SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K/A
                                 Amendment No. 2

(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 Englehard 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 a 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:  $ 8,169,622,  calculated by using the closing price on the New
York Stock  Exchange on November 29,  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.

              Class                          Outstanding as of November 30, 1999
              -----                          -----------------------------------
   Common Stock, $.01 par value                         44,952,783 shares


<PAGE>

                       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.


The registrant hereby amends the following items, financial statements, exhibits
or other  portions of its Annual Report on Form 10-K for the year ended December
31, 1998, which was filed with the Commission on April 15, 1999:

This amendment amends Part II of the Annual Report on Form 10-K as follows:  the
Consolidated  Statements of Operations and Consoldiated Statements of Cash Flows
by (a)  reclassifying  a $1.0 million  charge related to a pending legal dispute
from  Restructuring  charges to Cost of sales, (b)  reclassifying a $1.2 million
charge related to a customer chargeback from Selling, general and administrative
expenses to sales returns and allowances,  and (c)  reclassifying  certain items
previously labeled as Nonrecurring charges as Restructuring charges. In addition
to the changes on the face of the  financial  statements,  Footnotes 9 and 11 to
the financial statements,  as well as Management's Discussion and Analysis, also
have been amended to reflect these adjustments.



                                                                          Page 2
<PAGE>

                               AMENDMENT NO. 2 TO
                                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                                                10

4.     Submission of Matters to a Vote of Security Holders              10

PART II

5.     Market for the Registrant's Common Equity and
        Related Stockholder Matters                                     11

6.     Selected Financial Data                                          11

7.     Management's Discussion and Analysis of Financial
        Condition and Results of Operations                             12

8.     Financial Statements and Supplementary Data                      21

9.     Disagreements on Accounting and Financial Disclosure             50

PART III

10.     Directors and Executive Officers of the Registrant              50

11.     Executive Compensation                                          50

12.     Security Ownership of Certain Beneficial Owners
          and Management                                                50

13.     Certain Relationships and Related Transactions                  50

PART IV

14.     Exhibits, Financial Statement Schedules and
          Reports on Form 8-K                                           51


                                                                          Page 3
<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.


                                                                          Page 4
<PAGE>

     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 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


                                                                          Page 5
<PAGE>

     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.

     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.


                                                                          Page 6
<PAGE>

     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  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.


                                                                          Page 7
<PAGE>

     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.

     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):


                                                                          Page 8
<PAGE>

Facility              Square        Owned/             Products/
Location               Feet         Leased            Operations
--------               ----         ------            ----------

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)


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,


                                                                          Page 9
<PAGE>

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 10
<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)

                          1998      1997(b)       1996        1995     1994(a)
                       --------------------------------------------------------
Netsales               $ 48,876    $ 44,616    $ 58,808    $ 89,883   $ 95,818

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

Basic/dilutednetloss
percommonshare            (1.22)      (2.39)      (2.91)      (3.80)     (6.88)

Totalassets              18,464      26,722      26,167
                                                             43,229     69,448

Long-termobligations     70,728      60,147      66,423      57,243     49,258

(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.


                                                                         Page 11
<PAGE>

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

1998 COMPARED WITH 1997


Net sales of $48.9 million for 1998 represent an increase of 10% or $4.3 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 a $2.2  million  decrease in  undecorated  activewear,  a $0.3 million
decrease for women's fashion knitwear and a $1.2 million sales allowance related
to a single  large  chargeback  from a primary  customer  due to failure to meet
certain garment specifications. Sales in the fourth quarter of 1998 decreased to
$9.6  million from an average of $13.1  million for the first three  quarters of
1998.

