended as of December 31, 1998.

While the Company was aware of and was in the  process of  addressing  all known
and anticipated year 2000 issues, no formal plan had been adopted.  Accordingly,
the Company is in the process of, and has adopted, a formal year 2000 compliance
plan and expects to achieve implementation on or before September 30, 1999. This
effort  will be headed by a new MIS  manager  and  include  members  of  various
operational and functional units of the Company.

The Company is cognizant of the risk associated with the year 2000 and has begun
a  series  of   activities  to  reduce  the  inherent   risk   associated   with
non-compliance.



                                                                   Page 15 of 49
<PAGE>

The Company has planned to hire a new MIS manager whose  primary  responsibility
will be to insure that all Company  systems are Year 2000  compliant.  Among the
activities  which  the  Company  has not  performed  to date  include:  software
(operating  systems,  business  application  systems  and  EDI  system)  must be
upgraded and tested  (although  these systems are integrated and are included in
the Company's core  accounting  system);  PC's must be assessed and upgraded for
compliance,  letters/inquiries  have not been sent to  suppliers,  vendors,  and
others to determine their compliance  status  (although the Company's  principal
customers,  Wal-Mart,  Target and K-Mart, have indicated that they are Year 2000
compliant).

In the event that the Company or any of its  significant  customers or suppliers
does not  successfully  and timely achieve year 2000  compliance,  the Company's
business or operations could be adversely affected.  Thus, the Company is in the
process of adopting a contingency plan.

The Company is currently  developing a "Worst Case Contingency  Plan" which will
include  generally  an  environment  of utilizing  spreadsheets  and other "work
around" programming and procedures. This contingency system will be activated if
the  current  plans are not  successfully  implemented  and  tested  by  October
31,1999.  The cost of these  alternative  measures are estimated to be less than
$25,000.

The Company  believes  that its  current  operating  systems  are fully  capable
(except  for year 2000 data  handling)  of  processing  all  present  and future
transactions of the business. Accordingly, no major efforts have been delayed or
avoided which affect normal  business  operations as a result of the  incomplete
implementation  of the year 2000 IT systems.  These current  systems will become
the foundation of the Company's contingency system.

LIQUIDITY AND CAPITAL RESOURCES

The Company executed a new Revolving Credit Agreement and Term Loan on March 22,
1999 with its senior lender, BNY Financial Corporation (a subsidiary of the Bank
of New  York).  The term of the  agreement  extends  through  April  2004.  (See
Financial  Condition  and  Note  13  to  the  Notes  to  Consolidated  Financial
Statements.)

The new Revolving Credit Agreement and Term Loan provides the Company with up to
a maximum of $98.0 million aggregate credit availability, based on the Company's
inventory,  receivables,  fixed  assets,  collateral  pledged and  guarantees by
principal  shareholders of the Company.  Financial covenants under the agreement
have been modified in accordance with management's current business plan for the
Company. In connection with the agreement,  the Company has issued to the Senior
Lender 1,791,667 shares of restricted  common stock and exercisable  warrants to
purchase up to 375,000 shares of the Company's Common Stock at $1.50 per share.

As a result of continuing  losses,  the Company has been unable to fund its cash
needs through cash generated by operations.  The Company's liquidity  shortfalls
from   operations   during  these  periods  have  been  funded  through  several
transactions  with its  principal  shareholders  and with the  Company's  senior
lender.  These  transactions  are  detailed  above  in the  Financial  Condition
section.

Throughout  1998 and during the first quarter of 1999,  the Company  experienced
liquidity  shortfalls  from  operations  that were resolved  through  additional
advances against the Company's available  borrowing  capacity.  These shortfalls
bring into question whether the Company will be in compliance with the financial
covenants of its new Revolving  Credit Agreement and Term Loan at the end of the
first quarter for fiscal 1999 or have  sufficient  capacity  under its available
borrowings to fund its  operating  needs.  Accordingly,  all debt due the senior
lender has been classified as a current  liability in the  consolidated  balance
sheets.  If the senior lender were to accelerate  the maturity of such debt, the
Company would not have funds available to repay the debt.

If the debt due the senior lender does become subject to  accelerated  maturity,
there can be no  assurances  the Company  would be able to find other  financing
sources to continue operations or repay the senior lender.

The  Company's  continued  existence  is  dependent  upon its  ability  to raise
additional debt or equity financing and to  substantially  improve its operating
results during 1999. Plans to improve operations  include:  (i) reducing general
and administrative costs, (ii) focusing the Company's efforts on the embellished
activewear business, including licensed 


                                                                   Page 16 of 49
<PAGE>

products and various cartoon  characters,  (iii) reducing costs of sales through
outsourcing and other measures, (iv) seeking appropriate additional acquisitions
to  enhance  the  Company's  sales  and  profitability,  (v)  the  sale  of idle
facilities,  and (vi) integration of the acquisition of Tahiti Apparel,  Inc. to
increase sales and gross margins.

In order for the Company to have  sufficient  liquidity  for it to continue as a
going  concern in its present  form,  the Company will need to raise  additional
funds and execute planned improvements. The Company has no assurances it will be
able to raise additional  funds. The  consolidated  financial  statements do not
include any adjustments  relating to the  recoverability  and  classification of
recorded  asset amounts or the amount and  classification  of liabilities or any
other  adjustments  that might become  necessary should the Company be unable to
continue as a going concern in its present form. There can be no assurances that
the Company's operations can be returned to profitability.

If the Company's  sales and profit margins do not  substantially  improve in the
near term,  the Company may be required to seek  additional  capital in order to
continue its operations and to move forward with the Company's turnaround plans,
which include seeking appropriate  additional  acquisitions (subject to approval
of any such  acquisitions  by the  Company's  senior  lender).  To  obtain  such
additional  capital  and such  financing,  the  Company may be required to issue
additional  securities  that  may  dilute  the  interests  of its  stockholders.
Although  management  believes that the new Revolving  Credit Agreement and Term
Loan will provide the Company with adequate financial  resources in Fiscal 1999,
no assurance can be given that such  financing will be adequate or, if required,
additional financing will be available to the Company on commercially reasonable
terms  or  otherwise.   If  the  Company's  sales  and  profit  margins  do  not
significantly  improve  and  additional  funds  cannot be raised as needed,  the
Company will not be able to continue as a going concern.

INFLATION AND CHANGING PRICES

Inflation  and changing  prices have not had a material  effect on the Company's
results of operations or financial condition during the past three years.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Report of Independent Public Accountants

Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997

Consolidated  Statements  of Operations  for the Years Ended  December 31, 1998,
1997 and 1996

Consolidated  Statements of  Shareholders'  Deficit for the Years Ended December
31, 1998, 1997 and 1996

Consolidated  Statements  of Cash Flows for the Years Ended  December  31, 1998,
1997 and 1996

Notes to Consolidated Financial Statements

Financial Statement Schedules:

See Part IV, Item 14 (a) 2


                                                                   Page 17 of 49
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Signal Apparel Company, Inc.:

We have audited the accompanying  consolidated  balance sheets of SIGNAL APPAREL
COMPANY,  INC. (an Indiana corporation) AND SUBSIDIARIES as of December 31, 1998
and 1997, and the related consolidated  statements of operations,  shareholders'
deficit and cash flows for each of the three years in the period ended  December
31, 1998.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Signal Apparel Company,  Inc.
and  subsidiaries  as of December  31,  1998 and 1997,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated  financial  statements,  the Company has as of December  31, 1998 a
working  capital  deficit of $56.9  million,  an  accumulated  deficit of $284.9
million,  and the  liquidity  of the  Company  has been  adversely  affected  by
recurring losses from operations.  These matters raise  substantial  doubt about
the  Company's  ability to continue as a going  concern.  Management's  plans in
regard to these matters are also  described in Note 1. The financial  statements
do not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and  classification  of liabilities that
might result should the Company be unable to continue as a going concern.


/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP

Chattanooga,  Tennessee  
March 26, 1999 
(Except for the matter 
discussed in the
last paragraph of Note 11 
as to which the date 
is April 12, 1999)



                                                                   Page 18 of 49
<PAGE>


                  Signal Apparel Company, Inc. and Subsidiaries

                           Consolidated Balance Sheets

                           December 31, 1998 and 1997
                (in thousands of dollars, except per share data)

<TABLE>
<CAPTION>
                                                                       1998         1997
                                                                     ---------    ---------
<S>                                                                  <C>          <C>      
Assets:
     Current assets:
         Cash and cash equivalents                                   $     403    $     384
         Receivables, less allowance for doubtful
            accounts of $2,443 and $1,887, respectively                  1,415        3,981
         Note receivable                                                   283          500
         Inventories                                                    12,641       10,390
         Prepaid expenses and other                                        539          531
                                                                     ---------    ---------

               Total current assets                                     15,281       15,786
                                                                     ---------    ---------

     Property, plant and equipment, at cost:
         Land                                                              390          433
         Buildings and improvements                                      4,918        7,957
         Machinery and equipment                                        20,023       21,020
                                                                     ---------    ---------

               Total property, plant and equipment                      25,331       29,410
         Less:  accumulated depreciation                                22,330       23,365
                                                                     ---------    ---------

     Net, property, plant and equipment                                  3,001        6,045
                                                                     ---------    ---------

     Goodwill, less accumulated amortization of $56 in 1997                  0        4,832
                                                                     ---------    ---------
     Other assets                                                          182           59
                                                                     ---------    ---------

               Total assets                                          $  18,464    $  26,722
                                                                     ---------    ---------

Liabilities and Shareholders' Deficit:

     Current liabilities:
         Accounts payable                                            $   8,133    $   2,577
         Accrued liabilities                                             9,760        7,395
         Accrued interest                                                3,810        1,603
         Current portion of long-term debt                               6,435        7,110
         Revolving advance account, net of
           unamortized                                                  44,049       40,035
                                                                     ---------    ---------
            Discount of $0 and $422, respectively

               Total current liabilities                                72,187       58,720
                                                                     ---------    ---------

     Long-term debt, principally to related parties, less
        Current portion, net of unamortized discount of
        $6,276 and $3,294, respectively                                 13,968        9,286
                                                                     ---------    ---------
     Commitments and contingencies (Notes 1, 5, 6, 11
        And 13)

     Redeemable Series D Preferred Stock, $100,000
        Stated value per share, 100 shares authorized, none                  0            0
        Outstanding in 1998 and 1997


     Shareholders' deficit:

     Preferred Stock:
        Series F, $100,000 stated value per share, 1,000
           Shares authorized, none outstanding in 1998,                      0       44,316
           443.16 shares issued and outstanding in 1997
        Series G1, $1,000 stated value per share 5,000
           shares authorized, issued and outstanding in
           1998, (cumulative unpaid dividends of $73 in 1998)            4,484            0
</TABLE>

                                                                   Page 19 of 49
<PAGE>

<TABLE>
<CAPTION>
                                                                       1998         1997
                                                                     ---------    ---------
<S>                                                                  <C>          <C>      
        Series H, $100,000 stated value per share, 1,000
          Shares authorized 443.16 issued and outstanding
          In 1998, including cumulative unpaid dividends of $3,989      48,305            0
     Common stock, 80,000,000 shares authorized, $.01
          Par value per share, 32,661,955 and 32,536,460
          Shares issued and outstanding in 1998 and 1997                   326          325
     Additional paid-in capital                                        165,242      160,399
     Accumulated deficit                                              (284,931)    (245,207)
                                                                     ---------    ---------
               Subtotal                                                (66,574)     (40,167)
     Less: Cost of treasury shares (140,220 shares)                     (1,117)      (1,117)
                                                                     ---------    ---------

               Total shareholders' deficit                             (67,691)     (41,284)
                                                                     ---------    ---------

                    Total liabilities and shareholders' deficit      $  18,464    $  26,722
                                                                     ---------    ---------
</TABLE>



The  accompanying  notes  to  these  consolidated  financial  statements  are an
integral part of these consolidated balance sheets.


