UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-K

(Mark One)

[X]  Annual report pursuant to section 13 or 15(d) of the Securities Exchange
     Act of 1934

For the fiscal year ended June 30, 2005 or

[_]  Transition report pursuant to Section 13 or 15(d) of Securities Exchange
     Act of 1934

For the transition period from ___________ to _________

Commission File Number 1-5893

                                MOVIE STAR, INC.
             (Exact name of Registrant as specified in its Charter)

                 New York                                      13-5651322
     (State or other jurisdiction of                        (I.R.S. Employer
      incorporation or organization)                       Identification No.)

      1115 Broadway, New York, NY                                 10010
         (Address of Principal                                  (Zip Code)
           Executive Offices)

Registrant's telephone number, including area code (212) 684-3400

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

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

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

                                      None
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                Yes [X]   No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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.


                                        1



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)

                                Yes [_]   No [X]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act)

                                Yes [_]   No [X]

As of December 31, 2004 (the last business day of the registrant's most recently
completed second fiscal quarter), the aggregate market value of the registrant's
common stock (based on its reported last sale price on the American Stock
Exchange of $1.33), held by non-affiliates of the registrant, was $15,372,036.

As of September 15, 2005, there were 15,661,751 common shares outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

The information required in Part III by Items 10, 11, 12, 13 and 14 is
incorporated by reference to the registrant's proxy statement in connection with
the 2005 Annual Meeting of Shareholders, which will be filed by the registrant
within 120 days after the close of its fiscal year.

See Item 15 with respect to exhibits to this Form 10-K which are incorporated
herein by reference to documents previously filed or to be filed by the
Registrant with the Commission.


                                        2



                                MOVIE STAR, INC.
                          2005 FORM 10-K ANNUAL REPORT
                                TABLE OF CONTENTS



PART I                                                                                    PAGE NO.
                                                                                          --------

Item 1     Business...........................................................................4

Item 1A    Risk Factors.......................................................................7

Item 2     Properties........................................................................10

Item 3     Legal Proceedings.................................................................10

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

PART II

Item 5     Market for Company's Common Equity,
           Related Stockholder Matters and Issuer Purchases
           of Equity Securities..............................................................11

Item 6     Selected Financial Data...........................................................12

Item 7     Management's Discussion and Analysis of Financial Condition and
           Results of Operations.............................................................14

Item 7A    Quantitative and Qualitative Disclosures
           About Market Risk.................................................................20

Item 8     Financial Statements and Supplementary Data.......................................22

Item 9     Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure..............................................................45

Item 9A    Controls and Procedures...........................................................45

PART III

Item 10    Directors and Executive Officers of the Registrant................................46

Item 11    Executive Compensation............................................................46

Item 12    Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters...................................................46

Item 13    Certain Relationships and Related Transactions....................................46

Item 14    Principal Accounting Fees and Services............................................46

PART IV

Item 15    Exhibits and Financial Statement Schedules....................................... 47



                                        3



                                     PART I

ITEM 1. BUSINESS

Movie Star, Inc. ("Company"), a New York corporation organized in 1935, designs,
manufactures, markets and sells an extensive line of ladies' intimate apparel
which includes sleepwear, robes, leisurewear, loungewear, panties and daywear.

The Company's products consist of ladies' pajamas, nightgowns, baby dolls,
nightshirts, dusters, shifts, caftans, sundresses, rompers, short sets,
beachwear, peignoir ensembles, robes, leisurewear, panties, and daywear
consisting of bodysuits, soft bras, slips, half-slips, teddies, camisoles and
cami top sets. These products are manufactured in various fabrics, designs,
colors and styles depending upon seasonal requirements, changes in fashion and
customer demand. The Company maintains an in-house design staff, which affords
it the flexibility to work with merchandise buyers on fashion design and price
points.

On August 3, 2004, the Company completed its acquisition of certain assets of
Sidney Bernstein & Son Lingerie, Inc. ("SB&S"), a company engaged in the design,
marketing and sale of women's lingerie and related apparel and accessories.

The acquired assets were purchased for an aggregate price of $3,379,000,
excluding transaction related fees, and included, among other assets, $2,873,000
of inventory and $500,000 of intangible assets. The Company also assumed
$3,012,000 of SB&S' open purchase orders and received $7,408,000 of open
customer orders. Pursuant to the Asset Purchase Agreement, the Company also
agreed to pay up to an additional $1,000,000 in the aggregate based upon certain
gross profit levels generated by the Company's newly-established Sidney
Bernstein & Son Division during the next three fiscal years. In connection with
the asset purchase, Daniel Bernstein and Irwin Bernstein, the two owners of SB&S
joined the Company as President and Vice President, respectively, of the new
division. During fiscal 2005, both Daniel and Irwin Bernstein voluntarily left
the Company and, as a result, the Company is no longer obligated to pay any
portion of the additional $1,000,000.

The Company's products are sold to discount, specialty, national and regional
chain, mass merchandise and department stores and direct mail catalog marketers
throughout the United States. The prices to consumers for the Company's products
range from approximately $5.00 for certain of its products, such as nightshirts,
to approximately $85.00 for certain other products, such as peignoir sets. The
Company's products are sold by in-house sales personnel and outside
manufacturer's representatives. Approximately 40% of the Company's sales are
made to mass merchandisers, 12% to national chains, and 13% to department
stores; the balance of the Company's sales are unevenly distributed among
discount, specialty, regional chain stores and direct mail catalog marketers.
The Company's gross profit on its sales for each of the fiscal years ended June
30, 2005, 2004 and 2003 was approximately 24.3%, 30.0% and 31.7%, respectively.

The Company has historically limited the promotion of its products to
cooperative advertising in conjunction with its retail customers directed to the
ultimate retail consumer of its products.

The Company utilizes a large variety of fabrics made from natural and man-made
fibers including, among others, polyester, cotton, broadcloth, stretch terry,
brushed terry, flannel, brushed flannel, nylon, spun polyester, velour, satins,
tricot, jersey, fleece, jacquards, lace, stretch lace, charmeuse, chambray,
micro fibers, spandex and various knit fabrics.