Gross profit was $4.9  million  (10% of sales) in 1998  compared to $5.3 million
(12% of  sales)  in 1997.  Despite  increased  first  quality  sales  and  other
efficiencies during 1998, as well as improved margins on first quality sales due
to improved  sales mix and an overall  decrease in closeout  sales,  the Company
recorded a $0.4 million  decrease in gross profit in 1998 due to excessive  Cost
of sales of $13.0  million  for the fourth  quarter.  The  Company had sales and
negative  gross profit for the fourth quarter of 1998 of $9.6 million and ($2.3)
million,  respectively.  The  excessive  Cost of sales  for the  fourth  quarter
primarily  resulted  from  substantial  closeout  sales  completed in the fourth
quarter  of 1998  which had  costs of sales in excess of sales  price and a $1.0
million  charge  included in Cost of sales  related to a dispute  with a vendor.
This  dispute  arose after the vendor had  delivered  a portion of the  garments
pursuant  to the  Company's  purchase  agreement  and  before the  Company  took
delivery of  additional  goods for which it originally  was obligated  under the
agreement.  The  Company  did not take  delivery of the  additional  goods.  The
Company is asserting  breach of contract  against the vendor for both failure of
quality  and  untimely  delivery.  The vendor is  asserting  breach of  contract
against the Company.  No lawsuit has been filed and settlement  discussions  are
ongoing.  The Company  has  reserved  $1.0  million to cover  anticipated  costs
relating to the  resolution  of its dispute  with this vendor,  including  legal
fees. The Company  believes this accrual is sufficient  based upon the Company's
claims against this vendor for breach of contract.

Royalty expense related to licensed  product sales was 9% 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 44% and 31% of sales
for the years  ended  December  31,  1998 and 1997,  respectively.  Actual  SG&A
expense  increased in 1998 by $7.7 million to $21.6 million  principally  due to
additional  costs  associated  with  Big Ball and  Grand  Illusion.

The  Company's  SG&A  expenses in the fourth  quarter of 1998 were $7.8  million
compared  to the  SG&A  expenses  for the  first  nine  months  of 1998 of $13.8
million.  The average SG&A  expenses for the first nine months of 1998 were $4.6
million per quarter.  Thus,  the fourth  quarter  reflected  approximately  $3.2
million of SG&A  expenses  above the average  level for the balance of the year.
The material items which substantially contributed to this $5.4 million variance
are as follows: (a) $0.5 million of bad debt expense , (b) $0.5 million of legal
and professional  fees due to potential  liability related to the closure of the
La Grange  facility,  (c) $0.4  million of start-up  expenses  for the new Umbro
Division  which  commenced  in October,  1998,  (d) $0.1  million of  additional
insurance  expenses  related  to a  change  in  policies,  (e) $0.3  million  of
excessive  administrative expenses at the Grand Illusion division related to the
extraordinary  activity resulting from the shut down of the Chattanooga printing
facility, (f) $0.1 million of excessive factor interest related to slow payments
by  customers,  and (g) $0.1  million of temporary  accounting  labor and moving
costs related to the consolidation of administrative functions in New Jersey.



                                                                         Page 12
<PAGE>


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 Company  recorded a restructuring  charge of $2.8 million as a result of the
Company  reevaluating  its business  strategy during the latter portion of 1998.
The  reevaluation  resulted  in a shift from a capital  intensive  manufacturing
company to a sales and marketing  company with lower 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 the Big Ball division and the Chattanooga and Tazewell locations,  as
well as the sale of the Heritage and Grand Illusion divisions.

This analysis led,  among other  things,  to the sale of the Company's  Heritage
division,  which was completed on January 20, 1999 (for additional details,  see
Note 13 to the consolidated  financial  statements).  Additionally,  the Company
reached a  decision  during  the  fourth  quarter  of 1998 to close the Big Ball
division,  as well as the Chattanooga and Tazewell facilities,  by no later than
the end of the second quarter of fiscal 1999 with an  anticipated  completion of
this exit plan by the end of the third  quarter.  The  Chattanooga  and Tazewell
locations  ceased  operations  effective  December  14,  1998 and March 9, 1999,
respectively. As of December 1998, the Company was in negotiations regarding the
sale of the Grand Illusion  division and anticipated the completion of this sale
by mid-1999.