                                                                   Page 20 of 49
<PAGE>


                  Signal Apparel Company, Inc. and Subsidiaries

                      Consolidated Statements of Operations

              For the Years Ended December 31, 1998, 1997 and 1996
                (in thousands of dollars, except per share data)




                                                 1998         1997         1996
                                             --------     --------     --------

Net sales                                    $ 50,076     $ 44,616     $ 58,808
Cost of sales                                  42,999       39,287       54,974
                                             --------     --------     --------

Gross profit                                    7,077        5,329        3,834

Royalty expense                                 4,211        5,467        4,822
Selling, general and
administrative expenses                        22,843       13,916       17,742
Interest expense                                8,645       14,726       10,833
Other (income) expense, net                    (1,315)       1,565        4,133
Write-off of goodwill                           4,542            0            0
Nonrecurring charges                            3,758            0            0
                                             --------     --------     --------

Loss before income taxes                      (35,607)     (30,345)     (33,696)

Income taxes                                        0            0            0
                                             --------     --------     --------

Net loss                                     $(35,607)    $(30,345)    $(33,696)

Less: preferred stock dividends                (4,062)           0            0
                                             --------     --------     --------

Net loss applicable to common stock          $(39,669)    $(30,345)    $(33,696)
                                             ========     ========     ========

Weighted average shares outstanding,           32,644       12,693       11,566
                                             ========     ========     ========
     Basic and diluted

Basic/diluted net loss per share             $  (1.22)    $  (2.39)    $  (2.91)
                                             ========     ========     ========

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



                                                                   Page 21 of 49
<PAGE>


                  Signal Apparel Company, Inc. and Subsidiaries

                Consolidated Statements of Shareholders' Deficit

              For the Years Ended December 31, 1998, 1997 and 1996
                   (in thousands of dollars except share data)

<TABLE>
<CAPTION>
                                    Preferred Stock Series
                                                                                      Additional
                                                                              Common    Paid-In-  Accumulated   Treasury
                                  A         C          F        G1        H    Stock    Capital     Deficit      Stock       Total
<S>                           <C>       <C>       <C>        <C>      <C>       <C>     <C>       <C>          <C>         <C>      
Balance, December 31, 1995    $39,584   $36,618   $     0    $   0    $    0    $115    $73,012   $(181,166)   $(1,117)    $(32,954)
                              -------   -------   -------    -----    ------    ----   --------   ---------    -------     -------- 

Net loss                            0         0         0        0         0       0          0     (33,696)         0      (33,696)


Exercise of employee
stock options                       0         0         0        0         0       0        200           0          0          200


Compensation expense
related to stock options
granted below market
value                               0         0         0        0         0       0        295           0          0          295
                              -------   -------   -------    -----    ------    ----   --------   ---------    -------     -------- 

Balance, December 31, 1996    $39,584   $36,618   $     0    $   0    $    0    $115    $73,507   $(214,862)   $(1,117)    $(66,155)
                              -------   -------   -------    -----    ------    ----   --------   ---------    -------     -------- 

Net loss                            0         0         0        0         0       0          0     (30,345)         0      (30,345)


Exercise of warrants to
acquire 4,630,000
shares of Common
Stock through
conversion of $10,582
in debt and Series C
Preferred Stock                     0    (3,375)        0        0         0      46     13,911           0          0       10,582

Conversion of $23,802 in
debt and Series C
Preferred Stock into
Series F Preferred Stock            0   (20,514)   44,316        0         0       0          0           0          0       23,802

Conversion of $15,833 in
debt and Series A and C
Preferred Stock into
15,473,220 shares of
Common Stock                  (39,584)  (12,729)        0        0         0     155     67,991           0          0       15,833

Issuance of 855,194
Shares of Common Stock
for Big Ball acquisition            0         0         0        0         0       9      1,274           0          0        1,283
                                    
Issuance of 4,750,000
warrants in connection              
with extension of debt              0         0         0        0         0       0      3,716           0          0        3,716
                              -------   -------   -------    -----    ------    ----   --------   ---------    -------     -------- 

Balance, December 31, 1997    $     0   $     0   $44,316    $   0    $    0    $325   $160,399   $(245,207)   $(1,117)    $(41,284)
                              -------   -------   -------    -----    ------    ----   --------   ---------    -------     -------- 

Net loss                            0         0         0        0         0       0          0     (35,607)         0      (35,607)

Issuance of 125,000
shares of Common Stock              0         0         0        0         0       1        180           0          0          181

Conversion of Series F
Preferred Stock into
Series H Preferred Stock            0         0   (44,316)       0    44,316       0          0           0          0            0

Issuance of 5,000 shares
of Series G1 Preferred
Stock and 162,500  
warrants to purchase
common stock                        0         0         0    4,429         0       0        196           0          0        4,625

Issuance of 3,997,000
warrants to purchase
common stock to a lender            0         0         0        0         0       0      4,467           0          0        4,467
</TABLE>

                                                                   Page 22 of 49
<PAGE>

<TABLE>
<CAPTION>
                                    Preferred Stock Series
                                                                                      Additional
                                                                              Common    Paid-In-  Accumulated   Treasury
                                  A         C          F        G1        H    Stock    Capital     Deficit      Stock       Total
<S>                           <C>       <C>       <C>       <C>      <C>        <C>    <C>        <C>          <C>         <C>      

Accretion of Series G1
Preferred Stock                     0         0         0       55         0       0          0         (55)         0            0

Cumulative accrued
dividends on Series G1
Preferred Stock                     0         0         0        0         0       0          0         (73)         0          (73)

Cumulative accrued
dividends on Series H
Preferred Stock                     0         0         0        0     3,989       0          0      (3,989)         0            0
                              -------   -------   -------   ------   -------    ----   --------   ---------    -------     -------- 

Balance, December 31, 1998    $     0   $     0   $     0   $4,484   $48,305    $326   $165,242   $(284,931)   $(1,117)    $(67,691)
                              =======   =======   =======   ======   =======    ====   ========   =========    =======     ======== 
</TABLE>


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


                                                                   Page 23 of 49
<PAGE>




                  Signal Apparel Company, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows

                               For the Years Ended

                        December 31, 1998, 1997 and 1996
                (in thousands of dollars, except per share data)

<TABLE>
<CAPTION>

                                                                         1998        1997        1996
                                                                       --------    --------    --------
<S>                                                                    <C>         <C>         <C>      
Operating activities:
Net loss                                                               $(35,607)   $(30,345)   $(33,696)
Adjustments to reconcile net loss to net cash used in operating
activities:
         Nonrecurring charges                                             3,758           0           0
         Depreciation and amortization                                    3,933       1,467       2,924
         (Gain) loss on disposal and write-down of property, plant
         and  equipment                                                  (1,199)        977       2,340
         Write-off of goodwill                                            4,542          --          --
         Compensation expense related to stock options granted below
         market value                                                        --          --         295
         Changes in operating assets and liabilities,
         net of effects of businesses acquired:
                  Receivables                                             2,566      (2,147)      3,603
                  Inventories                                            (2,251)      5,146       7,435
                  Prepaid expenses and other                               (131)        349         775
                  Accounts payable and accrued liabilities                8,142       3,709       4,958
                                                                       --------    --------    --------
                    Net cash used in operating activities               (16,247)    (20,844)    (11,366)
                                                                       --------    --------    --------

Investing activities:
         Purchases of property, plant and equipment                        (215)       (233)       (285)
         Proceeds from the sale of property, plant and equipment          1,575       2,295         488
         Acquisitions of businesses, less cash acquired                      --        (200)         --
         Proceeds from note receivable                                      217          --          --
                                                                       --------    --------    --------
                     Net cash provided by investing activities            1,577       1,862         203
                                                                       --------    --------    --------

Financing activities:
         Net increase (decrease) in revolving advance account             3,592         (26)        724
         Proceeds from borrowings                                         9,754      22,472      12,533
         Principal payments on borrowings                                (2,970)     (3,998)     (1,830)
         Principal payments on multi-employer withdrawal liability         (312)       (795)       (246)
         Proceeds from issuance of Series G1 Preferred Stock              4,625          --          --
         Proceeds from exercise of stock options                             --          --         200
                                                                       --------    --------    --------

                  Net cash provided by financing activities              14,689      17,653      11,381
                                                                       --------    --------    --------

Net increase (decrease) in cash and cash equivalents                   $     19    $ (1,329)   $    218

Cash and cash equivalents, beginning of year                                384       1,713       1,495
                                                                       --------    --------    --------

Cash and cash equivalents, end of year                                 $    403    $    384    $  1,713
                                                                       --------    --------    --------
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements of cash flows.


                                                                   Page 24 of 49
<PAGE>

                  SIGNAL APPAREL COMPANY, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  Summary of Significant Accounting Policies

Basis of Presentation 

The  consolidated  financial  statements of Signal  Apparel  Company,  Inc. (the
"Company") have been presented on a going concern basis which  contemplates  the
realization of assets and the  satisfaction  of liabilities in the normal course
of  business.  The Company  reported a net loss  applicable  to Common  Stock of
$39,669,000  for  the  year  ended  December  31,  1998  and  cumulative  losses
applicable to common stock for the past three years of $103,710,000. As a result
of these  continuing  losses,  the  Company's  accumulated  deficit  now  totals
$284,931,000 at December 31, 1998.

As of  December  31,  1998,  the  Company  was not in  compliance  with  certain
financial  covenants of its amended and restated  factoring  agreement  with its
senior lender.  As described in Note 13, the Company  completed a refinancing of
its senior debt on March 22,  1999.  Accordingly,  the  factoring  agreement  in
effect  as of  December  31,  1998  was  replaced  with a new  Revolving  Credit
Agreement and Term Loan and amounts previously due the senior lender were repaid
with the new proceeds.

Throughout  1998 and during the first quarter of 1999,  the Company  experienced
liquidity  shortfalls  from  operations  that were resolved  through  additional
advances against the Company's available  borrowing  capacity.  These shortfalls
bring into question whether the Company will be in compliance with the financial
covenants of its new Revolving  Credit Agreement and Term Loan at the end of the
first  quarter of fiscal 1999 or have  sufficient  capacity  under its available
borrowings to fund its  operating  needs.  Accordingly,  all debt due the senior
lender has been classified as a current  liability in the  consolidated  balance
sheets.  The Company's  working  capital  deficit as of December 31, 1998 totals
$56,906,000.

If the debt due the senior lender does become subject to  accelerated  maturity,
there can be no  assurances  the Company  would be able to find other  financing
sources to continue operations or repay the senior lender.

The  Company's  continued  existence  is  dependent  upon its  ability  to raise
additional debt or equity financing and to  substantially  improve its operating
results during 1999. Plans to improve operations  include:  (i) reducing general
and administrative costs, (ii) focusing the Company's efforts on the embellished
activewear business, including licensed products and various cartoon characters,
(iii)  reducing  costs of sales through  outsourcing  and other  measures,  (iv)
seeking appropriate  additional  acquisitions to enhance the Company's sales and
profitability,  (v) the sale of idle  facilities,  and (vi)  integration  of the
acquisition of Tahiti Apparel, Inc. to increase sales and gross margins.

In order for the Company to have  sufficient  liquidity  for it to continue as a
going  concern in its present  form,  the Company will need to raise  additional
funds and execute planned improvements. The Company has no assurances it will be
able to raise additional  funds. The  consolidated  financial  statements do not
include any adjustments  relating to the  recoverability  and  classification of
recorded  asset amounts or the amount and  classification  of liabilities or any
other  adjustments  that might become  necessary should the Company be unable to
continue as a going concern in its present form. There can be no assurances that
the Company's operations can be returned to profitability.

Nature of Operations 

The Company is engaged in the  manufacture  and marketing of apparel  within the
following product lines: screenprinted and embroidered knit and woven activewear
for  men  and  boys,  and  screenprinted  and  embroidered   ladies  and  girl's
activewear, bodywear and swimwear.



                                                                   Page 25 of 49
<PAGE>

Principles of Consolidation 

The  consolidated  financial  statements  include the accounts of Signal Apparel
Company, Inc. ("Signal") and its wholly-owned  subsidiaries  (collectively,  the
"Company").  All significant  intercompany  balances and transactions  have been
eliminated.

Revenue Recognition 

Revenue is recognized when the Company's products are shipped to its customers.

Cash and Cash Equivalents 

Cash and  cash  equivalents  include  all cash  and  investments  with  original
maturities of three months or less.

Inventories

Inventories  are stated at the lower of  first-in,  first-out  ("FIFO")  cost or
market for all  inventories.  For  discontinued  and closeout  inventories,  the
Company  evaluates  the need for  write-downs  on an item by item basis.  Market
value for finished goods and blank (unprinted) goods is estimated net realizable
value.

Property, Plant and Equipment

Depreciation  of property,  plant and  equipment is provided  over the estimated
useful lives of the assets principally using accelerated  methods.  Assets under
capital leases are included in property,  plant and equipment,  and amortization
of such assets is included with depreciation expense. The estimated useful lives
of the assets range from 4 to 32 years for buildings and improvements and from 3
to 10 years for  machinery  and  equipment.  Expenditures  for  maintenance  and
repairs are charged to expense as incurred.  Depreciation  and  amortization  of
property,  plant and equipment  amounted to  $1,736,000  in 1998,  $1,411,000 in
1997, and $2,924,000 in 1996.

The Company has idle facilities in Marion,  South Carolina and Wabash,  Indiana.
At December 31, 1998,  the Company had idle  property,  plant and equipment held
for sale  with a net book  value of  approximately  $184,000.  The  Company  has
written the property,  plant and equipment down to its estimated fair value less
estimated costs to sell.

Net Loss per Share 

As the Company is in a loss  position for all periods  presented,  the Company's
common  stock  equivalents  would have an  anti-dilutive  effect on earnings per
share ("EPS") and are excluded from the diluted EPS  calculation for all periods
presented.

Stock-Based Compensation 

The Company  accounts for its  stock-based  compensation  plan under  Accounting
Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to  Employees"
("APB No. 25").  Effective in 1996, the Company adopted the disclosure option of
Statement of Financial  Accounting  Standards No. ("SFAS") 123,  "Accounting for
Stock-Based Compensation." SFAS No. 123 requires companies that do not choose to
account for stock-based  compensation as prescribed by the statement to disclose
the pro forma  effects on net income and  earnings  per share as if SFAS No. 123
had been  adopted.  Additionally,  certain other  disclosures  are required with
respect to stock-based  compensation  and the assumptions  used to determine the
pro forma effects of SFAS No. 123.

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 


                                 Page 26 of 49
<PAGE>

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.

Credit and Market Risk 

The Company sells products to a wide variety of customers servicing the ultimate
consumer. Pursuant to the terms of a factoring agreement with its senior lender,
the Company sells substantially all accounts receivable,  except cash-in-advance
or  cash-on-delivery  sales, to the senior lender on a pre-approved  basis.  The
Company pays a factoring  commission  as  consideration  for the credit risk and
other services provided by the senior lender.

With regard to credit-approved  sales, the senior lender accepts the credit risk
for  nonpayment  due to  financial  inability  to pay.  With regard to noncredit
approved  sales,  the  Company  accepts all credit  risk of  nonpayment  for any
reason. At December 31, 1998 the senior lender had outstanding  receivables from
the Company's  customers  totaling  $5.1 million,  of which $0.4 million was not
credit-approved  by the senior  lender.  The  Company  performs  ongoing  credit
evaluations  of those  customers  carried at its own risk and generally does not
require collateral for such receivables.  The Company maintains an allowance for
doubtful  accounts at a level which  management  believes is sufficient to cover
potential credit losses.