These materials are available from a variety of both domestic and foreign
sources. The sources are highly competitive in a world market. The Company
expects these competitive conditions to continue in the foreseeable future.
Generally, the Company has long-standing relationships with its domestic and
foreign suppliers and purchases its raw materials in anticipation of orders or
as a result of need based on orders received. Purchase of raw materials in high
volume provides the Company with the opportunity to buy at relatively low
prices. In turn, the Company is able to take advantage of these lower prices in
the pricing of its finished goods.

The Company has historically produced its products either at one of its domestic
facilities or by purchasing them from a finished package manufacturer or by
contracting for their assembly from a cut, make and trim manufacturer ("CMT").
Due to the Company's strategic decision to take advantage of lower labor costs
by purchasing more of its finished goods offshore, the Company eliminated its
domestic production in 2002 and increased its finished package purchases. The
purchase of finished packages increased from 71% of total production in fiscal
2003 to 76% in fiscal


                                        4



2004 and 87% in fiscal 2005. CMT production was 29% of total production in
fiscal 2003, 24% in fiscal 2004 and 13% in fiscal 2005.

The following table sets forth a list of the countries from which the Company
has purchased finished goods (referred to in the table as "FG") and in which the
Company has contracted for the assembly of its products, including the
approximate percentage of the Company's total cost of production allocable to
each country:

                                     2005                        2004
                         --------------------------   --------------------------
                         CMT   FG Purchased   Total   CMT   FG Purchased   Total
                         ---   ------------   -----   ---   ------------   -----
Bangladesh                --%       19%         19%    --%        7%          7%
Cambodia                  --         8           8     --        10          10
China                     --         7           7     --         7           7
Dominican Republic        12        --          12     18        --          18
India                     --        22          22     --         7           7
Mexico                    --         4           4      4         4           8
Pakistan                  --         3           3     --         7           7
Philippines               --        21          21      2        31          33
Other                      1         3           4     --         3           3
                         ---       ---         ---    ---       ---         ---
Total Production          13%       87%        100%    24%       76%        100%
                         ===       ===         ===    ===       ===         ===

In the second half of fiscal 2005, the Company exited the Dominican Republic as
a source of production and moved the production of the product being produced
there to El Salvador. Currently, the Company has two independent representatives
in Bangladesh, one employee in El Salvador (formerly this employee was located
in the Dominican Republic) and eight employees in the Philippines supervising
the production of finished products purchased by the Company or assembled for
the Company by CMT manufacturers in those countries. These employees and
representatives assist in maintaining quality and on-time delivery. Management
personnel travel to El Salvador and Asia throughout the year to monitor the
performance of the Company's offshore manufacturers and contractors.

In order to facilitate the coordination of its production in the Philippines,
which was 32% of total production in 2003, 33% in 2004 and 21% in 2005, the
Company opened a representative office in the Philippines in 2002. The office is
being utilized primarily for administrative and manufacturing support functions,
as well as sample making and pattern making.

The Company's transactions with its foreign manufacturers and suppliers are
subject to the risks of doing business abroad. The Company's import and offshore
operations are subject to constraints imposed by agreements between the United
States and a number of foreign countries in which the Company does business.
These agreements impose quotas on the amount and type of goods that can be
imported into the United States from these countries. Such agreements also allow
the United States to impose, at any time, restraints on the importation of
categories of merchandise that, under the terms of the agreements, are not
subject to specified limits. The Company's imported products are also subject to
United States customs duties and, in the ordinary course of business, the
Company is from time to time subject to claims by the United States Customs
Service for duties and other charges. The United States and other countries in
which the Company's products are manufactured may, from time to time, impose new
quotas, duties, tariffs or other restrictions, or adversely adjust presently
prevailing quotas, duty or tariff levels, which could adversely affect the
Company's operations and its ability to continue to import products at current
or increased levels. The Company cannot predict the likelihood or frequency of
any such events occurring.

The Company maintains sufficient inventories of raw materials and finished goods
to meet its production requirements and the delivery demands of its customers.
As a result, the Company relies on its short-term line of credit to supplement
internally generated funds to fulfill its working capital needs.

The Company has several registered trademarks, of which "Movie Star", "Movie
Star Loungewear", "Cinema Etoile", "Seductive Wear", "Meant To Be", "Cine Jour",
"Private Property", "Heather Nicole" and "Night Magic" are material to the
marketing by the Company of its products.


                                        5



The Company entered into a licensing agreement with Maidenform Inc. in February
2004. Under this agreement, the Company is designing, producing and marketing a
line of ladies' sleepwear and robes under the Maidenform(R) name. The Company's
Maidenform Collection is available to department stores, chains and high-end
specialty stores nationally. The Company is also actively marketing a line of
sleepwear, robes and daywear under the Maidenform trademarks "Sweet
Nothings(R)", "Self Expressions(R)" and "Rendezvous(R)."

The Company manufactures a wide variety of intimate apparel in many different
styles and sizes and for use in all seasons and climates in the United States.
Because of its product mix, it is subject to certain seasonal variations in
sales. Historically, more than 50% of the Company's sales have been made in the
first six months of its fiscal year, except in fiscal 2003 when the Company's
sales were evenly distributed between the first and second half of the year.

All sales are outright sales. Terms are generally net 10 days E.O.M. (end of
month) or net 30 days from the date the goods are shipped which, depending on
date of shipment, can be due from as short a period as 21 days or as long as 50
days. It has become industry practice to extend payment terms up to an
additional thirty 30 days for certain customers and the Company occasionally
follows this practice. Although sales are made without the right of return, in
certain instances the Company may accept returns or agree to allowances.

Wal-Mart accounted for 20% of sales for fiscal 2005, 38% of sales for fiscal
2004 and 42% of sales for fiscal 2003. Target accounted for 15% of sales for
fiscal 2005, 3% of sales for fiscal 2004 and 4% of sales for fiscal 2003. Sears,
Roebuck and Company accounted for 6% of sales for fiscal 2005 and 10% of sales
for fiscal 2004 and 2003.

Purchasing decisions by the Company's customers with respect to each group of
the Company's products and, in some instances, products within a group,
generally are made by different buyers and purchasing departments. The Company
believes that the loss of orders from any one buyer or purchasing department
would not necessarily result in the loss of sales to other buyers or purchasing
departments of those customers.