In connection with the decisions  discussed  above, the Company recorded a $2. 8
million  restructuring  charge in the fourth  quarter of 1998. The exit plan for
Chattanooga  and Tazewell  estimates the  termination  of 375 employees  (275 at
Chattanooga  and  100  at  Tazewell)  representing   substantially  all  of  the
management,  office staff,  plant supervisors,  artists,  and factory workers at
each of these locations.  As of December 31, 1998,  approximately  200 employees
consisting of  management,  supervisors,  and plant  workers of the  Chattanooga
Printwear location had been terminated but no termination benefits had been paid
as of year end.  Subsequent to the balance sheet date, all accrued benefits have
been paid out. Other than the lease buyouts  associated with the planned closure
of Big Ball, no other exit costs for Big Ball or Grand Illusion were  reasonably
estimable  by  management  as of the end of fiscal 1998.  Accordingly,  no other
costs were  accrued  as of the end of fiscal  1998 with  respect to the  planned
closure of the Big Ball  division and sale of the Grand  Illusion  division.  In
addition to the restructuring charge, the Company recorded a $4.5 million charge
to  write-off  the  remaining  goodwill  resulting  from the Big Ball and  Grand
Illusion acquisitions.

The  restructuring  charge is composed of the  writedown  of fixed assets of the
aforementioned divisions and locations, employee termination benefits, and other
exit costs such as lease buyouts, contract buyouts, legal and professional costs
associated with plant closures,  and cost of employees incurred after operations
cease that are  associated  with the  closing of the  Chattanooga  location,  as
summarized in the following table:



                                                                         Page 13
<PAGE>

<TABLE>
<CAPTION>
                                                                        Charge to
                                                             Initial     Related    Remaining
                                                              Charge      Assets     Balance
                                                             -------     -------    ---------
<S>                                                           <C>         <C>         <C>

Writedown of property, plant, and equipment                   $1,352      $1,352      $    0
(Big Ball division, Chattanooga and Tazewell facilities)
Severance costs of terminated employees                          276           0         276
(Chattanooga and Tazewell facilities)
Lease buyouts                                                    401           0         401
(Big Ball division)
Employee payroll incurred after plant closure                    495           0         495
(Chattanooga facility)
Legal and professional costs associated with closure             167           0         167
(Chattanooga and Tazewell facilities)
Other, including travel                                           67           0          67
                                                              ------      ------      ------
                                                              $2,758      $1,352      $1,406
                                                              ======      ======      ======
Write off of goodwill (Big Ball and Grand Illusion)           $4,542      $4,542      $    0
                                                              ======      ======      ======
</TABLE>

For  additional  information  concerning  the  restructuring,  see Note 9 to the
accompanying consolidated financial statements.


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.


                                                                         Page 14
<PAGE>

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.

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.


                                                                         Page 15
<PAGE>

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 ($2.8  million),  significantly
lower  receivable  levels ($2.6 million),  and an increase in accounts  payable,
accrued liabilities and accrued interest ($9.1 million).


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


                                                                         Page 16
<PAGE>

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 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%.


                                                                         Page 17
<PAGE>

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.

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.


                                                                         Page 18
<PAGE>

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.

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).


                                                                         Page 19
<PAGE>

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 products and various cartoon characters,
(iii)  reducing  costs of sales through


                                                                         Page 20
<PAGE>

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 21
<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 22
<PAGE>

                  Signal Apparel Company, Inc. and Subsidiaries

                           Consolidated Balance Sheets

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

                                                              1998         1997
                                                              ----         ----
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                                                      40,035
                                                                         -------
         Discount of $0 and $422, respectively               44,049
                                                            -------

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


                                                                         Page 23
<PAGE>

  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 Outstanding in 1998 and 1997                             0            0

Shareholders' deficit:

Preferred Stock:

   Series F, $100,000 stated value per share, 1,000
      Shares authorized, none outstanding in 1998,
      443.16 shares issued and outstanding in 1997               0       44,316
   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
   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'       $  18,464    $  26,722
                 deficit                                  --------     --------


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


                                                                         Page 24
<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
                                             ----           ----        ----
                                        (As Restated,
                                        See Note 14)

Net sales                                 $ 48,876       $ 44,616     $ 58,808
Cost of sales                               43,999         39,287       54,974
                                          --------       --------     --------
Gross profit                                 4,877          5,329        3,834

Royalty expense                              4,211          5,467        4,822
Selling, general and administrative
expenses                                    21,643         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
Restructuring charges                        2,758              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 25
<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-
                                            A            C           F            G1         H          Stock      Capital
<S>                                   <C>          <C>          <C>          <C>         <C>         <C>         <C>
Balance, December 31,
1995                                   $  39,584    $  36,618    $       0    $       0   $       0   $     115   $  73,012
                                       ---------    ---------    ---------    ---------   ---------   ---------   ---------
Net loss                                       0            0            0            0           0           0           0