Net sales to  customers  whose  sales have been 10% or greater of total sales in
fiscal 1998, 1997 and 1996 are as follows:

                        1998              1997             1996
                        ----              ----             ----
       Walmart           19%               20%              14%
       K-Mart            10%               10%              12%

When the Company's  current NFL license  expires on March 31, 1999,  the Company
will no longer have the right to manufacture NFL licensed  products.  During the
year ended December 31, 1998,  licensed NFL product sales were approximately 15%
of  consolidated  revenue.  The  loss of this  license  could  also  affect  the
Company's ability to sell other professional sports apparel to its customers.

Goodwill 

On October 17, 1997, the Company acquired GIDI Holdings, Inc., doing business as
Grand  Illusion  Sportswear.  On November 5, 1997,  the  Company  completed  the
related  acquisitions  of Big Ball  Sports,  Inc.  and  Print The  Planet,  Inc.
(collectively "Big Ball").  These acquisitions  resulted in goodwill of $751,000
and $4,137,000,  respectively.  As a result of the Company changing its business
strategy and outsourcing more of its manufacturing  process in 1998, the Company
wrote off the remaining  goodwill for both Grand Illusion and Big Ball. See Note
9 for nonrecurring  charges.  Amortization and write off of goodwill  associated
with the aforementioned acquisitions aggregated $4,832,000 in 1998. Amortization
expense for 1997 was $56,000.

Segment Information 

Effective in 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information".  SFAS No. 131 supersedes SFAS No. 14,
"Financial  Reporting  for  Segments of a Business  Enterprise",  replacing  the
"industry  segment"  approach with the  "management"  approach.  The  management
approach  designates  the internal  organization  that is used by management for
making  operating  decisions  and  assessing  performance  as the  source of the
Company`s  reportable  segments.  SFAS No. 131 also requires  disclosures  about
products and services,  geographic  areas, and major customers.  The adoption of
SFAS No. 131 did not affect the  results of  operations,  financial  position or
segment  related  disclosure  information.  Management has  determined  that the
Company is a single reportable segment.

Reclassifications 

Certain reclassifications have been made in the fiscal 1997 financial statements
to conform with the 1998 presentation.


                                                                   Page 27 of 49
<PAGE>

2.   Acquisitions

Pursuant to the terms of a stock purchase  agreement dated as of October 1, 1997
the Company  purchased  all of the issued and  outstanding  common stock of GIDI
Holdings,  Inc., d/b/a Grand Illusion Sportswear,  an Illinois Corporation,  for
$200,000. Grand Illusion assets acquired and liabilities assumed were $1,040,000
and $1,483,000,  respectively.  The acquisition has been accounted for under the
purchase  method of  accounting.  The excess of the purchase price over the fair
value of the net identifiable  assets acquired was previously being amortized on
a straight-line  basis over fifteen years. In 1998, the goodwill associated with
this  acquisition  was deemed  permanently  impaired.  Included in  nonrecurring
charges in the  accompanying  consolidated  statements of operations is $700,000
representing the write-off of the remaining goodwill.

Pursuant  to stock  purchase  agreements  dated  October 31,  1997,  the Company
acquired all of the outstanding capital stock of Big Ball Sports,  Inc., a Texas
Corporation  and Print the Planet,  Inc., a Texas  Corporation.  Pursuant to the
terms of the  purchase  agreements,  the  Company (i)  entered  into  employment
agreements with two of the former owners;  (ii) paid $250,000 in cash and issued
a promissory note in the amount of $250,000 (payable in 12 monthly  installments
of interest only, followed by 36 monthly  installments of principal and interest
beginning November 5, 1998) (in each case with interest on the unpaid balance at
prime); and (iii) issued a total of 855,194 shares of Common Stock in settlement
of various outstanding claims to creditors of Big Ball.

All of the shares of Common Stock issued pursuant to the purchase agreements are
unregistered,  restricted  shares  of  Common  Stock  pursuant  to the rules and
regulations of the Securities and Exchange Commission.  The Company entered into
Registration  Rights Agreements with each recipient of unregistered shares which
give each holder  certain "piggy back"  registration  rights for a period of two
years.

Big Ball Sports and Print the  Planet,  Inc.  assets  acquired  and  liabilities
assumed were $3,335,000 and $5,846,000,  respectively.  The acquisition has been
accounted  for  under  the  purchase  method of  accounting.  The  excess of the
purchase price over the fair value of the net  identifiable  assets acquired was
previously being amortized on a straight-line basis over fifteen years. In 1998,
the goodwill  associated with this acquisition was deemed permanently  impaired.
Included in nonrecurring charges in the accompanying  consolidated statements of
operations is $3,842,000 representing the write-off of the remaining goodwill.

3.  Note Receivable

On December 2, 1997, a third party entered into a $500,000  promissory note with
the Company as part of the sale of the Company's  LaGrange plant. The note bears
interest at 10% and is payable in 24 equal monthly  installments of interest and
principal beginning January 1, 1998.

4.  Inventories

Inventories consisted of the following at December 31:

           (in thousands)                             1998           1997
                                                     -------        -------
     Raw materials                                   $   788        $   731
     Work-in-process                                   1,377          1,032
     Finished goods                                   10,262          8,120
     Supplies                                            214            507
                                                     -------        -------

              Total inventories                      $12,641        $10,390
                                                     =======        =======



                                                                   Page 28 of 49
<PAGE>



5.  Debt

Debt consisted of the following at December 31:

                                                            1998          1997
                                                           -------       -------
                                                          (thousands of dollars)
Senior Obligations:
Revolving advance account under senior
credit facility - interest payable monthly
at the alternate base rate (as defined)
plus 1.25%
(9% at December 31, 1998); guaranteed by
principal shareholder (a)(b) (net of
unamortized debt discount of $0 and $422,
respectively)                                              $44,049       $40,035

Senior term note - repaid in 1998
                                                                --           823

Senior secured subordinated
promissory note to related party -
interest at 25% through August 22,
1997; thereafter at 10% (payable
quarterly); secured by a
second lien on accounts receivable,
inventory, machinery and
equipment, and
certain real estate (net of
unamortized debt discount of $6,276
and $3,294, respectively)                                   13,184         7,916


Notes payable to related parties --
interest accrued monthly at 5.5% per annum
based on the average outstanding debt                        1,981         1,981


Subordinated debt to related party                           3,000         3,000

Obligations under capital leases (a)                         1,029         1,205

Other                                                        1,209         1,471
                                                           -------       -------
Total                                                       64,452        56,431
Less:  Current portion of long-term                          6,435         7,110
         Debt
       Revolving advance account                            44,049        40,035
                                                           -------       -------
Long-term debt excluding current
     portion and                                           $13,968       $ 9,286
                                                           -------       -------
Revolving advance account

(a)  Substantially  all of the assets of the Company are secured under the terms
     of the aforementioned debt and capital lease agreements.

(b)  On March 22, 1999 the Revolving  Advance Account and Senior Credit Facility
     was replaced with a new revolving  credit agreement and term loan. See Note
     13 for the description and terms of the agreement.

During 1997, as part of the Restructuring  Plan (see Note 6), $20,000,000 of the
outstanding  debt owed to WGI, was repaid with  proceeds  from the senior lender
under the terms of the revolving advance account. In addition,  notes payable to
a 


                                                                   Page 29 of 49
<PAGE>

related party were converted to equity as part of the Restructuring  Plan. Also,
during 1997, the Company entered into a Reimbursement  Agreement of a Promissory
Note with FS  Signal,  a related  party,  whereby  the  Company  agreed to repay
amounts  that FS Signal pays in support of letters of credit.  At  December  31,
1998 and 1997 the Company had a debt of $1,981,000  relating to this  agreement.
Accrued  interest  relating  to this  debt at  December  31,  1998  and 1997 was
approximately $207,000 and $89,000, respectively.

During 1998,  the Company  received  $8,250,000 in additional  net advances from
WGI, LLC. In connection with the implementation of the 1997 Restructuring  Plan,
the Company also agreed with WGI, LLC, that all funds advanced to the Company by
WGI,  LLC  after  August  21,  1997  (which  indebtedness  was  not  part of the
Restructuring  Plan) would be documented  in the form of a new Credit  Agreement
with interest payable  quarterly at a rate of 10% per annum and with other terms
to be agreed upon between the Company and WGI. On August 10, 1998, the Company's
Board of Directors  approved a new Credit Agreement between the Company and WGI,
LLC, to be effective as of May 8, 1998 (the "WGI Credit Agreement"), pursuant to
which WGI will lend the Company up to  $25,000,000  on a  revolving  basis for a
three-year term ending May 8, 2001.  Additional material terms of the WGI Credit
Agreement  are as follows:  (i) maximum  funding of  $25,000,000,  available  in
increments  of  $100,000  in excess of the  minimum  funding of  $100,000;  (ii)
interest on outstanding  balances payable  quarterly at a rate of 10% per annum;
(iii) secured by a security  interest in all of the Company's assets (except for
the assets of its Heritage  division and certain former plant locations held for
sale),  subordinate  to the security  interests of the Company's  senior lender;
(iv)  funds  borrowed  may be used for any  purpose  approved  by the  Company's
directors  and executive  officers,  including  repayment of any other  existing
indebtedness  of the  Company;  (v) WGI,  LLC is entitled to have two  designees
nominated  for election to the Company's  Board of Directors  during the term of
the agreement and (vi) WGI, LLC will receive  (subject to shareholder  approval,
which was obtained at the Company's 1998 Annual Meeting) warrants to purchase up
to 5,000,000 shares of the Company's Common Stock at $1.75 per share.

The warrants  issuable in connection with the WGI Credit  Agreement will vest at
the rate of 200,000 warrants for each $1,000,000 increase in the largest balance
owed at any one time over the life of the credit  agreement  (as of December 31,
1998, the largest outstanding balance to date has been $19,985,000,  which means
that warrants to acquire 3,997,000 shares of Common Stock would have been vested
as of such date). The warrants have  registration  rights no more favorable than
the  equivalent  provisions  in the  currently  outstanding  warrants  issued to
principal  shareholders  of the Company,  except that such rights  include three
demand  registrations.  The warrants also contain antidilution  provisions which
require that the number of shares  subject to such warrants shall be adjusted in
connection with any future  issuance of the Company's  Common Stock (or of other
securities  exercisable  for or  convertible  into  Common  Stock) such that the
aggregate  number  of  shares  issued  or  issuable  subject  to these  warrants
(assuming  eventual  vesting  as to  the  full  5,000,000  shares)  will  always
represent  ten  percent  (10%) of the total  number  of shares of the  Company's
Common  Stock  on a fully  diluted  basis.  The  fair  market  value  using  the
Black-Scholes  option pricing model (see Note 6 for assumptions) of the warrants
was  $4,467,000  and has  been  shown  as a debt  discount  in the  accompanying
consolidated  balance  sheets.  These  warrants  expire  August 17, 2003.  These
additional advances accrued interest at a rate of 10% through December 31, 1998.
Effective  January 1, 1999, no interest will be payable under this note, but the
Company shall issue preferred stock to WGI, LLC in amounts to be determined.

In the latter part of 1997, the Company  issued  250,000  warrants to its senior
lender at an exercise price of $2.50 per share in connection  with the extension
of the revolving  advance  account.  In addition,  the Company issued  4,500,000
warrants  with an exercise  price of $1.75 per share to WGI,  LLC in  connection
with advances made by WGI,  LLC. The fair market value of these  warrants  using
the Black-Scholes option pricing model was $3,716,000.  The fair market value of
the  aforementioned  warrants  have been  reflected  as a debt  discount  in the
accompanying balance sheets. These costs are being discounted over the remaining
terms  of the  debt  with  the  senior  lender  and of the  WGI,  LLC  advances.
Amortization of debt discount was approximately  $1,672,000 and $0 for the years
ended  December  31,  1998 and  1997,  respectively,  and has been  included  in
interest expense in the consolidated statement of operations.

The Company  financed  certain  capital  expenditures  relating to machinery and
equipment  totaling $205,000 and $842,000 by entering into capital leases during
the years ended December 31, 1998 and 1997, respectively.

Effective  March 31, 1994, the Company  signed a promissory  note for $3,000,000
with a related party,  FS Signal  Associates I. The  promissory  note was due on
April 30, 1997,  subject to the terms of the  subordination  agreement  with the
Company's senior lender.  Interest was payable at maturity at the prime rate, as
defined,  plus 3%. In connection with


                                                                   Page 30 of 49
<PAGE>

this promissory note,  accrued  interest  payable to FS Signal  Associates I was
approximately  $1,670,000  and  $1,322,000  as of  December  31,  1998 and 1997,
respectively.

Interest expense in the consolidated  statements of operations includes interest
to related parties of $2,211,000,  $11,081,000 and $7,119,000  during 1998, 1997
and 1996, respectively.

The Company  made cash  payments  for  interest of  $4,366,000,  $2,349,000  and
$2,649,000  during  1998,  1997 and 1996,  respectively.  The  aggregate  future
scheduled maturities of debt for the five years subsequent to December 31, 1998,
are as follows:  1999 -  $50,484,000;  2000 - $468,000;  2001 - $13,360;  2002 -
$110,000,  and 2003 - $30,000.  As a result of the Company  entering  into a new
Revolving Credit Agreement and Term Loan subsequent to year-end,  the maturities
of debt for each of the five subsequent years has changed significantly.

6.  Capital Stock

On December 30, 1997,  the  shareholders  approved an amendment to the Company's
1985  Stock  Option  Plan to  increase  the  number of  shares  of Common  Stock
available for grant from 1,910,000 to 4,000,000  shares.  The options have terms
ranging  from 3 to 10 years and vest over  periods  from one to four  years from
date of grant.