The backlog of orders was approximately $28,363,000 as of June 30, 2005,
$27,145,000 as of June 30, 2004 and $27,420,000 as of June 30, 2003. When the
Company completed its acquisition of certain assets of SB&S in August 2004, it
also acquired $7,408,000 of open customer orders. These SB&S orders are not
included in the June 30, 2004 backlog, however, the Company had approximately
$6,900,000 of low margin orders that were included in the June 30, 2004 backlog.
The Company believes that the current backlog is firm and will be filled by the
end of the current fiscal year. Orders are booked upon receipt.

The intimate apparel business is fragmented and highly competitive. The industry
is characterized by a large number of small companies manufacturing and selling
unbranded merchandise, and by several large companies which have developed
widespread consumer recognition of the brand names associated with merchandise
manufactured and sold by these companies. In addition, certain of the larger
retailers to whom the Company has historically sold its products have sought to
expand the development and marketing of their own brands and to obtain intimate
apparel products directly from similar sources as the Company.

The intimate apparel industry is further characterized by competition on the
basis of price, quality, efficient service and prompt delivery. Because of this
competitive pressure, the Company no longer relies on domestic manufacturing and
relies entirely on offshore manufacturers and contractors. Accordingly, changes
in import quotas, currency valuations and political conditions in the countries
from which the Company imports products could adversely affect the Company's
business.

No material research activities relating to the development of new products or
services or the improvement of existing products or services were undertaken
during the last fiscal year, except for the normal continuing development of new
styles and marketing methods.

There are no costs relating to complying with environmental regulations in the
fiscal year just completed or over future periods of which the Company is aware.

As of August 31, 2005, the Company had 280 full-time and 9 part-time employees.
Approximately 11 are executive


                                        6



and senior management, 71 are in design, design support and sample making, 17
are in sales and sales support, 46 are administrative personnel and office
support, 89 are in production, manufacturing and offshore support and 55 are in
distribution and warehousing.

The Company has never experienced an interruption of its operations because of a
work stoppage. Even though the Company is subject to certain seasonal variations
in sales, significant seasonal layoffs are rare.

Employees have an interest in the Company's common stock through the Company's
ESOP. The Company believes its relationship with its employees to be good. The
Company is not a party to any collective bargaining agreement with any union.

ITEM 1A. RISK FACTORS

WE RELY ON A FEW KEY CUSTOMERS, AND THE LOSS OF ANY ONE KEY CUSTOMER WOULD
SUBSTANTIALLY REDUCE OUR REVENUES. THERE HAS ALSO BEEN A GROWING TREND TOWARD
RETAIL CONSOLIDATION AND WE ARE INCREASINGLY DEPENDENT UPON FEWER CUSTOMERS.

Over 80% of our sales are generated from less than 30 of our customers and a
significant amount of our revenues are generated from a few major customers. A
significant decrease in business from or loss of any of our major customers
could harm our business and financial condition by causing a significant decline
in revenues attributable to such customers.

Wal-Mart accounted for 20 % of sales for fiscal 2005, 38% of sales for fiscal
2004 and 42% of sales for fiscal 2003. Target accounted for 15 % of sales for
fiscal 2005, 3 % of sales for fiscal 2004 and 4 % of sales for fiscal 2003.
Sears, Roebuck and Company accounted for 6% of sales for fiscal 2005 and 10% of
sales for fiscal 2004 and 2003.

We do not have long-term contracts with any of our customers and therefore our
business is subject to unpredictable increases and decreases in sales depending
upon the size and number of orders that we receive each time we present our
products to our customers. If we experience a significant decrease in sales to
any of our major customers, and are unable to replace such sales volume with
orders from other major customers, there would be a material adverse effect on
our operating results and financial condition.

OUR BUSINESS RELIES ON CONSUMER SPENDING PATTERNS.

Our business is susceptible to a number of factors that influence the levels of
consumer spending, including economic conditions such as the levels of
disposable consumer income, consumer debt, interest rates and consumer
confidence. Reduced consumer spending on apparel and accessories could lead to a
decline in revenues and there could be a material adverse effect on our
operating results and financial condition.

WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY. IF WE ARE UNABLE TO SUCCESSFULLY
COMPETE, IT COULD RESULT IN A LOSS OF REVENUES.

The intimate apparel business is highly competitive. The industry is
characterized by a large number of small companies manufacturing and selling
unbranded merchandise, and by several large companies which have developed
widespread consumer recognition of the brand names associated with merchandise
manufactured and sold by these companies. In addition, certain of the larger
retailers to whom we have historically sold our products have sought to expand
the development and marketing of their own brands and to obtain intimate apparel
products directly from similar sources as we do.

The intimate apparel industry is further characterized by competition on the
basis of price, quality, efficient service and prompt delivery. If we do not
continue to provide high quality and reliable services on a timely basis at
competitive prices, we may not be able to continue to compete in our industry.
If we are unable to compete successfully, we could lose one or more of our
significant customers which, if not replaced, could negatively impact our sales
and have an adverse effect on our operating results and financial condition.


                                        7



IF OUR PRODUCT DESIGNS ARE NOT ACCEPTED BY OUR CUSTOMERS OR BY THE RETAIL
CONSUMERS, WE COULD EXPERIENCE A REDUCTION IN SALES OR OUR CUSTOMERS COULD
EXPERIENCE A REDUCTION IN SALES, WHICH, IN EITHER EVENT, COULD MATERIALLY
ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.

Our operating results could be negatively affected as a result of decreased
revenue if our product designs are not accepted by our customers. Also, if our
customers purchase our product and do not have success in selling our product at
retail, they may request a price adjustment to assist them in marking down the
selling price to make the product more attractive to the retail consumer. They,
in turn, could then request that we provide them with sales allowances which
would reduce our sales revenues.

WE OPERATE ON VERY TIGHT DELIVERY SCHEDULES AND IF WE RECEIVE OUR CUSTOMER
ORDERS LATE, OR IF THERE ARE DELAYS IN THE PRODUCTION PROCESS AND WE ARE UNABLE
TO MEET THE EXPECTED DELIVERY DATES IT COULD NEGATIVELY AFFECT OUR
PROFITABILITY.