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

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

Balance, December 31, 1996             $  39,584    $  36,618    $       0    $       0   $       0   $     115   $  73,507
                                       ---------    ---------    ---------    ---------   ---------   ---------   ---------
Net loss                                       0            0            0            0           0           0           0

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

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


Balance, December 31, 1997
                                       $       0    $       0    $  44,316    $       0   $       0   $     325   $ 160,399
                                       ---------    ---------    ---------    ---------   ---------   ---------   ---------
Net loss                                       0            0            0            0           0           0           0
Issuance of 125,000 shares of
Common Stock
                                               0            0            0            0           0           1         180

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

<CAPTION>
                                       Accumulated.   Treasury
                                         Deficit       Stock         Total
<S>                                    <C>          <C>          <C>
Balance, December 31,
1995                                    $(181,166)   $  (1,117)   $ (32,954)
                                        ---------    ---------    ---------
Net loss                                  (33,696)           0      (33,696)

Exercise of employee stock options              0            0          200

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

Balance, December 31, 1996              $(214,862)   $  (1,117)   $ (66,155)
                                        ---------    ---------    ---------
Net loss                                  (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            0       10,582

Conversion of $23,802 in debt and
Series C Preferred Stock into
Series F Preferred Stock
                                                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
                                                0            0       15,833
Issuance of 855,194
Shares of Common Stock for Big
Ball acquisition
                                                0            0        1,283
Issuance of 4,750,000
warrants in connection with
extension of debt                               0            0        3,716
                                        ---------    ---------    ---------
Balance, December 31, 1997              $(245,207)   $  (1,117)   $ (41,284)
                                        ---------    ---------    ---------
Net loss                                  (35,607)           0      (35,607)
Issuance of 125,000 shares of
Common Stock                                    0            0          181

Conversion of Series F Preferred
Stock into  Series H Preferred
Stock                                           0            0            0
</TABLE>

                                                                         Page 26

<PAGE>


<TABLE>
<CAPTION>
                                                      Preferred Stock Series
                                                                                                                 Additional
                                                                                                       Common      Paid-In-
                                            A            C           F            G1         H          Stock      Capital
<S>                                   <C>          <C>          <C>          <C>         <C>         <C>         <C>
Issuance of 5,000 shares of
Series G1 Preferred Stock and                  0            0            0        4,429           0           0         196
162,500 warrants to purchase
common stock
Issuance of 3,997,000 warrants to
purchase common stock to a lender              0            0            0            0           0           0       4,467
Accretion of Series G1 Preferred
Stock                                          0            0            0           55           0           0           0
Cumulative accrued  dividends on
Series G1 Preferred Stock                      0            0            0            0           0           0           0
Cumulative accrued dividends on
Series H Preferred Stock                       0            0            0            0       3,989           0           0
                                       ---------    ---------    ---------    ---------   ---------   ---------   ---------

Balance, December 31, 1998             $       0    $       0    $       0    $   4,484   $  48,305   $     326   $ 165,242
                                       =========    =========    =========    =========   =========   =========   =========

<CAPTION>
                                       Accumulated.   Treasury
                                         Deficit       Stock         Total
<S>                                    <C>          <C>          <C>
Issuance of 5,000 shares of
Series G1 Preferred Stock and                   0            0        4,625
162,500 warrants to purchase
common stock
Issuance of 3,997,000 warrants to
purchase common stock to a lender               0            0        4,467
Accretion of Series G1 Preferred
Stock                                         (55)           0            0
Cumulative accrued  dividends on
Series G1 Preferred Stock                     (73)           0          (73)
Cumulative accrued dividends on
Series H Preferred Stock                   (3,989)           0            0
                                        ---------    ---------    ---------

Balance, December 31, 1998              $(284,931)   $  (1,117)   $ (67,691)
                                        =========    =========    =========

</TABLE>


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

                                                                         Page 27

<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
                                                                          ----            ----          ----
                                                                      (As Restated,
                                                                      See Note 14)
<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 28
<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.