The Company  accounts for its stock-based  compensation  under APB No. 25, under
which no compensation expense has been recognized for stock options granted with
exercise prices equal to or greater than the fair value of the Company's  Common
Stock on the date of grant.  The  Company  adopted  SFAS No. 123 for  disclosure
purposes only in 1996. For SFAS No. 123 purposes,  the fair value of each option
and  warrant  grant  has  been  estimated  as of the  date of  grant  using  the
Black-Scholes   option  pricing  model  with  the  following   weighted  average
assumptions for 1998, 1997 and 1996,  respectively:  risk-free  interest rate of
5.63%,  6.11% and  6.52%,  expected  life of 7.0,  3.0 and 5.0  years,  expected
dividend  yield of 0% and expected  volatility  of 71% for 1998 and 1997 and 46%
for 1996. Using these assumptions,  the fair value of the employee stock options
and warrants  (excluding  warrants issued to lenders)  granted in 1998, 1997 and
1996 is  $7,537,000,  $2,743,000  and  $913,000,  respectively,  which  would be
amortized  as  compensation  expense  over the  vesting  period of the  options.
Compensation  expense recognized under APB No. 25 in 1998, 1997 and 1996 was $0,
$0 and $295,000 respectively. Had compensation cost for the plan been determined
in accordance with SFAS No. 123,  utilizing the assumptions  detailed above, the
Company's  pro  forma net loss  would  have been  $43,303,000,  $31,049,000  and
$34,314,000 for the years ended December 31, 1998, 1997 and 1996,  respectively.
Pro forma  net loss per share  would  have been  $1.33,  $2.45 and $2.97 for the
years ended December 31, 1998, 1997 and 1996, respectively.

The pro forma effect on net loss in this disclosure may not be representative of
the pro forma effect on net loss in future  years  because it does not take into
consideration expense related to grants made prior to 1995.

A summary of the Company's  stock option  activity for 1998, 1997 and 1996 is as
follows:

<TABLE>
<CAPTION>
                                                  1998                           1997                           1996
                                                  ----                           ----                           ----
                                                          Weighted                       Weighted                     Weighted 
                                                          Average                        Average                       Average
                                         Shares        Exercise Price   Shares        Exercise Price    Shares      Exercise Price
<S>                                     <C>                 <C>          <C>               <C>          <C>               <C>  
Outstanding, beginning of year          2,648,350           $2.69        493,600           $5.29        760,236           $5.47
Granted, at market price                  430,000           $1.76      1,700,000           $2.12         18,000           $6.19
Granted, at below market price                  0           $0.00         65,000           $2.38         52,500           $4.48
Granted, at above market price            350,000           $1.75        682,000           $2.38              0           $0.00
Exercised                                       0           $0.00              0           $0.00        (50,000)          $4.00
Canceled or expired                    (1,023,500)          $2.82       (292,250)          $3.38       (287,136)          $5.90
Outstanding, end of year                2,404,850           $2.33      2,648,350           $2.69        493,600           $5.29
Exercisable, at end of year               623,684           $3.17        380,600           $5.38        433,825           $5.31
Weighted  average  fair  value of
options granted:
     At market price                                        $0.96                          $1.31                          $3.27
     At below market price                                    N/A                          $1.26                          $3.30
     At above market price                                  $1.05                          $ .46                            N/A
</TABLE>


There  are  2,404,850  options  outstanding  at  December  31,  1998,  including
2,164,250 having exercise prices between $1.23 and $2.94 with a weighted average
exercise price of $2.03 and a weighted average remaining contractual life of 3.6
years. 


                                                                   Page 31 of 49
<PAGE>

Of these options,  383,084 were  exercisable at year end with a weighted average
exercise  price of $2.00.  There are also 127,500  options with exercise  prices
between $3.00 and $4.00,  with a weighted  average exercise price of $3.84 and a
weighted average  remaining  contractual life of 6.5 years. All of these options
were exercisable at year end. The remaining 113,100 options have exercise prices
between $5.00 and $7.06,  with a weighted  average exercise price of $6.38 and a
weighted average  remaining  contractual life of 5.8 years. All of these options
were exercisable at year end.

On December 30, 1997,  the  Company's  shareholders  approved the issuance of an
additional  15,473,220 shares of the Company's Common Stock in connection with a
plan approved by the Board of Directors to restructure the Company's outstanding
subordinated debt and preferred stock (the "Restructuring Plan").

In anticipation of the adoption of the Restructuring Plan, WGI, LLC, a principal
shareholder of the Company,  acquired an additional  4,630,000  shares of Common
Stock  through the exercise of warrants on November 7, 1997 (the  "Restructuring
Acquisition").  After this exercise of warrants,  WGI owned 50.44% of the Common
Stock of the Company (not including remaining exercisable warrants).

Pursuant  to  an  agreement   between  the  Company  and  WGI   concerning   the
Restructuring  Plan, the Company  applied  $20,000,000 of the increased  funding
available under an amended and restated  factoring  agreement with the Company's
senior lender to reduce the Company's outstanding  indebtedness under the credit
agreement  between it and WGI. The reduction of outstanding  indebtedness  under
the credit  agreement  with WGI also  reduced  the  Company's  effective  annual
interest  rate on this  portion of its debt from over 20% per annum to a rate of
prime plus 1-1/4% (9.75% at December 31, 1998). The  Restructuring  Plan reduced
the Company's annual interest expense by eliminating  approximately  $50,200,000
of  indebtedness  from  the  Company's  balance  sheet,  leaving   approximately
$41,282,000 owed to the Senior Lender and approximately  $17,800,000 owed to WGI
and  FS  Signal   (including   approximately   $11,397,000  owed  to  WGI).  The
Restructuring  Plan also  eliminated a liability of $11,725,000  for accrued but
unpaid  dividends on  preferred  stock and reduced the  Company's  shareholders'
deficit from approximately $89.3 million to approximately $41.3 million.

The Restructuring Plan also included: (i) amendment of all remaining outstanding
warrants held by WGI as of December 31, 1997 (covering a total of 345,000 shares
with an exercise price of $7.06 per share),  reducing the exercise price of such
warrants to $1.75 per share (approximately equal to the market price on the date
of the  Restructuring  Plan); (ii) issuance to WGI of 8,000,000 shares of Common
Stock valued at approximately  $1.98 per share (a premium of  approximately  13%
over the market  price on the date of the 1997  Annual  Meeting)  in payment for
$15,831,950  of the  remaining  subordinated  debt  owed by the  Company  to WGI
(representing  a discount on the debt repayment of $1,831,950,  which equals the
net economic  benefit of repricing the WGI  warrants);  and (iii)  conversion of
both the remaining  outstanding  balance of such debt of $23,802,000  (including
accrued interest through the date of the 1997 Annual Meeting) and  approximately
$20,514,000 in stated value (plus  accumulated  dividends) of Series C Preferred
Stock held by WGI into a total of approximately  443.16 shares of a new Series F
Preferred Stock, stated value $100,000 per share.

The new Series F Preferred Stock accrued cumulative  undeclared dividends at the
rate of 9% per annum.  These  dividends were payable in cash when declared.  The
Series F Preferred Stock was not convertible into Common Stock or into any other
security  issued by the Company,  and did not have any  mandatory  redemption or
call features.  However,  in connection  with the 1998 issuance of the Series G1
Convertible  Preferred Stock, the Series F Preferred Stock was exchanged in full
for the Series H Preferred Stock. This new Series H Preferred Stock is identical
to the  Series F  Preferred  Stock in every  respect  except  that the  Series H
Preferred Stock will be junior in priority to the Company's 5% Series G1. During
1998, WGI elected to have both accrued and future dividends distributed 3,989 as
additional shares of Series H Preferred Stock.

Effective  September  17,  1998,  the  Company  reached an  agreement  with four
investors  regarding  the  private  placement  of up to $10 million in 5% senior
convertible  preferred  stock.  Under this agreement,  the Company has placed an
initial  installment of $5 million of 5% Convertible  Preferred Stock, Series G1
(5,000  shares  with a stated  value of $1,000 per share).  Since the  Company's
agreement  with  these  institutional  investors  required  that the  Series  G1
Convertible  Preferred  Stock be senior to all classes of the  Company's  equity
securities in priority as to dividends and distributions,  WGI, LLC, in order to
facilitate  the completion of this private  placement by the Company,  exchanged
all of the  shares of  Series F  Preferred  Stock for a like  number of Series H
Preferred Stock.



                                                                   Page 32 of 49
<PAGE>

In connection  with the issuance of the 5% Series G1, the Company  issued 62,500
warrants to the placement agent and another  100,000  warrants to the purchasers
of the Series G1 Preferred Stock. These warrants, using the Black-Scholes Option
Pricing  Model,  were  valued  at  approximately   $196,000.  The  statement  of
shareholders'  deficit  reflects  the face  amount of the 5% Series G1, less the
value the  warrants  issued and other costs of issuance.  Accretion  and accrued
dividends for 1998 were $55,000 and $73,000, respectively.

In addition to the transactions  described above between the Company and WGI, in
1997 the Company  exercised  its rights under an agreement  dated March 31, 1995
between the Company  and the holders of all  outstanding  shares of its Series A
Preferred Stock and Series C Preferred Stock (the "Preferred  Stock  Agreement")
to  redeem  all of  the  remaining  outstanding  shares  (including  accumulated
dividends)  of the  Company's  Series A  Preferred  Stock and Series C Preferred
Stock  with  shares of Common  Stock  valued  for such  purpose at $7 per share.
Following  the  completion of the  restructuring  transactions  described  above
involving  WGI,  FS  Signal  was the only  remaining  holder  of  shares  of the
Company's  Series A Preferred Stock and Series C Preferred Stock. The redemption
of all of such stock held by FS Signal ($39,583,700 in stated value plus accrued
dividends  in Series A  Preferred  Stock and  $12,728,841  in stated  value plus
accrued  dividends in Series C Preferred  Stock)  resulted in the issuance of an
additional 7,473,220 shares of the Company's Common Stock to FS Signal.

The  issuance  of  Common  Stock  as  described  above  in  connection  with the
Restructuring  Plan and  related  transactions  resulted in WGI having a greater
percentage of voting power.  Prior to the  implementation  of the  Restructuring
Plan and the aforementioned related transactions, WGI owned 34.35% of the issued
and outstanding shares of the Company's Common Stock (not including  exercisable
warrants).  At December 31, 1998 WGI owned 50.09% of the issued and  outstanding
shares of  Common  Stock  (not  including  exercisable  warrants).  FS  Signal's
percentage  of voting power has remained the same,  approximately  35.64% of the
issued  and  outstanding  shares  of Common  Stock  (not  including  exercisable
warrants).  Implementation  of the Restructuring  Plan and related  transactions
described above has resulted in ownership of shareholders  other than WGI and FS
Signal  being  reduced from  approximately  30% to  approximately  14.27% of the
issued and  outstanding  shares of the  Company's  Common  Stock (not  including
exercisable  warrants).  Although WGI at December 31, 1998 owned over 50% of the
voting  securities (as defined by Rule 12b-2 of Regulation  S-K) of the Company,
the  Company  does not deem the  implementation  of the  Restructuring  Plan and
related  transactions to have effected a change in control of the Company as WGI
already,  through its ownership of other  securities of the Company  convertible
into  Common  Stock  and its  relationship  with  the  Company  and  management,
possessed the power to direct the management and policies of the Company.

Under its Restated  Articles of Incorporation,  as amended,  the Company has the
authority  to issue  1,600,000  shares of  preferred  stock having no par value,
issuable  in  series,  with  the  designation,   powers,  preferences,   rights,
qualifications and restrictions to be established by the board of directors.  At
December 31, 1998,  the Company had  authorized 400 shares of Series A Preferred
Stock,  250 shares of Series B  Preferred  Stock,  and 1,000  shares of Series C
Preferred  Stock,  100 shares of Series D Preferred  Stock and 20,000  shares of
Series E Preferred Stock, and 1,000 shares of Series F Preferred Stock. See Note
7 for discussion of the Series D Redeemable Preferred Stock.

At December 31, 1998 and 1997,  there were no shares of the Series A, B, C, D or
E Preferred Stock outstanding.

From  June  1996  through  December  1997,  the  Company   incurred   additional
indebtedness  to WGI for funds advanced in an aggregate  amount of  $33,044,000,
bringing the  Company's  total  indebtedness  to WGI in December  1997 (prior to
implementation of the Restructuring  Plan),  including accrued interest thereon,
to approximately $50,214,000. These funds were advanced to the Company on an "as
needed" basis with the understanding  that the additional  indebtedness would be
documented on the same terms as the existing WGI Credit Agreement. Additionally,
as of December 31, 1996, the Company had not made all interest payments required
by the WGI Credit Agreement and had breached the financial  covenants  specified
by the  agreement.  In  March  1997,  Walsh  Greenwood  agreed  to  waive  those
conditions.  Finally, in connection with the Company's amendment and restatement
of the factoring  agreement  with its senior  lender in 1997,  the senior lender
required WGI to (i) deposit  $15,000,000 of collateral as security in support of
a portion  of the  Company's  borrowing  base under this  amended  and  restated
factoring agreement and (ii) to continue in place a guaranty of a portion of the
Company's  obligations in the amount of $9,000,000 which was originally  entered
into  February  27, 1996 by another  affiliate of WGI As  discussed  above,  the
Company issued 443.16 shares of Series F Preferred Stock effective  December 31,
1997 in  connection  with  the  implementation  of the  Restructuring  Plan.  As
discussed  above, the Series F Preferred Stock was exchanged in its entirety for
443.16 shares of the Series H Preferred Stock. The Company entered into a

                                                                   Page 33 of 49
<PAGE>

Reimbursement  Agreement and related  Promissory Note with WGI dated October 31,
1997  (subordinate  to the Company's  obligations to its senior lender and parri
passu with its  obligations to FS Signal),  pursuant to which the Company agreed
to repay any amounts  that WGI may be  required  to pay to the senior  lender by
virtue of these arrangements. As an inducement to WGI to provide such additional
funding to the Company,  and in connection  with such waiver and the  collateral
and guaranty arrangements with the senior lender, the Company agreed (subject to
shareholder  approval)  to issue  warrants to WGI to  purchase  up to  4,500,000
additional  shares of the Company's  Common Stock at an exercise  price of $1.75
per share  (approximately the then-current  market price). The Company agreed to
issue these warrants with  antidilution  provisions and  registration  rights no
more  favorable  than the equivalent  provisions in other  outstanding  warrants
issued to principal  shareholders of the Company,  except that the  registration
rights would include three demand  registrations.  Using a formula  vesting such
warrants at the rate of 100,000 shares for each $1,000,000 of additional funding
(as  under the WGI  Credit  Agreement),  these  warrants  were  vested as to all
4,500,000 shares when their issuance was approved by the Company's  shareholders
on December 30, 1997. The warrants were issued effective as of such date.