Our customers have been placing their orders in such a manner that the amount of
time that we have to source and produce the orders is shorter than it has ever
been. If our customers delay the ordering process any more or if there are
difficulties during the production process it could create delays in the
delivery of the goods. If there is a delay in the delivery of the goods our
customers may cancel their orders or request a reduced price for the delivery of
their orders. If their orders are canceled, it would leave us in an
over-inventoried position and require the sale of inventory at low or negative
profits. If customers request a reduced price, it would reduce our
profitability. We may also incur extra costs to meet the delivery dates of our
customers.

THE UNAVAILABILITY OR DISRUPTION OF OUR SUPPLIERS COULD LEAD TO THE REDUCTION IN
REVENUE.

If we are unable to secure satisfactory manufacturers to produce our orders, it
could lead to the loss of revenue. Also, if our manufacturers are late or unable
to deliver the goods to us due to unexpected circumstances such as, weather
conditions, disruption of the transportation systems or shipping lines used by
our suppliers or uncontrollable factors such as terrorism and war, we may
experience a reduction in revenue or we may incur additional costs to deliver
the orders to our customers, such as shipping goods via air.

THE INABILITY TO UTILIZE OUR DISTRIBUTION CENTER COULD LEAD TO A REDUCTION IN
REVENUE.

If we are unable to utilize our distribution center due to unexpected
circumstances such as weather conditions, disruption of the transportation
systems or uncontrollable factors such as terrorism and war, we may be late or
unable to deliver goods to our customers, or we may be forced to incur
additional costs to deliver the orders to our customers through alternate
channels, which, in either event, would result in a reduction in revenue.

WE DEPEND ON OUR KEY PERSONNEL.

Our success depends to a large extent upon the continued services of key
employees. The loss of the services of any key employee could have a material
negative impact on our ability to manage our business successfully. Our success
depends upon our ability to retain and attract qualified management,
administrative and sales personnel to support our business. Our inability to do
so may have a significant negative impact on our ability to manage and grow our
business.

TRANSACTIONS WITH OUR FOREIGN MANUFACTURERS AND SUPPLIERS ARE SUBJECT TO RISKS
OF DOING BUSINESS ABROAD.

Our import and offshore operations are subject to constraints imposed by
agreements between the United States and a number of foreign countries in which
we conduct business. These agreements impose quotas on the amount and type of
goods that can be imported into the United States from these countries. Such
agreements also allow the United States to impose, at any time, restraints on
the importation of categories of merchandise that, under the terms of the
agreements, are not subject to specified limits. Our imported products are also
subject to United States customs duties and, in the ordinary course of business,
we are from time to time subject to claims by the United States Customs Service
for duties and other charges. The United States and other countries in which our
products are manufactured may, from time to time, impose new quotas, duties,
tariffs or other restrictions, or adversely adjust presently prevailing quotas,
duty or tariff levels, which could adversely affect our operations and our
ability to continue to import products at current or increased levels.


                                        8



THE AMERICAN STOCK EXCHANGE (THE "EXCHANGE") MAY DELIST OUR COMMON STOCK FROM
QUOTATION ON ITS EXCHANGE.

Our common stock is currently listed on the American Stock Exchange. In order to
continue the listing of our common stock, we must maintain certain financial,
distribution and stock price levels. Generally, we must maintain a minimum
amount in shareholders' equity (usually between $2 million and $4 million) and a
minimum number of public shareholders (usually 300 shareholders or 200,000
shares held by our non-affiliates). Additionally, our common stock cannot have
what is deemed to be a "low selling price" as determined by the Exchange.

On September 15, 2005 the sale price of our common stock was $0.70. If the
Exchange were to determine that this price is a "low selling price," it may
require us to effect a reverse split or suspend or remove our common stock from
listing on the Exchange. In determining whether a reverse split or suspension or
removal is appropriate, the Exchange will consider all pertinent factors
including market conditions in general, the number of shares outstanding, plans
which may have been formulated by management, applicable regulations of the
state or country of incorporation or of any governmental agency having
jurisdiction over the company and the relationship to other Exchange policies
regarding continued listing.

If the Exchange delists our common stock from trading on its exchange, investors
could face significant material adverse consequences including:

     o    a limited availability of market quotations for our common stock;

     o    a more limited amount of news and analyst coverage for our company;
          and

     o    a decreased ability to issue additional securities or obtain
          additional financing in the future


                                        9



ITEM 2. PROPERTIES

     The following table sets forth all of the facilities owned or leased by the
Company as of June 30, 2005.



                                                         OWNED OR   BLDG. AREA   EXPIRATION
LOCATION             USE                                  LEASED     (SQ. FT.)    OF LEASE
------------------   ---------------------------------   --------   ----------   ----------

1115 Broadway,       Corporate Offices                   Leased       11,000        12/10
New York, NY         Divisional Sales Office and
                     Showroom                                          8,000
                     Production Staff and Design                      12,000
                                                                     -------
                                                                      31,000
                                                                     =======

180 Madison Ave.,    Sales Office and Showroom           Leased        3,000        3/06
New York, NY

Petersburg, PA (1)   Warehousing for finished goods      Owned (1)   137,000        N/A
                     Distribution Center                               3,000
                                                                     -------
                                                                     140,000
                                                                     =======

Mississippi          Manufacturing Support               Leased       24,000        11/20
                     Warehousing and Distribution                    172,000
                     Office                                           16,000
                                                                     -------
                                                                     212,000
                                                                     =======

                     Warehousing                         Owned        27,000        N/A
                     Office                                            2,000
                                                                     -------
                                                                      29,000
                                                                     =======

Philippines          Administrative and Manufacturing    Leased        3,800        4/08
                     Support Sample and Pattern Making


----------
     (1) In June 2005, management decided to close this facility. This facility
was temporarily reopened in September 2005 to assist with the backlog of orders
caused by hurricane Katrina.

ITEM 3. LEGAL PROCEEDINGS

There are no legal proceedings pending which are material.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

None.


                                       10



                                     PART II

     ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
                    AND ISSUER PUCHASES OF EQUITY SECURITIES

The Company's common stock is traded on the American Stock Exchange under the
symbol "MSI." The following table sets forth for the indicated periods the
reported high and low prices per share.