                                                                         Page 29
<PAGE>

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.

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


                                                                         Page 30
<PAGE>

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  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.


                                                                         Page 31
<PAGE>

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.

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.


                                                                         Page 32
<PAGE>

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
                                              =======      =======

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


                                                                         Page 33
<PAGE>

                                                  1998               1997
                                                  ----               ----
                                          (thousands of dollars)

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 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


                                                                         Page 34
<PAGE>

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 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


                                                                         Page 35
<PAGE>

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 Average            Weighted Average            Weighted 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. 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).


                                                                         Page 36
<PAGE>

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.

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


                                                                         Page 37
<PAGE>

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
Reimbursement Agreement and related


                                                                         Page 38
<PAGE>

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 Average            Weighted Average            Weighted 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.


                                                                         Page 39
<PAGE>

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.

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.   Restructuring Charges

In the fourth quarter of 1998, the Company reevaluated its business strategy.
The reevaluation resulted in a shift from a capital intensive manufacturing
company to a sales and marketing company with lower 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 the Big Ball division and the Chattanooga and Tazewell locations, as
well as the sale of the Heritage and Grand Illusion divisions.

This analysis led, among other things, to the sale of the Company's Heritage
division, which was completed on January 20, 1999 (see Note 13). Additionally,
the Company reached a decision during the fourth quarter of 1998 to close the
Big Ball division, as well as the Chattanooga and Tazewell facilities, by no
later than the end of the second quarter of fiscal 1999 with an anticipated
completion of this exit plan by the end of the third quarter. The Chattanooga
and Tazewell locations ceased operations effective December 14, 1998 and March



                                                                         Page 40
<PAGE>


9, 1999, respectively. Finally, the Company was in negotiations regarding the
sale of the Grand Illusion division as of December 1998 and anticipated the
completion of this sale by mid-1999. In connection with these decisions,
management also assessed (1) the realizability of the goodwill recorded for the
Big Ball and Grand Illusion divisions when they were acquired in late 1997 and
(2) the fair value of the assets associated with these divisions and those
associated with the Chattanooga and Tazewell plant locations. The determination
of goodwill impairment for Big Ball and Grand Illusion was based on the
Company's plans to close down the Big Ball division and the expected loss
resulting from the sale of the Grand Illusion division. Neither of these
divisions is expected to provide further cash flows sufficient to recover any of
the remaining goodwill, and the goodwill was deemed fully impaired. Accordingly,
the Company recorded a $4,542,000 charge to write-off the remaining goodwill
resulting from the Big Ball and Grand Illusion acquisitions.

Both of these actions are due to continuing operating losses and the uncertainty
about the Company's ability to return the divisions to profitability. Net sales
and net operating losses for Big Ball and Grand Illusion (both acquired in the
fourth quarter of 1997) for 1997 and 1998 were as follows (in thousands):

                                          Big Ball     Grand Illusion
                                          --------     --------------

            1998
               Net Sales                   $7,638          $3,091
               Net Operating Loss          $6,885          $1,153

            1997
               Net Sales                   $1,362          $  347
               Net Operating Loss          $  445          $  167

The net book value of the property, plant and equipment of the aforementioned
divisions and locations prior to being written down to net realizable value was
approximately $1.3 million for Big Ball, $1.6 million for the Chattanooga
location, $0.2 million for Tazewell, and $0.4 million for Grand Illusion. The
net book value of all the assets of the Heritage division was approximately $1.9
million. The net carrying value of all the assets for these divisions and
locations that will be disposed of after management has written them down to net
realizability is approximately $4.0 million.

In connection with the decisions discussed above, the Company recorded a
$2,758,000 restructuring charge in the fourth quarter of 1998. The exit plan for
Chattanooga and Tazewell estimates the termination of 375 employees (275 at
Chattanooga and 100 at Tazewell) representing substantially all of the
management, office staff, plant supervisors, artists, and factory workers at
each of these locations. As of December 31, 1998, approximately 200 employees
consisting of management, supervisors, and plant workers of the Chattanooga
Printwear location had been terminated but no termination benefits had been paid
as of year end. Subsequent to the balance sheet date, all accrued benefits have
been paid out. Other than the lease buyouts associated with the planned closure
of Big Ball, no other exit costs for Big Ball or Grand Illusion were reasonably
estimable by management as of the end of fiscal 1998. Accordingly, no other
costs were accrued as of the end of fiscal 1998 with respect to the planned
closure of the Big Ball division and sale of the Grand Illusion division.