A summary  of the  Company's  warrant  activity  for  1998,  1997 and 1996 is as
follows:

<TABLE>
<CAPTION>
                                                  1998                           1997                           1996
                                                  ----                           ----                           ----
                                                          Weighted                       Weighted                     Weighted 
                                                          Average                        Average                       Average
                                         Shares        Exercise Price   Shares        Exercise Price    Shares      Exercise Price
<S>                                     <C>                 <C>          <C>               <C>          <C>               <C>  
Outstanding, at  beginning of year      10,889,560          $4.21         9,754,560        $5.22        9,754,560         $5.22
Issued, at market price                  8,816,546          $1.75           250,000        $2.38                0         $0.00
Issued, at  above market price             162,500          $3.05         5,710,000        $1.86                0         $0.00
Issued, at  below market price                   0          $0.00           250,000        $2.50                0         $0.00
Exercised                                        0          $0.00        (4,630,000)       $3.01                0         $0.00
Canceled or expired                     (5,297,500)         $6.02          (445,000)       $7.06                0         $0.00
Outstanding, at end of year             14,571,106          $2.05        10,889,560        $4.21        9,754,560         $5.22
Exercisable, at end of year             11,138,075          $2.13         9,824,560        $4.40        9,254,560         $5.12
Weighted  average fair value of
options granted:
     At market price                                        $1.27                          $1.22                            N/A
     At below market price                                    N/A                          $1.69                            N/A
     At above market price                                  $1.21                          $0.46                            N/A
</TABLE>

Of the 14,571,106  warrants  outstanding at December 31, 1998,  14,039,046  have
exercise prices between $1.75 and $3.125, with a weighted average exercise price
of $1.79 and a weighted  average  remaining  contractual  life of 5.5 years.  Of
these warrants,  10,606,015 are  exercisable  with a weighted  average  exercise
price of $1.79.  The remaining  532,060  warrants have exercise  prices  between
$7.06 and $11.61, with a weighted average exercise price of $8.82 and a weighted
average  remaining  contractual  life of 1.5 years.  All of these  warrants  are
exercisable.

7.  Redeemable Preferred Stock

The Series D Preferred  Stock is junior to the Series A, B and C Preferred Stock
of the Company (see Note 6); bears a cumulative dividend at an annual rate equal
to ten percent  (10%) of the stated value of such stock,  compounded  quarterly;
and is  required  to be  redeemed  by the  Company  on  November  22,  1999 at a
redemption price equal to the stated value per share for such stock plus accrued
and unpaid  dividends,  subject to the  rights of the  holders of the  Company's
other  outstanding  series of  Preferred  Stock which are senior to the Series D
Preferred Stock.  The Series D Redeemable  Preferred Stock has a stated value of
$100,000 per share and a  liquidation  preference  of $100,000  per share,  plus
cumulative  unpaid  dividends.  As of  December  31, 1998 and 1997 none had been
issued.

8. Income Taxes

The Company  recognizes  deferred  tax assets and  liabilities  for the expected
future tax  consequences  of events  that have been  included  in the  financial
statements  or  tax  returns.  Under  this  method,   deferred  tax  assets  and
liabilities  are  determined  based on the  differences  between  the  financial
reporting and income tax bases using enacted tax rates in effect for the year in
which the differences are expected to reverse.

There was no income tax  provision  or benefit  recorded  during the years ended
December 31, 1998, 1997, and 1996, due to the losses sustained by the Company.



                                                                   Page 34 of 49
<PAGE>

Deferred  income tax assets and liabilities for 1998 and 1997 reflect the impact
of  temporary  differences  between  the  amount of assets and  liabilities  for
financial  reporting  and  income  tax  reporting  purposes.   The  Company  has
established a valuation  allowance for the entire amount of the net deferred tax
asset  due to the  uncertainty  regarding  the  realizability  of these  assets.
Temporary  differences and carryforwards  which give rise to deferred tax assets
at December 31, 1998 and 1997 are as follows (in thousands):

                                                      1998               1997

Deferred tax asssets:
Tax loss carryforwards                             $  95,425          $  86,778
Inventory reserves                                     1,135              1,741
Accounts receivable reserves                           1,748                983
Nonrecurring charges                                   1,229                  0
Other                                                  1,719              2,158
                                                   ---------          ---------
Total deferred tax asset                             101,256             91,660
Valuation allowance                                 (101,017)           (91,183)
Deferred tax liabilities:
LIFO to FIFO change                                     (239)              (477)
                                                   ---------          ---------
Net deferred tax asset                             $       0          $       0
                                                   =========          =========

The Company and its subsidiaries file a consolidated  federal income tax return.
At December 31, 1998, the Company had tax loss  carryforwards  of  approximately
$251,000,000 which expire in years 1999 through 2014 if not utilized earlier. At
the time Shirt Shed,  American Marketing Works and Big Ball were acquired,  they
had  tax  loss   carryforwards  of  $17,400,000,   $11,800,000  and  $3,021,000,
respectively, which are included above. These tax loss carryforwards are subject
to annual limitations imposed for the change in ownership (as defined in Section
382 of the Internal Revenue Code) and application of the consolidated income tax
return rules.

The Company did not pay any income taxes in 1998, 1997 and 1996.

9. Nonrecurring Charges

In the fourth quarter of 1998, the Company  reevaluated  its business  strategy.
The  reevaluation   resulted  in  the  shift  from  being  a  capital  intensive
manufacturing  company to a sales and marketing company with low fixed costs. In
connection with the reevaluation of the Company's business strategy, the Company
analyzed  the  performance  of  its  operations  and  divisions.  This  analysis
indicated that significant strategic and operational changes would be necessary,
including  the  closure  of certain  plants and the sale of certain  operations.
These factors also caused management to assess the realizability of the goodwill
recorded for certain  acquisitions  and the fair value of certain  assets.  As a
result of this assessment, the Company made the determination that it would seek
a new  financing  agreement  with  its  senior  lender,  close  or sell  certain
operations,  and write down the value of  certain  long-term  assets,  including
goodwill.

The  determination  of goodwill  impairment was based on the Company's  plans to
sell certain  divisions,  continuing  operating losses and the uncertainty about
the Company's ability to return the divisions to profitability. In addition, the
Company has written down to fair value certain  long-term assets and accrued for
costs associated with plant closings. The Company is also in a dispute regarding
raw  material  purchases  from a third party  vendor.  The  Company  anticipates
incurring exiting costs associated with this third party vender of approximately
$1,000,000.

In 1998 the Company recorded a $3,758,000 charge for certain  nonrecurring items
and  $4,542,000  charge for the  write-off of goodwill.  On March 22, 1999,  the
Company  completed a new financing  agreement with its senior lender. On January
20, 1999, the Company completed the sale of its Heritage division (see Note 13).


                                                                   Page 35 of 49
<PAGE>

The major components of the nonrecurring charges are as follows:

                                                           Charge to
                                                  Initial   Related    Remaining
                                                  Charge     Assets     Balance
                                                  ------     ------     -------
                                                    (thousands of dollars)

Writedown of property, plant and equipment        $1,352     $1,352     $    0
Severance costs of terminated employees              276          0        276
Lease buyouts                                        370          0        370
Costs of exiting purchase contract                 1,000          0      1,000
Other                                                760          0        760
                                                  ------     ------     ------
                                                  $3,758     $1,352     $2,406
                                                  ------     ------     ------

Write off of goodwill                             $4,542     $4,542          0
                                                  ------     ------     ------


10. Pension and Retirement Plans

The Company  sponsors a defined  contribution  plan for  employees.  The Company
makes  contributions  to the plan  equal to a  percentage  of the  participants'
contributions within certain limitations. The Company recognized expense related
to this plan of $120,000 in 1998,  $121,000  in 1997 and  $124,000 in 1996.  The
Company's policy is to fund amounts accrued annually.

Certain former employees of Signal participate in a defined benefit pension plan
negotiated  with a union  (multi-employer  plan) that no longer  represents  any
employee of the  Company.  The total  multi-employer  withdrawal  liability  was
approximately $69,000 and $350,000 at December 31, 1998 and 1997, respectively.

11.  Commitments and Contingencies

Operating Leases

The Company occupies certain manufacturing facilities,  sales and administrative
offices and uses certain  equipment  under operating  lease  arrangements.  Rent
expense  aggregated  approximately  $1,377,000  in 1998,  $1,229,000 in 1997 and
$1,263,000  in 1996.  Approximate  future  minimum  rental  commitments  for all
noncancellable  operating leases as of December 31, 1998 are as follows:  1999 -
$606,000;  2000 - $274,000,  2001 - $55,000. Real estate taxes,  insurance,  and
maintenance expense are generally obligations of the Company.

Letters of Credit Supported by Related Parties

The Company uses letters of credit  (which are  supported  by  commitments  from
entities controlled by FS Signal) to assist the Company in purchasing inventory,
maintaining licenses and other matters.  During 1997, the Company entered into a
Reimbursement Agreement and a Promissory Note with FS Signal whereby the Company
agreed to repay  amounts  that FS Signal  pays in  support  of these  letters of
credit.  At December 31, 1998, the Company had $1,981,000 in current  portion of
long-term  debt due to FS Signal  for  creditor  drawdowns  on these  letters of
credit which were repaid by FS Signal in 1997 and 1996.

Royalty and Other Commitments

Pursuant to the terms of various license agreements, the Company is obligated to
pay future  minimum  royalties  of  approximately  $1,481,000  due in 1999.  The
Company has estimated that certain guaranteed  royalties will not be met through
the normal course of business and has accrued approximately $290,000 at December
31, 1998 to cover such guarantees.

Financial Advisor Agreement

Effective  May 9, 1997 the Company  entered  into an  agreement  with  Weatherly
Financial  ("Weatherly")  pursuant  to which  Weatherly  was  engaged  to act as
financial  advisor  to  the  Company  on an  exclusive  basis  with  respect  to
evaluating,  pricing, negotiating and closing mergers and acquisitions and other
investments  and arranging  financing on the 


                                                                   Page 36 of 49
<PAGE>

Company's  behalf ( the "Weatherly  Agreement").  The Weatherly  Agreement had a
term of two years,  subject to the  Company's  right to terminate  the agreement
upon ninety days' prior  written  notice after May 8, 1998.  Weatherly was to be
compensated  for these services  through:  (a) a $5,000 base monthly fee and (b)
prescribed  additional  success  fees for  completed  financing  or  acquisition
transactions arranged through Weatherly's assistance. In addition, Weatherly was
granted  warrants,  effective  May 9, 1997,  to purchase  805,000  shares of the
Company's  Common  Stock at $2.50 per share in  connection  with such  services.
These warrants vest upon achievement of certain business objectives with respect
to the Company's business  performance which were part of an overall arrangement
that also included  additional warrant  opportunities.  Subject to its fiduciary
duties, the Company also agreed to use its efforts to cause two persons selected
by Weatherly to be nominated for election to the Company's Board of Directors at
each annual meeting through the term of the Agreement.

When  the  Weatherly  Agreement  was  executed,   all  of  the  parties  thereto
anticipated  that Thomas A. McFall and John W. Prutch,  in their  capacities  as
associates  of  Weatherly,  would  play a  significant  role in  performing  the
services  to be provided to the  Company by  Weatherly,  and, in such  capacity,
would  receive a  significant  portion  of the  compensation  payable  under the
Weatherly Agreement.  In connection with the Company's subsequent  employment of
Mr.  McFall as CEO of the Company,  and Mr.  Prutch as President of the Company,
the Company has  renegotiated  the  Weatherly  agreement,  replacing  it with an
agreement, approved by the Board of Directors on August 10, 1998 to be effective
as of May 8, 1998, directly with Messrs. McFall and Prutch.

Under  the  terms  of the new  agreement,  the  Warrants  previously  issued  to
Weatherly have been assigned 50% to Mr. McFall and 50% to Mr.  Prutch,  and have
been  repriced to $1.75 per share.  Each of Messrs.  McFall and Prutch also have
been  issued  warrants,  with a term of ten  years,  for the  purchase  of up to
1,902,273 shares of Common Stock at an exercise price of $1.75 per share (giving
each of them warrants to purchase approximately 5%, as defined, of the Company's
outstanding  shares  of Common  Stock on a  fully-diluted  basis).  All of these
warrants are now subject to a new vesting  schedule which provides that 33.4% of
the  warrants  (777,309  shares  for each of  Messrs.  McFall  and  Prutch)  are
immediately exercisable.