                                                HIGH    LOW
                                               -----   -----

YEAR ENDED JUNE 30, 2005
First Quarter...............................   $1.46   $1.07
Second Quarter..............................    1.55    1.08
Third Quarter...............................    1.61     .85
Fourth Quarter..............................    1.30     .80

YEAR ENDED JUNE 30, 2004
First Quarter ..............................   $2.49   $1.58
Second Quarter .............................    2.75    1.33
Third Quarter...............................    1.82    1.20
Fourth Quarter..............................    1.59    1.26

HOLDERS

As of September 15, 2005, there were 833 shareholders of record of the common
stock. The Company believes that there are a significant number of beneficial
owners of its common stock whose shares are held in "street name".

DIVIDEND POLICY

The Company presently intends to retain all earnings for the Company's growth.
Depending upon the Company's capital resources and needs, the Company may pay
cash dividends in the future. The payment of dividends, if any, in the future is
within the discretion of the Board of Directors and will depend upon the
Company's earnings, its capital requirements and financial condition, and other
relevant factors.

EQUITY COMPENSATION PLAN INFORMATION

The following sets forth certain information as of June 30, 2005 concerning the
Company's equity compensation plans:



                                       NUMBER OF SHARES TO BE     WEIGHTED-AVERAGE     NUMBER OF SHARES REMAINING
                                      ISSUED UPON EXERCISE OF     EXERCISE PRICE OF       AVAILABLE FOR FUTURE
                                        OUTSTANDING OPTIONS,    OUTSTANDING OPTIONS,     ISSUANCE UNDER EQUITY
            PLAN CATEGORY               WARRANTS AND RIGHTS      WARRANTS AND RIGHTS       COMPENSATION PLANS
-----------------------------------   -----------------------   --------------------   --------------------------

Plans approved by shareholders
   1988 Non-Qualified Stock Option
     Plan                                      200,000                  $1.14                   1,466,666
   1994 Incentive Stock Option Plan            620,000                    .65                          --
   2000 Performance Equity Plan (1)            338,000                    .91                     391,929
                                             ---------                   ----                   ---------
                                             1,158,000                    .81                   1,858,595
Plans not approved by shareholders
   Warrant
                                                50,000                    .44                          --
                                             ---------                  -----                   ---------
Total                                        1,208,000                  $ .79                   1,858,595
                                             =========                  =====                   =========


(1) Includes 20,071 shares of common stock issued and 48,000 shares of common
stock issuable upon exercise of options under the 2000 Performance Equity Plan
granted to non-employee directors pursuant to the Company's Non-Employee
Director Compensation Plan, which provides for each non-employee director to
elect to receive their annual stipend and meeting fees in


                                       11



cash and/or shares of the Company's common stock under the Company's 2000
Performance Equity Plan in such proportion as is determined by each non-employee
director. If a non-employee director elects to be paid in stock, either in full
or in part, the number of shares of common stock to be issued is determined by
dividing the dollar amount of the stipend and meeting fees earned during the
quarter (or a percentage thereof, if the non-employee director elects to receive
stock payment in part) by the last sale price of the Company's common stock on
the last trading day of each calendar quarter in which the fees were earned.

MOVIE STAR, INC.
ITEM 6. SELECTED FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------



                                                                            FISCAL YEARS ENDED JUNE 30,
                                                                -----------------------------------------------
STATEMENT OF OPERATIONS DATA:                                     2005      2004      2003      2002      2001
                                                                -------   -------   -------   -------   -------

Net sales                                                       $58,533   $53,691   $64,916   $54,359   $62,462
                                                                -------   -------   -------   -------   -------
Cost of sales                                                    44,304    37,581    44,345    39,157    44,072
Selling, general and administrative expenses                     19,024    15,824    14,623    13,689    14,869
Loss on closing of distribution facility                             --        --        --        --     1,188
                                                                -------   -------   -------   -------   -------
                                                                 63,328    53,405    58,968    52,846    60,129
                                                                -------   -------   -------   -------   -------
Operating (loss) income from continuing operations               (4,795)      286     5,948     1,513     2,333
Gain on purchases of subordinated debentures and senior notes        --        --        --        --      (482)
Interest income                                                      (1)      (12)       (4)       (3)       (6)
Interest expense                                                    282        76       351       695     1,476
                                                                -------   -------   -------   -------   -------
(Loss) income from continuing operations before income tax
   (benefit) provision                                           (5,076)      222     5,601       821     1,345
Income tax (benefit) provision                                   (1,954)       94     2,170       360      (695)
                                                                -------   -------   -------   -------   -------
(Loss) income from continuing operations                         (3,122)      128     3,431       461     2,040
Income (loss) from discontinued operations                           --        --        --        86      (326)
                                                                -------   -------   -------   -------   -------
Net (loss) income                                               $(3,122)  $   128   $ 3,431   $   547   $ 1,714
                                                                =======   =======   =======   =======   =======
BASIC NET (LOSS) INCOME PER SHARE:
From continuing operations                                      $  (.20)  $   .01   $   .23   $   .03   $   .14
From discontinued operations                                         --        --        --       .01      (.02)
                                                                -------   -------   -------   -------   -------
Net (loss) income                                               $  (.20)  $   .01   $   .23   $   .04   $   .12
                                                                =======   =======   =======   =======   =======
DILUTED NET (LOSS) INCOME PER SHARE:
From continuing operations                                      $  (.20)  $   .01   $   .22   $   .03   $   .13
From discontinued operations                                         --        --        --       .01      (.02)
                                                                -------   -------   -------   -------   -------
Net (loss) income                                               $  (.20)  $   .01   $   .22   $   .04   $   .11
                                                                =======   =======   =======   =======   =======
Basic weighted average number of shares outstanding              15,625    15,574    15,133    15,085    14,899
                                                                =======   =======   =======   =======   =======
Diluted weighted average number of shares outstanding            15,625    16,199    15,407    15,112    15,301
                                                                =======   =======   =======   =======   =======



                                       12





                                                                                  AT JUNE 30,
                                                                -----------------------------------------------
BALANCE SHEET DATA:                                               2005      2004      2003      2002      2001
                                                                -------   -------   -------   -------   -------