The restructuring charge is composed of the writedown of fixed assets of the
aforementioned divisions and locations, employee termination benefits, and other
exit costs such as lease buyouts, contract buyouts, legal and professional costs
associated with plant closures, and cost of employees incurred after operations
cease that are associated with the closing of the Chattanooga location, as
summarized in the following table:



                                                                         Page 41
<PAGE>

<TABLE>
<CAPTION>

                                                                         Charge to
                                                             Initial      Related    Remaining
                                                              Charge      Assets       Balance
                                                              ------      ------       -------
<S>                                                           <C>         <C>         <C>
Writedown of property, plant, and equipment                   $1,352      $1,352      $    0
(Big Ball division, Chattanooga and Tazewell facilities)
Severance costs of terminated employees                          276           0         276
(Chattanooga and Tazewell facilities)
Lease buyouts                                                    401           0         401
(Big Ball division)
Employee payroll incurred after plant closure                    495           0         495
(Chattanooga facility)
Legal and professional costs associated with closure             167           0         167
(Chattanooga and Tazewell facilities)
Other, including travel                                           67           0          67
                                                              ------      ------      ------
                                                              $2,758      $1,352      $1,406
                                                              ======      ======      ======
Write off of goodwill (Big Ball and Grand Illusion)           $4,542      $4,542      $    0
                                                              ======      ======      ======
</TABLE>


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.


                                                                         Page 42
<PAGE>

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 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


                                                                         Page 43
<PAGE>

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 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.


The Company is also in a dispute regarding certain finished garment purchases
from a third party vendor. The vendor had delivered a portion of the garments
pursuant to the Company's purchase agreement when a dispute arose between the
Company and the vendor concerning quality problems and failure of the goods to
meet the Company's specifications. At that time, the Company was obligated under
the agreement for the purchase of additional goods for which the Company did not
take delivery. The Company is asserting breach of contract against the vendor
for both failure of quality and untimely delivery. The vendor is asserting
breach of contract against the Company. No lawsuit has been filed and settlement
discussions are ongoing. The Company has reserved $1,000,000 to cover
anticipated costs relating to the resolution of its dispute with this third
party vendor, including legal fees. This $1,000,000 charge is reflected in
Selling, general and administrative expenses for 1998 in the accompanying
consolidated statements of operations.


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.


                                                                         Page 44
<PAGE>

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

     (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.


                                                                         Page 45
<PAGE>

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 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


                                                                         Page 46
<PAGE>

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,


                                                                         Page 47
<PAGE>

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 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


                                                                         Page 48
<PAGE>

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% 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:


                                                                         Page 49
<PAGE>

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


14.  Restatement

Subsequent to the audit of the financial statements, the Company recorded
certain reclassifications to its previously reported December 31, 1998 financial
statements. The most significant of these were the reclassification of a $1.0
million charge related to a pending legal dispute from Restructuring charges to
Cost of Sales and the reclassification of a $1.2 million charge related to a
customer chargeback from Selling, general and administrative expenses to sales
returns and allowances. In addition, certain items previously labeled as
Nonrecurring charges have subsequently been identified as Restructuring charges.
These changes did not affect the Company's reported net loss or net loss per
share for the year ended December 31, 1998.

As a result of these Reclassifications recorded by the Company, the Company has
revised its reported results of operations and statement of cash flows for the
year ended December 31, 1998. This Amendment No. 2 on Form 10-K/A to the
Company's Annual Report on Form 10-K reflects the effects of these
reclassifications.


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

Not Applicable

                                    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

                                                                         Page 50

<PAGE>

                                     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

Exhibit                                       Incorporation by Reference (to SEC
Number  Description of Exhibit                File No. 1-2782) or Filed Herewith
------  ----------------------                ----------------------------------

2.1     Asset Purchase Agreement dated as of    Exhibit 10.1 to current report
        December 17, 1998, by and among the     on Form 8-K dated March 22,
        Company, Tahiti Apparel, Inc. and the   1999.
        stockholders of Tahiti Apparel, Inc.