Each of the  three  remaining  incremental  installments  of 22.2% of the  total
warrants  (approximately  516,655 shares for each of Messrs.  McFall and Prutch)
will  vest on the  basis  of the  achievement  of  goals  concerning  prescribed
increases in the Company's  annual  pre-tax  earnings  and/or the average public
trading  price of its Common Stock over any period of 120  consecutive  calendar
days.  The warrants also will contain  customary  anti-dilution  provisions  and
piggyback  registration rights, and Messrs. McFall and Prutch will be restricted
in their  ability to dispose of the Common  Stock  issuable  under the  Warrants
without the prior consent of WGI, LLC.

The new agreement  also provides that Messrs.  McFall and Prutch,  collectively,
will  receive  a success  fee  equal to three  percent  of the  proceeds  of any
financing  transactions  which they  participate in developing,  negotiating and
closing with third  parties for the benefit of the  Company,  a portion of which
may be  paid  in  additional  equity  under  certain  circumstances.  They  also
(collectively)  will  receive  a success  fee in  connection  with  identifying,
negotiating  and  closing  any  Acquisition  Transactions  (as  defined  in  the
agreement)  equal to three  percent of the Aggregate  Consideration  paid by the
Company (as defined in the Agreement).  All cash payments to Messrs.  McFall and
Prutch will be subject to reduction by the amount of any compensation which they
receive in their capacities as officers of the Company.

For the year ended  December 31,  1998,  such fees  totaled  $855,000,  of which
$350,000  has  been  paid  for  professional   fees  in  connection  with  these
transactions,  with the remaining balance being accrued as of December 31, 1998.
For the period subsequent to December 31, 1998, these individuals have earned an
additional  $692,000 as success fees for the acquisition of Tahiti Apparel Co. ,
Inc. and for the sale of the Heritage sportswear unit of the Company.

Umbro Licensing Agreement

On November 23, 1998, the Company  acquired the U.S.  license for Umbro, a world
recognized  soccer brand and will begin selling  Umbro soccer  apparel and other
products in 1999.  The initial  contract  period  expires on December  31, 2002,
subject to certain renewal rights by the Company and certain  repurchase  rights
by the licensor.  In connection  with this license,  the Company  entered into a
expense  sharing  agreement  with  Riddell  Sport,  who has a similar  licensing
agreement for Umbro  products in a different  channel of  distribution,  whereby
Riddell and Signal Apparel will split certain 


                                                                   Page 37 of 49
<PAGE>

budgeted expenses relating to the selling and marketing of Umbro products,  with
Signal generally paying 60% of these expenses.

Legal Proceedings

The Company is a party to various legal proceedings  incidental to its business.
The ultimate disposition of these matters is not presently determinable but will
not,  in the  opinion  of  management,  have a  material  adverse  effect on the
Company's financial condition or results of operations.

On April 5, 1999,  litigation was filed against the Company by former  employees
of the Company's LaGrange, Georgia facility which the Company closed in December
1996. The litigation  complaint alleges that the Company violated the provisions
of the WARN Act in  connection  with the closing of the LaGrange  facility.  The
Company  intends to defend its position and has accrued  $500,000 for legal fees
and other potential costs of the litigation.

12. Fair Value of Financial Instruments

The carrying amount of cash,  receivables and short-term  payables  approximates
fair value because of the short maturity of these financial instruments.  Due to
the  current  financial  condition  (Note 1) and the  ongoing  attempts to raise
additional  funds,  it is not  practical  to  estimate  the  fair  value  of the
Company's debt.

13. Subsequent Events

New Revolving Credit Agreement and Term Loan with Senior Lender

Effective March 22, 1999, pursuant to a Revolving Credit, Term Loan and Security
Agreement dated March 12, 1999 ( the "Credit Agreement") the Company completed a
new  financing  arrangement  with its senior  lender,  (in its own behalf and as
agent for other participating  lenders).  This arrangement  provides the Company
with  funding of up to  $98,000,000  (the  "Maximum  Facility  Amount")  under a
combined  facility that includes a $50,000,000  Term Loan  (supported in part by
$25,500,000  of  collateral  pledged by an affiliate of WGI,  LLC, the Company's
principal  shareholder)  and a Revolving  Credit Line of up to $48,000,000  (the
"Maximum  Revolving  Advance  Amount").  Subject to the lenders' approval and to
continued  compliance with the terms of the original  facility,  the Company may
elect to increase the Maximum  Revolving  Advance Amount from  $48,000,000 up to
$65,000,000, in increments of not less than $5,000,000.

The Term Loan  portion of the new  facility is divided  into two  segments  with
differing  payment  schedules:  (i)  $27,500,000  ("Term Loan A") payable,  with
respect  to  principal,  in a  single  installment  on March  12,  2004 and (ii)
$22,500,000  ("Term  Loan  B")  payable,  with  respect  to  principal,   in  47
consecutive  monthly  installments  on the  first  business  day of  each  month
commencing  April 1, 2000, with the first 46  installments to equal  $267,857.14
and the final  installment to equal the remaining unpaid balance of Term Loan B.
The Credit  Agreement allows the Company to prepay either term loan, in whole or
in part, without premium or penalty.

In connection with the Revolving Credit Line, the Credit Agreement also provides
(subject to certain  conditions)  that the senior  lender will issue  Letters of
Credit on behalf of the Company,  subject to a maximum amount of $40,000,000 and
further  subject  to the  requirement  that the sum of all  advances  under  the
revolving credit line (including any outstanding L/Cs) may not exceed the lesser
of the Maximum  Revolving  Advance  Amount or an amount (the  "Formula  Amount")
equal to the sum of:

     (1)  up to 85% of Eligible Receivables, as defined, plus

     (2)  up to 50% of the value of Eligible  Inventory,  as defined  (excluding
          L/C inventory and subject to a cap of $30,000,000 availability), plus

     (3)  up to 60% of the first cost of  Eligible  L/C  Inventory,  as defined,
          plus

     (4)  100% of the value of  collateral  and letters of credit  posted by the
          Company's principal shareholders, minus



                                                                   Page 38 of 49
<PAGE>

     (5)  the aggregate undrawn amount of outstanding Letters of Credit, minus

     (6)  Reserves (as defined).

In addition to the secured revolving advances represented by the Formula Amount,
and subject to the overall  limitation of the Maximum  Revolving Advance Amount,
the agreement  provides the Company with an  additional,  unsecured  Overformula
Facility of $17,000,000 (the outstanding balance of which must be reduced to not
more than  $10,000,000  for at least one business day during a five business day
cleanup period each month) through December 31, 2000.  Between December 31, 2000
and June 1, 2001,  both the maximum  overall  balance  and the  maximum  cleanup
period balance under this Overformula  Facility are gradually reduced to zero in
six  equal  monthly  increments.  Subject  to the  limitations  of  the  Maximum
Revolving Advance Amount and the Formula Amount, as well as the Maximum Facility
Amount,  the agreement  also provides that the senior lender (in its  individual
capacity)  may make  Swingline  Loans of up to  $5,000,000  to the  Company  for
periods not to exceed seven (7) days for any one such loan.

Interest on all amounts  advanced  under the Credit  Agreement  (pursuant to the
either Term Loan or Revolving  Advances  (including any  outstanding  Letters of
Credit) is payable in arrears on the last day of each month. The facility allows
the  Company to select  (separately)  interest  rates for both the Term Loan and
Revolving  Advances  based  on  either a  Domestic  Rate or a  Eurodollar  Rate.
Interest on Domestic Rate Loans is payable at a fluctuating  Alternate Base Rate
equal to the higher of the prime rate (as  defined)  or the  federal  funds rate
plus 0.5%, plus the Applicable Margin (as defined).  Interest on Eurodollar Rate
Loans is payable at a fluctuating  Eurodollar Rate equal to the daily average of
the 30-day London Interbank Offered Rate as published in The Wall Street Journal
(calculated  as prescribed in the  agreement),  plus the  Applicable  Margin (as
defined). The Applicable Margin for both Domestic Rate Loans and Eurodollar Rate
Loans is tied to the  Company's  ratio of Funded Debt to Free Cash Flow (each as
defined in the  agreement),  and ranges (A) in the case of Domestic  Rate Loans,
from zero for a ratio  less than or equal to 1.0:1 to 1.25% for a ratio  greater
than 5.0:1 and (B) in the case of Eurodollar  Rate Loans,  from 1.5% for a ratio
less than or equal to 1.0:1 to 3.5% for a ratio greater than 5.0:1.

Notwithstanding  the foregoing,  the Credit Agreement provides that (x) from and
after the  Closing  Date  through  and  including  the  earlier of (i) the first
anniversary  of the  Closing  Date and (ii) the date on which the senior  lender
receives the Company's 1999 annual audited financial statements as required, the
Applicable Margin shall be 1.25% for Domestic Rate Loans and 3.5% for Eurodollar
Rate Loans, and (y) from and after the date that the Company repays in full Term
Loan B and (ii) the date at which  advances  are no longer  permitted  under the
Overformula Facility, the Applicable Margin in effect from time to time for both
Domestic Rate Loans and Eurodollar Rate Loans shall be increased by .50%.

In addition to the amounts due for  interest,  the Company is  obligated to pay:
(i) a monthly unused  facility fee,  computed at the rate of 0.25% per annum, on
the  difference  between the Maximum  Revolving  Advance  Amount and the average
daily balance of  outstanding  Revolving  Advances  (plus the aggregate  undrawn
amount of outstanding  Letters of Credit) during that month,  (ii) a monthly fee
computed  at the rate of 0.25% per annum on the  outstanding  face amount of any
Letters of Credit (plus certain  customary  fees charged by the senior lender in
connection  with issuing  letters of credit),  and (iii) certain  administrative
fees payable to the senior lender under a fee letter executed in connection with
the agreement.

The Credit Agreement requires, among other things, maintenance by the Company of
prescribed  minimum  amounts of tangible net worth,  ratios of current assets to
current  liabilities,  working  capital  and net  operating  results  (excluding
extraordinary  items). The Credit Agreement also limits the Company's ability to
pay  dividends,  the Company's  future  capital  expenditures  and the amount of
indebtedness the Company may incur, and effectively prohibits future acquisition
or  business  combination  transactions  by the  Company  without  the  lenders'
consent. The Company has not yet closed its books on the first quarter of Fiscal
1999, however,  due to continuing liquidity shortfalls during the first quarter,
substantial doubt exists regarding the Company's ability to maintain  compliance
with its financial covenants under the new Credit Agreement.

In  consideration  of the  provision of the  additional,  unsecured  Overadvance
Facility prescribed in the agreement, the Company permitted the senior lender to
purchase a total of 1,791,667  shares of the  Company's  Common Stock at the par
value of $.01 per share  (the  "Issued  Shares")  under the terms of a  separate
Subscription  and Stock  Purchase  Agreement  executed in  conjunction  with the
Credit Agreement.  The fair market value of these shares less the purchase price
was  $2,110,000.  The  Company  also  issued to the  senior  lender a warrant to
purchase  up to  375,000  additional  shares of its


                                                                   Page 39 of 49
<PAGE>

Common Stock (the "Warrant Shares") at an exercise price of $1.50 per share. The
fair market value of these warrants using the Black-Scholes Option Pricing Model
was $204,000 and will be treated as a debt discount and amortized  over the term
of the  agreement.  Subject to certain  requirements  for advance  notice to the
Company by the holder  regarding  the number of Warrant  Shares which the holder
intends to purchase,  the warrant becomes  exercisable over a three-year  period
beginning  December  31,  1999 with  respect to a maximum of 125,000  shares per
year.  The  agreement  also gives the  senior  lender the right to have both the
Issued Shares and the Warrant Shares  registered for resale under the Securities
Act of 1933 in  prescribed  installments  over a staggered  period of time,  and
provides certain customary antidilution  protections with respect to the Warrant
Shares and the 625,000 Issued Shares for which resale registration is delayed.

The Subscription and Stock Purchase  Agreement also provides for certain put and
call options with respect to the Issued Shares. Under the put option, the senior
lender will have the right (upon  specified  advance  written  notice) once each
calendar  year for three years,  beginning  December  31,  1999,  to require the
Company to purchase  up to 388,889 of the Issued  Shares at a price of $1.50 per
share. This right will only be exercisable,  however, if the average closing bid
price of the Company's  Common Stock for the five trading days prior to the date
of the exercise of the put option is less than $1.50. Under the call option, the
Company has the right (but not the  obligation),  exercisable  at any time while
the senior lender holds the 1,166,667  issued shares for which  registration  is
not delayed under the  agreement,  to purchase all or any of the portion of such
shares at $3.00 per share.

Furthermore, in connection with WGI, LLC's guaranteeing of certain overadvances,
the Company is  expected to grant WGI,  LLC up to  10,000,000  warrants  with an
exercise price of $1.00 per share.  Using the Black-Sholes  Option Pricing Model
the fair market value of these warrants would be estimated to be $8,400,000. The
warrants would be capitalized as debt issuance costs and amortized over the term
of the credit agreement.

Acquisition of Tahiti Apparel Co., Inc.

On March 22, 1999, the Company completed the acquisition of substantially all of
the assets of Tahiti  Apparel Co.,  Inc.  ("Tahiti"),  a New Jersey  corporation
engaged in the  marketing of swimwear,  bodywear and  activewear  for ladies and
girls.  The purchase price for the assets and business of Tahiti is $15,872,500,
payable in shares of the  Company's  common  stock  having an agreed  value (for
purposes of such payment only) of $1.1875 per share.  Additionally,  the Company
assumed,  generally,  the  liabilities  of Tahiti set forth on Tahiti's  audited
balance  sheet as of June 30,1998 and all  liabilities  incurred in the ordinary
course of business  during the period  commencing July 1, 1998 and ending on the
Closing Date  (including  Tahiti's  liabilities  under a separate  agreement (as
described   below)  between  Tahiti  and  Ming-Yiu   Chan,   Tahiti's   minority
shareholder).