WORKING CAPITAL                                                 $10,673   $16,543   $15,979   $ 9,529   $ 8,016
                                                                =======   =======   =======   =======   =======
TOTAL ASSETS                                                    $24,907   $20,779   $24,089   $22,406   $27,799
                                                                =======   =======   =======   =======   =======
SHORT-TERM DEBT - Including current maturities
   of long-term debt and capital lease obligations              $ 4,794   $    --   $ 2,304   $ 4,169   $10,327
                                                                =======   =======   =======   =======   =======
LONG-TERM DEBT - Including deferred lease
   and other long-term liabilities                              $   390   $   374   $   325   $   254   $   183
                                                                =======   =======   =======   =======   =======
SHAREHOLDERS' EQUITY                                            $14,677   $17,747   $17,264   $13,624   $13,021
                                                                =======   =======   =======   =======   =======



                                       13



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

FORWARD LOOKING STATEMENTS

When used in this Form 10-K and in future filings by the Company with the
Commission, the words or phrases "will likely result," "management expects" or
"the Company expects," "will continue," "is anticipated," "estimated" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned not to place undue reliance on any such forward-looking statements,
each of which speak only as of the date made. The Company has no obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.

Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. These risks are included in "Item 1: Business," "Item
1A: Risk Factors" and "Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Form 10-K. In assessing
forward-looking statements contained herein, readers are urged to carefully read
those statements.

Among the factors that could cause actual results to differ materially are:
business conditions and growth in the Company's industry; general economic
conditions; the addition or loss of significant customers; the loss of key
personnel; product development; competition; foreign government regulations;
fluctuations in foreign currency exchange rates; rising costs of raw materials
and the unavailability of sources of supply; the timing of orders placed by the
Company's customers; and the risk factors listed from time to time in the
Company's SEC reports. We urge you to carefully read the following discussion in
conjunction with these factors.

OVERVIEW

The intimate apparel business is a highly competitive industry. The industry is
characterized by a large number of small companies selling unbranded
merchandise, and by several large companies that have developed widespread
consumer recognition of the brand names associated with merchandise sold by
these companies. In addition, retailers to whom we sell our products have sought
to expand the development and marketing of their own brands and to obtain
intimate apparel products directly from the same sources from which we obtain
our products.

The intimate apparel business for the department stores, specialty stores and
regional chains is broken down into five selling seasons a year. We create a new
line of products that represent our own brand name "Cinema Etoile" for each
selling season. Our brand name does not have widespread consumer recognition,
although it is well known by our customers. We sell our brand name products
primarily during these selling seasons. We also develop specific products for
some of our larger accounts, mass merchandisers and national chains, and make
between five and eight presentations throughout the year to these accounts. We
do not have long-term contracts with any of our customers and therefore our
business is subject to unpredictable increases and decreases in sales depending
upon the size and number of orders that we receive each time we present our
products to our customers.

On August 3, 2004, we completed the acquisition of certain assets of Sidney
Bernstein & Son Lingerie, Inc. ("SB&S"), a company engaged in the design,
marketing and sale of women's lingerie and related apparel accessories. This
transaction allows us to expand our product offerings, as well as diversify and
broaden our sales distribution.

During fiscal 2005 and 2004, we experienced a significant reduction in sales
that was primarily the result of receiving fewer orders from some of our larger
customers. However, we do not believe that this is a permanent trend and these
larger customers continue to welcome us to present our products to them. Absent
the addition of the SB&S division, the dollar volume of orders shipped in fiscal
2005 would have been lower than in fiscal 2004. The orders shipped in fiscal
2005 were from different customers than in fiscal 2004 and some of the shipments
were at a considerably lower gross margin.

We expect sales for the first half of fiscal 2006 to be lower than the first
half of fiscal 2005. However, the orders for the first half of fiscal 2006 were
taken with an overall higher gross margin. Additionally, in our effort to return
to


                                       14



profitability, during the fourth quarter of fiscal 2005, we made personnel
changes, including reductions in staff, which were necessary to improve our
business, terminated a consulting agreement with our prior Chairman and closed
our Petersburg, Pennsylvania distribution center. As a result of hurricane
Katrina, we temporarily reopened the Petersburg facility to assist with shipping
goods to our customers.

Hurricane Katrina is having an impact upon our business operations in the
quarter ending September 30, 2005. Our distribution center in Poplarville,
Mississippi was forced to close from August 29th to September 6th as a result of
the hurricane. Operations at the Poplarville distribution center resumed once
power was restored to the facility on September 6th. Because some of our
employees have been unable to return to work, at September 15, 2005, the
facility was operating at approximately 65% of capacity. We have been diverting
some of our incoming inventory to a public warehouse operation in Los Angeles,
California and to our Petersburg, Pennsylvania distribution center, which we
closed during the fourth quarter of fiscal 2005 but determined to reopen on a
temporary basis to assist with shipping our goods to customers. However,
notwithstanding our best efforts, some orders may be delayed and shipped in the
second quarter of fiscal 2006 instead of the first quarter. We have been working
closely with our customers and they have been understanding of the situation. We
believe that they will continue to work with us but there can be no assurances
of their continued cooperation and accommodation, as needed. We are also working
with our insurance companies to minimize the financial impact of this
occurrence. As of the date of this Report, we are unable to estimate the
financial consequences of the hurricane on our results of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the appropriate
application of certain accounting policies, many of which require estimates and
assumptions about future events and their impact on amounts reported in the
financial statements and related notes. Since future events and their impact
cannot be determined with certainty, the actual results will inevitably differ
from our estimates. Such differences could be material to the financial
statements.

Management believes the application of accounting policies, and the estimates
inherently required by the policies, are reasonable. These accounting policies
and estimates are constantly re-evaluated, and adjustments are made when facts
and circumstances dictate a change. Historically, management has found the
application of accounting policies to be appropriate, and actual results
generally do not differ materially from those determined using necessary
estimates.

Our accounting policies are more fully described in Note 1 to the consolidated
financial statements. Management has identified certain critical accounting
policies that are described below.

Inventory - Inventory is carried at the lower of cost or market on a first-in,
first-out basis. Management writes down inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.