2.2     Amendment, dated March 16, 1999, to     Exhibit 10.2 to current report
        Asset Purchase Agreement dated as of    on Form 8-K dated March 22,
        December 17, 1998, by and among the     1999.
        Company, Tahiti Apparel, Inc. and the
        stockholders of Tahiti Apparel, Inc.

3.1     Restated Articles of Incorporation of   Exhibit 3.1 to current report
        Signal Apparel Company, Inc., as        on Form 8-K dated September
        amended through September 17, 1998.     17, 1998.

3.2     Copy of Bylaws as amended March 23,     Exhibit 3-2 to Form 10-K for
        1992.                                   the year ended December 31,
                                                1991.


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

10.1    Warrant Purchase Agreement, dated as    Exhibit 10.25 to Form 10-K for
        of March 1, 1991, between the           the year ended December 31,
        Company, The Shirt Shed, Inc. and       1991.
        Licensing Corporation of America.

10.2    Warrant No. 002 issued to Licensing     Exhibit 10.1 to the Form 10-Q
        Corporation of America, covering        for the quarter ended
        193,386 shares of the Company's         September 30, 1994.
        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
        Corporation of America, covering        for the quarter ended
        38,674 shares of the Company's Common   September 30, 1994.
        Stock, dated as of April 30, 1993 and
        expiring April 30, 2003.

                                                                         Page 51

<PAGE>

Exhibit                                       Incorporation by Reference (to SEC
Number  Description of Exhibit                File No. 1-2782) or Filed Herewith
------  ----------------------                ----------------------------------

10.4    Promissory Note dated March 31, 1994    Exhibit 10.2 to Form 10-Q for
        between the Company and FS Signal       the quarter ended March 31,
        Associates I.                           1994.

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

10.6    Warrant Certificate dated April 1,      Exhibit 10.4 to Form 10-Q for
        1994 to purchase 300,000 shares of      the quarter ended March 31,
        Common Stock of the Company, issued     1994.
        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
        between the Company and Sherri          the quarter ended March 31,
        Winkler and MW Holdings, Inc.           1995.

10.8    Real Estate Mortgage, Security          Exhibit 10.4 to current report
        Agreement, Assignment of Lease and      on Form 8-K filed on May 10,
        Rents and Fixture filing dated March    1995.
        31, 1995 between The Shirt Shed and
        Walsh Greenwood.

10.9    First Amendment dated August 10,        Exhibit 10.102 to Form 10-K
        1995, to Real Estate Mortgage,          for the year ended December
        Security Agreement, Assignment of       31, 1995.
        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
        Promissory Note dated January 30,       for the year ended December
        1997, among the Company, FS Signal      31, 1996.
        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         Exhibit 2-1 to Current Report
        October 31, 1997, by and among the      on Form 8-K dated November 5,
        Company, Lee Ellis and Jimmy Metyko.    1997.

10.12   Stock Purchase Agreement, dated         Exhibit 2-2 to Current Report
        October 31, 1997, by and among the      on Form 8-K dated November 5,
        Company and Elizabeth Miller.           1997.

10.13   Convertible Preferred Stock Purchase    Exhibit 10.1 to Current Report
        Agreement dated September 17, 1998,     on Form 8-K dated September
        among the Company and four              17, 1998.
        institutional purchasers of the
        Company's 5% Convertible Preferred
        Stock, Series G1.

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

10.15   Warrants to purchase Common Stock,      Exhibit 10.3 to Current Report
        issued to purchasers of Series G1       on Form 8-K dated September
        Preferred Stock, dated September 17,    17, 1998.
        1998.

                                                                         Page 52

<PAGE>

Exhibit                                       Incorporation by Reference (to SEC
Number  Description of Exhibit                File No. 1-2782) or Filed Herewith
------  ----------------------                ----------------------------------

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

10.17   Securities Purchase Agreement dated     Exhibit 10.1 to Current Report
        March 3, 1999, among the Company and    on Form 8-K dated March 3,
        two institutional purchasers of the     1999.
        Company's 5% Convertible Debentures
        due March 3, 2003.