The acquisition  resulted in the issuance of 13,366,316  shares of the Company's
Common  Stock to Tahiti in payment of the purchase  price under the  Acquisition
Agreement.   One  million  of  such  shares  have  been  placed  in  escrow  for
approximately two years following the closing date to satisfy the obligations of
Tahiti and its  majority  stockholders  and to  indemnify  the  Company  against
certain potential claims as specified in the Acquisition  Agreement.  During the
course of negotiations  leading to the execution of the  Acquisition  Agreement,
and in order to enable  Tahiti to obtain  working  capital  financing  needed to
support its on-going  operations,  the Company guaranteed repayment by Tahiti of
certain amounts owed by Tahiti under one of its loans from its senior lender.

At a meeting held  January 29, 1999,  the  Company's  shareholders  approved the
issuance of up to 10,070,000  shares of the Company's Common Stock in connection
with the Acquisition  Agreement and the Chan Agreement  discussed  below,  which
shares were issued in  connection  with the closing.  Under the rules of the New
York Stock Exchange, on which the Company's Common Stock is traded,  issuance of
the additional  4,296,316  shares of Common Stock called for by the amendment to
the  Acquisition  Agreement  will  be  subject  to  approval  by  the  Company's
shareholders at the Company's annual meeting,  which the Company expects to hold
not later than June 15,1999.

All of the  shares  of Common  Stock  issued  or to be  issued  pursuant  to the
Acquisition Agreement are unregistered,  restricted shares pursuant to the rules
of the  Securities  and  Exchange  Commission.  Under  the  terms of a  separate
Registration  Rights  Agreement  executed  in  connection  with the  Acquisition
Agreement, Tahiti and/or its stockholders (and certain permitted assignees) have
the right for a period of ten years  following the Closing  Date,  under certain
circumstances, to have the Company register the shares of Common Stock issued to
them pursuant to the Acquisition  Agreement for resale. Tahiti stockholders have
also agreed with the Company  (subject to certain  limited  exceptions) to


                                                                   Page 40 of 49
<PAGE>

limit their  transfers  of Company  Common  Stock  during each of the first five
years  following  the closing  date (two years in the case of the shares  issued
under the Chan  Agreement)  to no more than five percent of the number of shares
held by each of them during each such year.

Pursuant to the terms of the  Acquisition  Agreement,  the Company  also entered
into employment agreements with Tahiti's two former majority stockholders. These
agreements  call for minimum  annual  salaries of $500,000  each for five years.
Each of them must be appointed to the Company's Executive  Management  Committee
and  one  must  be  appointed  as a  director  of the  Company.  The  employment
agreements  also  provide for the  issuance in the  aggregate of up to 4,000,000
warrants to purchase the Company's  Common Stock with an average  exercise price
of $1.75 per share.  One million of such warrants vested upon the signing of the
Agreement  and the  remaining  three  million  warrants  are  subject to certain
vesting restrictions.

In  connection  with  the  acquisition,  Tahiti  and  Tahiti's  former  majority
stockholders  reached an agreement with Tahiti's  former  minority  stockholder,
Ming-Yiu  Chan (" the Chan  Agreement"),  pursuant  to which  Tahiti  executed a
promissory note to Chan in the principal amount of $6,770,000 (the "Chan Note"),
bearing interest at the rate of 8% per annum, and payable as follows:

     (a)  $3,500,000  payable in cash (with  accrued  interest  thereon)  in the
          following installments:

          $1,000,000  payable in equal  installments  of $250,000 (90 days,  180
          days, 270 days and 360 days following the closing)

          $2,500,000  payable  in  equal  quarterly   installments  of  $312,500
          commencing June 1, 2000 with a final payment due on March 1, 2002.

     (b)  The balance of $3,270,000 plus accrued interest payable, at the option
          of Tahiti,  through either: the delivery of 1,000,000 shares of Common
          Stock of the  Company  within  five  business  days of the  closing or
          payment  of  such  amount  in cash in  eight  quarterly  installments,
          beginning  on the first  anniversary  of the  closing  under the Asset
          Purchase Agreement.

Under the terms of the Acquisition Agreement,  the Company assumed the Chan note
following  closing and  effective  March 22, 1999 repaid  $3,270,000 of the Chan
note through the issuance of 1,000,000 shares of Common Stock.

The Acquisition  Agreement gives Tahiti's former majority stockholders the right
(jointly) to repurchase  Tahiti's assets from the Company,  if at any time prior
to the fifth  anniversary  of the  Closing,  the  Company  is unable to  provide
sufficient  financing  to its  subsidiary  or division  operating  the  business
purchased from Tahiti to support a level of sales at least equal to the sales of
such  business  for the  preceding  season plus a  reasonable  rate of growth (a
"Financing Default").  If the rights were exercised,  the repurchase price would
consist of repayment to the Company of the original  $15,872,500  purchase price
(payable  in shares of Common  Stock which would be valued at $1.1875 per share,
plus the assumption of liabilities incurred in the ordinary course of business.

Issuance of 5% Convertible Debentures

Effective March 3, 1999 (the "Closing  Date"),  the Company reached an agreement
("the  Purchase  Agreement")  with two  institutional  investors  concerning the
private placement of five million dollars of 5% Convertible Debentures due March
3, 2002 (the  "Debentures").  In  connection  with the  private  placement,  the
Company  paid  $50,000 of the  purchasers  expenses.  The  Company  also  issued
warrants to the  institutional  purchasers  for the  purchase of up to 2,500,000
shares of the  Company's  Common Stock at an exercise  price of $1.00 per share,
with a term of five years. Proceeds from issuance of the Debentures were used to
redeem all of the  remaining  outstanding  shares of the  Company's 5% Series G1
Convertible  Preferred Stock  (following the conversion of $260,772.92 of stated
value and accrued  dividends of such stock into 248,355  shares of the Company's
Common Stock effective February 26, 1999, by two other institutional investors).

The Debentures  are junior in priority of payment to all of the Company's  other
outstanding  indebtedness,  and will be  pari-passu  with any  future  series of
convertible debentures.  The Debentures will bear interest at the rate of 5% per
year,  payable  quarterly in arrears,  commencing July 1, 1999.  Interest on any
amounts in default  will  accrue at the rate of 20% 


                                                                   Page 41 of 49
<PAGE>

per annum.  Interest on the  debentures is payable at the option of the Company,
either in cash or in shares  of the  Company's  Common  Stock  (valued  for such
purposes at the  average of the  closing bid prices for the Common  Stock on the
New  York  Stock  Exchange  ("NYSE")  over  the ten  trading  days  prior to the
applicable  interest  payment date,  disregarding the highest and lowest of such
prices.

The  Debentures,   including  any  accrued  and  unpaid  interest  thereon,  are
convertible  at the option of the  purchasers  (subject to certain  limitations)
into shares of the Common Stock at a fixed  conversion  price of $2.00 per share
of Common Stock.  The conversion  price is subject to adjustment in the event of
certain  stock  dividends,   stock  splits,   reverse  stock  splits,  or  other
transactions   affecting  the  Company's  outstanding  Common  Stock;  provided,
however,  that no  adjustment  shall  be made to the  conversion  price  for any
reverse stock split occurring prior to December 31, 1999.

After March 3, 2000,  the Company will have the right to force the conversion of
the outstanding  Debentures into Common Stock, in whole or in part, upon 30 days
written  notice,  provided  that:  (a) the closing  bid price for the  Company's
Common Stock on the NYSE is $4.00 or more for at least 20 out of 30 trading days
prior to the date of the Company's  notice of its exercise of such right and (b)
the Company  issues to the Debenture  holders  additional  warrants to acquire a
number of shares of Common Stock equal to the amount of remaining  interest that
would have been paid to such holders had the Debentures remained outstanding for
their full term  divided by the average of the closing bid prices for the Common
Stock  on the  NYSE  over the ten  (10)  trading  days  prior to the date of the
redemption  notice  (disregarding  the  highest and lowest  such  prices).  Such
warrants  would have an exercise  price equal to 120% of such average price over
the applicable ten day period and  additional  terms  equivalent to the warrants
issued in connection with the Purchase Agreement.

 The  Purchase  Agreement  and an  accompanying  Registration  Rights  Agreement
require  the  Company  to  register  the  shares of Common  Stock into which the
Debentures are convertible,  plus any shares of Common Stock which may be issued
in payment of interest on the Debentures and the shares of Common Stock issuable
upon the exercise of the purchaser's  warrants,  for resale by the institutional
purchasers  under the  Securities  Act of 1933, as amended.  In order to satisfy
these  requirements,  the Company is required to register for resale a number of
shares equal to at least the sum of 120% of the number of shares of Common Stock
issuable upon the  conversion  of the  Debentures  plus the 2,500,000  shares of
Common Stock issuable upon exercise of the purchaser's warrants.

Sale of the Heritage Division

In January  1999,  the Company  completed  the sale of its Heritage  division to
Heritage  Sportswear,  LLC, a new company  formed by certain  former  members of
management of the Heritage  division.  Under the terms of the sale dated January
20, 1999,  the Company  retained  accounts  receivable  and accounts  payable of
approximately  $0.1 million and $0.5  million,  respectively  and received  cash
consideration of $2.1 million and a note receivable of $0.4 million,  subject to
post closing adjustments. The note receivable bears interest at 10% with accrued
interest  payable  with  each  principle  payment.  Aggregate  annual  principal
payments are due as follows:

                        1999                        $100,000
                        2000                          91,666
                        2001                          83,332
                        2002                          83,332
                        2003                          41,670




ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable


                                                                   Page 42 of 49
<PAGE>

                                    PART III


Those portions of the Company's  Proxy  Statement for its 1999 Annual Meeting of
Shareholders described below are incorporated herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Election of Directors and Executive Officers

ITEM 11. EXECUTIVE COMPENSATION

Executive Compensation Information and Employment Agreements

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners and Management

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Compensation   Committee  Interlocks  and  Insider   Participation  and  Certain
Relationships and Related Transactions

                                     PART IV

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

     (a)1.Financial Statements and Schedules

     The financial  statements are incorporated by reference under Part II, Item
     8 and are set  forth in the Index to  Financial  Statements  and  Schedules
     found in Part II, Item 8.

     (a)2. Financial Statement Schedules:

     Report of Independent Public Accountants

     Schedule II -- Valuation and Qualifying Accounts

     All other schedules are omitted as the required information is inapplicable
     or the information is presented in the consolidated financial statements or
     related notes.

     (a)3. Exhibits

<TABLE>
<CAPTION>
    Exhibit                                                            Incorporation by Reference (to SEC
     Number       Description of Exhibit                                File No. 1-2782) or Filed Herewith
     ------       ----------------------                                ----------------------------------
<S>               <C>                                                  <C>
       2.1        Asset  Purchase  Agreement  dated  as of             Exhibit  10.1 to  current  report on 
                  December  17,  1998,  by and  among  the             Form 8-K dated March 22, 1999.
                  Company,  Tahiti  Apparel,  Inc. and the 
                  stockholders of Tahiti Apparel, Inc.     
                  
       2.2        Amendment,  dated  March  16,  1999,  to             Exhibit  10.2 to  current  report on 
                  Asset  Purchase  Agreement  dated  as of             Form  8-K dated March 22, 1999.
                  December  17,  1998,  by and  among  the 
                  Company,  Tahiti  Apparel,  Inc. and the 
                  stockholders of Tahiti Apparel, Inc.     
                  
       3.1        Restated  Articles of  Incorporation  of             Exhibit  3.1  to  current  report on 
                  Signal Apparel Company, Inc., as amended             Form 8-K dated September 17, 1998.
                  through September 17, 1998.             
</TABLE>

                                                                   Page 43 of 49
<PAGE>

<TABLE>
<CAPTION>
    Exhibit                                                            Incorporation by Reference (to SEC
     Number       Description of Exhibit                                File No. 1-2782) or Filed Herewith
     ------       ----------------------                                ----------------------------------
<S>               <C>                                                  <C>
       3.2        Copy of Bylaws as amended March 23, 1992.            Exhibit 3-2 to Form 10-K for the year
                                                                       ended December 31, 1991.

       4.1        Form of 5% Convertible  Debentures,  due             Exhibit 4.1 to Current Report on Form 8-K
                  March  3,   2003,   of  Signal   Apparel             dated March 3, 1999.
                  Company, Inc.                           

      10.1        Warrant Purchase Agreement,  dated as of             Exhibit 10.25 to Form 10-K for the year
                  March 1, 1991, between the Company,  The             ended December 31, 1991.
                  Shirt   Shed,    Inc.   and    Licensing 
                  Corporation of America.                  
                  
      10.2        Warrant  No.  002  issued  to  Licensing             Exhibit 10.1 to the Form 10-Q for the
                  Corporation of America, covering 193,386             quarter ended September 30, 1994.
                  shares of the  Company's  Common  Stock, 
                  dated as of July 27,  1991 and  expiring 
                  July 22, 2001.                           

      10.3        Warrant  No.  003  issued  to  Licensing             Exhibit 10.2 to the Form 10-Q for the
                  Corporation of America,  covering 38,674             quarter ended September 30, 1994.
                  shares of the  Company's  Common  Stock, 
                  dated as of April 30, 1993 and  expiring 
                  April 30, 2003.                          
                  
      10.4        Promissory  Note  dated  March  31, 1994             Exhibit 10.2 to Form 10-Q for the quarter
                  between   the   Company  and  FS  Signal             ended March 31, 1994.
                  Associates I.          


      10.5        Subordination Agreement, dated March 30,             Exhibit 10.47 to Form 10-K for the year 
                  1994,  between  the  Company,  FS Signal             ended December 31, 1993.
                  Associates     and     BNY     Financial
                  Corporation.                            

      10.6        Warrant  Certificate dated April 1, 1994             Exhibit 10.4 to Form 10-Q for the quarter 
                  to  purchase  300,000  shares  of Common             ended March 31, 1994.
                  Stock  of  the  Company,  issued  to  FS    
                  Signal  Associates I in connection  with
                  the  promissory  note  dated  March  31,
                  1994.                                   