Allowance for Doubtful Accounts/Sales Discounts - Management maintains
allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. Management also
estimates allowances for customer discounts, orders and incentive offerings. If
market conditions were to decline, management may take actions to increase
customer incentive offerings possibly resulting in an incremental allowance at
the time the incentive is offered.

Deferred Tax Valuation Allowance - In assessing the need for a deferred tax
valuation allowance, we consider future taxable income and ongoing prudent and
feasible tax planning strategies. Since we were able to determine that we should
be able to realize our deferred tax assets in the future, a deferred tax asset
valuation allowance was not deemed necessary. Likewise, should we determine that
we would not be able to realize all or part of our net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made.


                                       15



The following table shows each specified item as a dollar amount and as a
percentage of net sales in each fiscal period, and should be read in conjunction
with the consolidated financial statements included elsewhere in this Annual
Report on Form 10-K:



                                                          Years Ended June 30,
                                         -----------------------------------------------------
                                              2005                2004              2003
                                         ---------------    ----------------   ---------------

Net sales                                $58,533   100.0%   $53,691   100.0%   $64,916   100.0%
Cost of sales                             44,304    75.7%    37,581    70.0%    44,345    68.3%
                                         -------   -----    -------   -----    -------   -----
   Gross profit                           14,229    24.3%    16,110    30.0%    20,571    31.7%
   Selling, general and administrative
      expenses                            19,024    32.5%    15,824    29.5%    14.623    22.5%
                                         -------   -----    -------   -----    -------   -----
   (Loss) income from operations          (4,795)   (8.2)%      286      .5%     5,948     9.2%
Interest income                               (1)     --        (12)     --         (4)     --
Interest expense                             282      .5%        76      .1%       351      .6%
                                         -------   -----    -------   -----    -------   -----
   (Loss) income before income tax
      (benefit) provision                 (5,076)   (8.7)%      222      .4%     5,601     8.6%
Income tax (benefit) provision            (1,954)   (3.4)%       94      .2%     2,170     3.3%
                                         -------   -----    -------   -----    -------   -----
Net (loss) income                        $(3,122)   (5.3)%  $   128      .2%   $ 3,431     5.3%
                                         =======   =====    =======   =====    =======   =====


FISCAL 2005 COMPARED TO FISCAL 2004

Results of Operations

Net sales for the year ended June 30, 2005 were $58,533,000 as compared to
$53,691,000 in the comparable period in 2004. The increase in sales was due to
the sales contribution of $12,964,000 of the SB&S division and the shipment of a
$7,800,000 low margin order partially offset by a reduction in orders from some
of our larger customers. The revenues of the Movie Star division declined by
approximately $8,122,000 and were adversely impacted by higher than expected
markdown allowances due to a highly promotional retail environment as well as
lower than anticipated product performance at retail.

The low margin order of $7,800,000, as mentioned above, was shipped in the
second and third quarters of fiscal 2005. This order was for one major retailer
and the expected gross margin was considerably lower than Movie Star's regular
business. The costs to prepare this order for shipment were significantly higher
than we originally anticipated. In addition, a significant portion of the
merchandise arrived late at our distribution centers from India and, in some
cases, to meet the delivery dates of our customer, goods were shipped via air at
a much higher cost and we also incurred additional costs to prepare the goods
for shipment to our customer. We have declined to bid on this order for fiscal
2006.

The gross profit percentage was 24.3% for the year ended June 30, 2005 as
compared to 30.0% for the year ended June 30, 2004. The lower overall margin
resulted primarily from the addition of the SB&S division, which operated at
23.2% (which was lower than the anticipated margin due to the sale of
closeouts), the low margin order that was shipped in the second and third
quarters of fiscal 2005 and the higher sale of closeouts. Also contributing to
the reduction in gross margins were the additional costs to exit the Dominican
Republic as a source of production and move the production of the product being
produced there to El Salvador. The Movie Star division operated at a 24.6%,
30.0% and 31.7% gross margin for the years ended June 30, 2005, 2004 and 2003,
respectively.

As a result of differences between the accounting policies of companies in the
industry relating to whether certain items of expense are included in cost of
sales rather than recorded as selling expenses, the reported gross profits of
different companies, including our own, may not be directly compared. For
example, we record the costs of preparing merchandise for sale, including
warehousing costs and shipping and handling costs, as a selling expense, rather
than a cost of sale. Therefore, our gross profit is higher than it would be if
such costs were included in cost of sales.

Selling, general and administrative expenses were $19,024,000, or 32.5% of net
sales, for the year ended June 30, 2005 as compared to $15,824,000, or 29.5% of
net sales, for the similar period in 2004. This increase of $3,200,000 is a
result of an increase in salary expense and salary related costs of $411,000,
shipping expense and shipping related costs of $725,000, consulting fees of
$520,000, samples and design related costs of $351,000, outbound freight expense
of $214,000, commissions of $174,000, a greater recovery of bad debts in the
prior year of $308,000 and a


                                       16



net increase in other general overhead expenses. The increase in salaries was
primarily the result of the additional personnel for the SB&S division and costs
associated with personnel changes partially offset by a one-time expense of
$1,084,000 related to a lump sum payment to President and Chief Executive
Officer, Mel Knigin, in the prior year. Absent this one-time expense in the
prior year, salaries would have increased approximately $1,495,000. The payment
to Mr. Knigin occurred as a result of a stock ownership sale by the former
Chairman of the Company, which activated a provision in Mr. Knigin's employment
agreement. Under the terms of the agreement with Mr. Knigin, this payment is to
be applied against any severance obligations of the Company owed to Mr. Knigin
under his employment contract, which, in accordance with its terms, expires on
June 30, 2007. The increase in shipping expense is the result of the addition of
the SB&S division, unanticipated costs for the large low margin order and the
increased use of a West Coast public warehouse. Also, utilizing the SB&S
distribution center created excess shipping capacity and as of January 2005, we
closed this facility and began shipping the SB&S orders from our distribution
centers in Mississippi and Pennsylvania. We also decided in June 2005 to close
the Pennsylvania distribution center. In September 2005 we temporarily reopened
the Pennsylvania facility to handle some of the backlog of orders caused by the
hurricane in Mississippi. The increase in samples and design related costs was
the result of the addition of the SB&S division and the new Maidenform line. The
increase in outbound freight expense was due to the expediting of the large
order discussed earlier. The increase in consulting fees was primarily due to
termination of our prior Chairman's services in connection with our consulting
agreement with him in the amount of $450,000 and the addition of our consulting
agreement with LLI, Inc. to provide the sales representation for us in Canada
and supervise the operations of our office in Montreal. The increase in
commissionable sales was the result of commissions paid on the SB&S division's
sales and an increase in commissionable sales in the remaining business. The
recovery of bad debts in the prior year resulted primarily from one customer in
bankruptcy that resolved our claim more favorably than we had anticipated.