10.18   Registration Rights Agreement dated     Exhibit 10.2 to Current Report
        March 3, 1999, among the Company and    on Form 8-K dated March 3,
        two institutional purchasers of the     1999.
        Company's 5% Convertible Debentures
        due March 3, 2003.

10.19   Form of Warrants to purchase Common     Exhibit 10.3 to Current Report
        Stock issued to purchasers of 5%        on Form 8-K dated March 3,
        Convertible Debentures, dated March     1999.
        3, 1999.

10.20   Escrow Agreement, dated March 16,       Exhibit 10.3 to Current Report
        1999, by and among the Company,         on Form 8-K dated March 22,
        Tahiti Apparel, Inc. and Wachtel &      1999.
        Masyr, LLP.

10.21   Agreement, dated March 16, 1999,        Exhibit 10.4 to Current Report
        between Tahiti Apparel, Inc. and Ming   on Form 8-K dated March 22,
        Yiu Chan, together with related Form    1999.
        of Promissory Note (assumed by the
        Company at closing).

10.22   Stock Resale Agreement, dated March     Exhibit 10.5 to Current Report
        16, 1999, between the Company, Tahiti   on Form 8-K dated March 22,
        Apparel, Inc., Zvi Ben-Haim, Michael    1999.
        Harary and Ming Yiu Chan.

10.23   Registration Rights Agreement, dated    Exhibit 10.6 to Current Report
        March 16, 1999, between the Company,    on Form 8-K dated March 22,
        Tahiti Apparel, Inc., Zvi Ben-Haim,     1999.
        Michael Harary and Ming Yiu Chan.

10.24   Securities Transfer Agreement, dated    Exhibit 10.9 to Current Report
        March 16, 1999, between the Company     on Form 8-K dated March 22,
        and Zvi Ben-Haim.                       1999.

10.25   Securities Transfer Agreement, dated    Exhibit 10.10 to Current
        March 16, 1999, between the Company     Report on Form 8-K dated March
        and Michael Harary.                     22, 1999.

10.26   Form of Warrants to be issued to each   Exhibit 10.11 to Current
        of Zvi Ben-Haim and Michael Harary      Report on Form 8-K dated March
        under Securities Transfer Agreements    22, 1999.
        dated March 16, 1999.

10.27   Revolving Credit, Term Loan and         Exhibit 10.12 to Current
        Security Agreement, dated March 12,     Report on Form 8-K dated March
        1999, between the Company and BNY       22, 1999.
        Financial Corporation (individually
        and as Agent).

10.28   Second Amended and Restated Factoring   Exhibit 10.13 to Current
        Agreement, dated March 12, 1999,        Report on Form 8-K dated March
        between the Company and BNY Financial   22, 1999.
        Corporation.

                                                                         Page 53

<PAGE>

Exhibit                                       Incorporation by Reference (to SEC
Number  Description of Exhibit                File No. 1-2782) or Filed Herewith
------  ----------------------                ----------------------------------

10.29   Subscription and Stock Purchase         Exhibit 10.14 to Current
        Agreement, dated March 12, 1999,        Report on Form 8-K dated March
        between the Company and BNY Financial   22, 1999.
        Corporation.

10.30   Form of Warrants to purchase the        Exhibit 10.15 to Current
        Company's Common Stock issued to BNY    Report on Form 8-K dated March
        Financial Corporation, dated March      22, 1999.
        12, 1999.

10.31   Employment Agreement with Leon          Exhibit 10.5 to Form 10-Q for
        Ruchlamer dated as of March 27, 1995.   the quarter ended March 31,
                                                1995.

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

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

10.34   Employment Agreement with David E.      Employment Agreement with
        Houseman, dated October 1, 1997.        David E. Houseman, dated

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
        October 2, 1997.                        the year ended December 31,

10.37   Employment Agreement, dated March 16,   Exhibit 10.7 to Current Report
        1999, between the Company and Zvi       on Form 8-K dated March 22,
        Ben-Haim.                               1999.

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

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).


                                                                         Page 54
<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 55
<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 56
<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: November 30, 1999                    /s/ Robert J. Powell
                                           -----------------------
                                           Robert J. Powell
                                           Vice President and Secretary



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