      10.7        Agreement  dated  May  10,  1995  by and             Exhibit 10.4 to Form 10-Q for the quarter 
                  between the  Company and Sherri  Winkler             ended March 31, 1995.
                  and MW Holdings, Inc.                   

      10.8        Real    Estate    Mortgage,     Security             Exhibit 10.4 to current report on Form 8-K 
                  Agreement, Assignment of Lease and Rents             filed on May 10, 1995.
                  and Fixture  filing dated March 31, 1995     
                  between   The   Shirt   Shed  and  Walsh 
                  Greenwood.                               
                  
      10.9        First  Amendment  dated August 10, 1995,             Exhibit 10.102 to Form 10-K for the year 
                  to  Real   Estate   Mortgage,   Security             ended December 31, 1995.
                  Agreement, Assignment of Lease and Rents    
                  and Fixture Filing dated March 31, 1995,
                  between   The   Shirt   Shed  and  Walsh
                  Greenwood.                              
                                                          
     10.10        Reimbursement   Agreement   and  related             Exhibit 10.108 to Form 10-K for the year 
                  Promissory  Note dated January 30, 1997,             ended December 31, 1996.
                  among the Company,  FS Signal Associates     
                  Limited   Partnership   and  FS   Signal     
                  Associates   II   Limited   Partnership,     
                  concerning    renewal    and    guaranty     
                  arrangements  with  respect  to  certain     
                  letters of credit.                           
                     
     10.11        Stock Purchase Agreement,  dated October             Exhibit 2-1 to Current Report on Form 8-K 
                  31, 1997, by and among the Company,  Lee             dated November 5, 1997.
                  Ellis and Jimmy Metyko.                   
</TABLE>

                                                                   Page 44 of 49
<PAGE>

<TABLE>
<CAPTION>
    Exhibit                                                            Incorporation by Reference (to SEC
     Number       Description of Exhibit                                File No. 1-2782) or Filed Herewith
     ------       ----------------------                                ----------------------------------
<S>               <C>                                                  <C>
     10.12        Stock Purchase Agreement,  dated October             Exhibit 2-2 to Current Report on Form 8-K 
                  31,  1997,  by and among the Company and             dated November 5, 1997.
                  Elizabeth Miller.                        

     10.13        Convertible   Preferred  Stock  Purchase             Exhibit 10.1 to Current Report on Form 8-K 
                  Agreement   dated  September  17,  1998,             dated September 17, 1998.
                  among the Company and four institutional    
                  purchasers    of   the    Company's   5%
                  Convertible Preferred Stock, Series G1. 
                  
     10.14        Registration   Rights   Agreement  dated             Exhibit 10.2 to Current Report on Form 8-K 
                  September  17,  1998,  among the Company             dated September 17, 1998.
                  and four institutional purchasers of the   
                  Company's   5%   Convertible   Preferred
                  Stock, Series G1.                       
                  
     10.15        Warrants  to  purchase   Common   Stock,             Exhibit 10.3 to Current Report on Form 8-K 
                  issued  to   purchasers   of  Series  G1             dated September 17, 1998.
                  Preferred  Stock,  dated  September  17,
                  1998.                                   

     10.16        Warrants  to  purchase   Common   Stock,             Exhibit 10.4 to Current Report on Form 8-K 
                  issued to placement  agent for Series G1             dated September 17, 1998.
                  Preferred  Stock,  dated  September  17,
                  1998.                                   

     10.17        Securities   Purchase   Agreement  dated             Exhibit 10.1 to Current Report on Form 8-K 
                  March 3, 1999, among the Company and two             dated March 3, 1999.
                  institutional    purchasers    of    the     
                  Company's 5% Convertible  Debentures due 
                  March 3, 2003.                           
                  
     10.18        Registration   Rights   Agreement  dated             Exhibit 10.2 to Current Report on Form 8-K 
                  March 3, 1999, among the Company and two             dated March 3, 1999.
                  institutional    purchasers    of    the  
                  Company's 5% Convertible  Debentures due
                  March 3, 2003.                          
                  
     10.19        Form  of  Warrants  to  purchase  Common             Exhibit 10.3 to Current Report on Form 8-K dated 
                  Stock   issued  to   purchasers   of  5%             March 3, 1999.
                  Convertible  Debentures,  dated March 3, 
                  1999.                                    

     10.20        Escrow Agreement,  dated March 16, 1999,             Exhibit 10.3 to Current Report on Form 8-K 
                  by  and   among  the   Company,   Tahiti             dated March 22, 1999.
                  Apparel, Inc. and Wachtel & Masyr, LLP.  
                  
     10.21        Agreement, dated March 16, 1999, between             Exhibit 10.4 to Current Report on Form 8-K 
                  Tahiti Apparel,  Inc. and Ming Yiu Chan,             dated March 22, 1999.
                  together with related Form of Promissory     
                  Note   (assumed   by  the   Company   at 
                  closing).                                
                  
     10.22        Stock Resale Agreement,  dated March 16,             Exhibit 10.5 to Current Report on Form 8-K 
                  1999,   between  the   Company,   Tahiti             dated March 22, 1999.
                  Apparel,  Inc.,  Zvi  Ben-Haim,  Michael 
                  Harary and Ming Yiu Chan.                
                  
     10.23        Registration  Rights  Agreement,   dated             Exhibit 10.6 to Current Report on Form 8-K 
                  March 16,  1999,  between  the  Company,             dated March 22, 1999.
                  Tahiti  Apparel,   Inc.,  Zvi  Ben-Haim, 
                  Michael Harary and Ming Yiu Chan.        
                  
     10.24        Securities  Transfer  Agreement,   dated             Exhibit 10.9 to Current Report on Form 8-K 
                  March 16, 1999,  between the Company and             dated March 22, 1999.
                  Zvi Ben-Haim.                           
                  
     10.25        Securities  Transfer  Agreement,   dated             Exhibit 10.10 to Current Report on Form 8-K 
                  March 16, 1999,  between the Company and             dated March 22, 1999.
                  Michael Harary.                          
</TABLE>

                                                                   Page 45 of 49
<PAGE>

<TABLE>
<CAPTION>
    Exhibit                                                            Incorporation by Reference (to SEC
     Number       Description of Exhibit                                File No. 1-2782) or Filed Herewith
     ------       ----------------------                                ----------------------------------
<S>               <C>                                                  <C>
     10.26        Form of Warrants to be issued to each of             Exhibit 10.11 to Current Report on Form 8-K 
                  Zvi  Ben-Haim  and Michael  Harary under             dated March 22, 1999.
                  Securities   Transfer  Agreements  dated
                  March 16, 1999.                         
                  
     10.27        Revolving Credit, Term Loan and Security             Exhibit 10.12 to Current Report on Form 8-K 
                  Agreement, dated March 12, 1999, between             dated March 22, 1999.
                  the    Company    and   BNY    Financial    
                  Corporation (individually and as Agent).
                  
     10.28        Second  Amended and  Restated  Factoring             Exhibit 10.13 to Current Report on Form 8-K 
                  Agreement, dated March 12, 1999, between             dated March 22, 1999.
                  the    Company    and   BNY    Financial
                  Corporation.                            
                  
     10.29        Subscription    and    Stock    Purchase             Exhibit 10.14 to Current Report on Form 8-K 
                  Agreement, dated March 12, 1999, between             dated March 22, 1999.
                  the    Company    and   BNY    Financial 
                  Corporation.                             
                  
     10.30        Form  of  Warrants   to   purchase   the             Exhibit 10.15 to Current Report on Form 8-K 
                  Company's  Common  Stock  issued  to BNY             dated March 22, 1999.
                  Financial  Corporation,  dated March 12,
                  1999.                                   
                  
     10.31        Employment Agreement with Leon Ruchlamer             Exhibit 10.5 to Form 10-Q for the quarter 
                  dated as of March 27, 1995.                          ended March 31, 1995.

     10.32        Severance  Agreement  dated  November 5,             Exhibit 10.93 to Form 10-K for the year 
                  1995 with Marvin Winkler.                            ended December 31, 1995.

     10.33        Employment Agreement with Barton Bresky,             Exhibit 10.109 to Form 10-K for the year 
                  dated January 7, 1997.                               ended December 31, 1996.

     10.34        Employment   Agreement   with  David  E.             Employment Agreement with David E. Houseman, 
                  Houseman, dated October 1, 1997.                     dated October 1, 1997.
                  
     10.35        Separation   Agreement   with  David  E.             Filed Herewith.
                  Houseman, dated as of October 1, 1998.

     10.36        Employment   with  John  Prutch,   dated             Exhibit 10.93 to Form 10-K for the year 
                  October 2, 1997.                                     ended December 31, 1997.
                  
     10.37        Employment  Agreement,  dated  March 16,             Exhibit 10.7 to Current Report on Form 8-K 
                  1999,   between   the  Company  and  Zvi             dated March 22, 1999.
                  Ben-Haim.                               

     10.38        Employment  Agreement,  dated  March 16,             Exhibit 10.8 to Current Report on Form 8-K 
                  1999,  between  the  Company and Michael             dated March 22, 1999.
                  Harary.                                 

       21         List of Subsidiaries                                 Filed Herewith.

       23         Consent   of   Arthur    Andersen   LLP,             Filed Herewith.
                  Independent Public Accountants          

       27         Financial Data Schedule                              Filed Herewith (EDGAR version only).
</TABLE>


                                                                   Page 46 of 49
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To:  Signal Apparel Company, Inc.:

We have audited in accordance with generally  accepted auditing  standards,  the
consolidated  financial statements included in Part II, Item 8 of this Form 10-K
and have issued our report  thereon  dated March 26, 1999 (except for the matter
discussed  in the last  paragraph  of Note 11, as to which the date is April 12,
1999).  Our  audits  were made for the  purpose  of  forming an opinion on those
statements taken as a whole. Our report on the consolidated financial statements
includes an  explanatory  paragraph  with  respect to the  Company's  ability to
continue as a going concern as described in Note 1 to the financial  statements.
Schedule II is the  responsibility of the Company's  management and is presented
for purposes of complying with the Securities  and Exchange  Commission's  rules
and is not  part of the  basic  financial  statements.  This  schedule  has been
subjected  to the  auditing  procedures  applied  in  the  audits  of the  basic
financial statements and, in our opinion, fairly states in all material respects
the  financial  data  required to be set forth  therein in relation to the basic
financial statements taken as a whole.

/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP

Chattanooga, Tennessee
March 26, 1999


                                                                   Page 47 of 49
<PAGE>

                          SIGNAL APPAREL COMPANY, INC.
                                AND SUBSIDIARIES

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                          Additions
                                                          ---------

                                       Balance at      Charged to                                             Balance
                                       Beginning       Costs and                                              at End
                                       of Period        Expense          Other            Deductions         of Period
                                       ---------        -------          -----            ----------         ---------
<S>                                      <C>             <C>             <C>                <C>                <C>   
Year ended December 31, 1998

Deducted from asset accounts:
Allowance to reduce inventories
to net realizable value                  $4,561          $1,194          $    0             $2,732             $3,023
Allowance for doubtful accounts           1,887             601               0                 45(1)          $2,443
                                         ------          ------          ------             ------             ------
                                         $6,448          $1,795          $    0             $2,777             $5,466

Year ended December 31, 1997
Deducted from asset accounts:
Allowance to reduce inventories
to net realizable value                  $3,544          $4,202          $    0             $3,185             $4,561
Allowance for doubtful accounts           1,573             107             391(2)             184(1)           1,887
                                         ------          ------          ------             ------             ------

                                         $5,117          $4,309          $  391             $3,369             $6,448
                                         ------          ------          ------             ------             ------
Year ended December 31, 1996
Deducted from asset accounts:
Allowance to reduce inventories
to net realizable value                  $3,179          $2,355          $    0             $1,990             $3,544
Allowance for doubtful accounts           1,703              55          $    0                185(1)           1,573
                                         ------          ------          ------             ------             ------
                                         $4,882          $2,410          $    0             $2,175             $5,117
                                         ------          ------          ------             ------             ------
</TABLE>

(1)  Uncollectible  accounts  written off,  net of  recoveries.  (2)  Represents
     allowance for doubtful accounts acquired in acquisition.


                                                                   Page 48 of 49
<PAGE>

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned there unto duly authorized.


                                            SIGNAL APPAREL COMPANY, INC. 
                                            (Registrant)

Date:                                      /s/Thomas McFall
                                           ----------------------------------
                                           Thomas McFall
                                           Chief Executive Officer,

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed  below or on  counterparts  thereof by the  following  person on
behalf of the registrant and in the capacities and on the dates indicated.

Name                          Capacity                            Date
----                          --------                            ----


/s/ Henry L. Aaron            Director                            April 14, 1999
-------------------------
Henry L. Aaron

                              Director                            
-------------------------
Zvi Ben-Haim

                              Director                            
-------------------------
Barry F. Cohen

/s/ Jacob I. Feigenbaum       Director                            April 14, 1999
-------------------------
Jacob I. Feigenbaum

/s/ Paul R. Greenwood         Director                            April 14, 1999
-------------------------
Paul R. Greenwood

/s/ Thomas A. McFall           Director                           April 14, 1999
-------------------------
Thomas A. McFall

/s/ John W. Prutch            Director                            April 14, 1999
-------------------------
John W. Prutch

/s/ Stephen Walsh             Director, Chairman of the Board     April 14, 1999
-------------------------
Stephen Walsh

/s/ Howard N. Weinberg        Director, Chief Financial Officer,  March 18, 1999
-------------------------     Chief Accounting Officer
Howard N. Weinberg



                                                                   Page 49 of 49