We recorded a loss from operations of $4,795,000 for the year ended June 30,
2005, as compared to operating income of $286,000 for the similar period in
2004. This decrease was due to, lower gross margins and higher selling, general
and administrative expenses partially offset by higher sales.

Interest income for the year ended June 30, 2005 was $1,000 as compared to
$12,000 for 2004.

Interest expense for the year ended June 30, 2005 was $282,000 as compared to
$76,000 for 2004. This increase was due primarily to higher borrowing levels,
which were the result of the acquisition of the SB&S division and higher sales,
which required higher inventories and accounts receivable.

We provided for an income tax benefit of $1,954,000 for the year ended June 30,
2005, as compared to a provision for income taxes of $94,000 for the similar
period in 2004. The tax benefit was the result of loss in fiscal 2005.

We recorded a net loss for the year ended June 30, 2005 of $3,122,000 as
compared to net income of $128,000 for the same period in 2004. This reduction
was due to lower gross margins, higher selling, general and administrative
expenses and higher interest costs, partially offset by higher sales and an
income tax benefit in the current year as compared to an income tax provision
for the prior year.

FISCAL 2004 COMPARED TO FISCAL 2003

Results of Operations

Net sales for the year ended June 30, 2004 were $53,691,000 as compared to
$64,916,000 in the comparable period in 2003. The decrease in sales was due
primarily to a decrease in orders with our primary customer (which accounted for
approximately 46% of the decrease), an initial set-up replenishment order for
our primary customer being shipped in fiscal 2003 (which accounted for
approximately 11% of the decrease) and a poor holiday season in intimate apparel
at retail. The poor holiday season intimate apparel at retail caused the
retailers to have excess inventory of replenishment goods resulting in lower
orders following the holiday season.

The gross profit percentage was 30.0% for the year ended June 30, 2004 as
compared to 31.7% for the year ended June 30, 2003. The lower margins resulted
primarily from lower margins in the fourth quarter. We had a 25.8% gross margin
in the fiscal 2004 fourth quarter as compared to a 32.3% gross margin in the
same quarter in the prior year. The lower margin in the fourth quarter was the
result of a large program to our primary customer, which was at a full margin,
in the fourth quarter last year that we did not have in the current year, lower
sales in the fourth quarter of


                                       17



this year that caused closeout sales to be a higher percentage of total sales
and higher markdown allowances to our customers in the current year.

As a result of differences between the accounting policies of companies in the
industry relating to whether certain items of expense are included in cost of
sales rather than recorded as selling expenses, the reported gross profits of
different companies, including our own, may not be directly compared. For
example, we record the costs of preparing merchandise for sale, including
warehousing costs and shipping and handling costs, as a selling expense, rather
than a cost of sale. Therefore, our gross profit is higher than it would be if
such costs were included in cost of sales.

Selling, general and administrative expenses were $15,824,000, or 29.5% of net
sales, for the year ended June 30, 2004 as compared to $14,623,000, or 22.5% of
net sales, for the similar period in 2003. This increase of $1,201,000 resulted
primarily from a one-time expense of $1,084,000 related to a lump sum payment to
President and Chief Executive Officer, Mel Knigin. This occurred as a result of
a stock ownership sale by the former Chairman of the Company, which activated a
provision in Mr. Knigin's employment agreement. Under the terms of the agreement
with Mr. Knigin, this payment is to be applied against any severance obligations
owed to Mr. Knigin under his employment contract, which, in accordance with its
terms, expires on June 30, 2007. In addition to the above one-time expense, we
had increases in salaries and salary related expenses of approximately $398,000,
business insurance expense of $139,000 and medical insurance expense of $79,000
as well as a net overall increase in other selling, general and administrative
expenses. These increases were partially offset by a reduction in commission
expense of $175,000 and officers' bonuses of $291,000. We also had a more
favorable than expected recovery of bad debts in the current year of $350,000
that was primarily related to the Montgomery Ward bankruptcy.

Operating income from continuing operations decreased to $286,000 for the year
ended June 30, 2004, from $5,948,000 for the similar period in 2003. This
decrease was due to lower sales and gross margins, as well as higher selling,
general and administrative expenses.

Interest income for the year ended June 30, 2004 was $12,000 as compared to
$4,000 for 2003.

Interest expense for the year ended June 30, 2004 was $76,000 as compared to
$351,000 for 2003. This reduction was due primarily to lower borrowing levels
and, to a lesser extent, lower interest rates.

We provided for income taxes of $94,000 for the year ended June 30, 2004, as
compared to $2,170,000 for the similar period in 2003. This decrease was
primarily the result of lower income.

We recorded net income from continuing operations for the year ended June 30,
2004 of $128,000 as compared to $3,431,000 for the same period in 2003. This
decrease was due to lower sales and gross margins as well as higher selling,
general and administrative expenses, partially offset by lower net interest
costs and a smaller provision for income taxes in the current year.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

To facilitate an understanding of our contractual obligations and commercial
commitments, the following data is provided as of June 30, 2005 (in thousands):



                                                    Payments Due by Period
                                          ----------------------------------------
                                          Within                           After 5
                                 Total    1 Year   2-3 Years   4-5 Years    Years
                                -------   ------   ---------   ---------   -------

Contractual Obligations
Note Payable                    $ 4,794   $4,794     $   --      $   --      $ --
Licensing Agreement                 380      115        265          --        --
Operating Leases                  6,623    1,233      2,355       2,416       619
Consulting Agreements               471      471         --          --        --
Employment Contracts              1,787    1,016        771          --        --
                                -------   ------     ------      ------      ----
Total Contractual Obligations   $14,055   $7,629     $3,391      $2,416      $619
                                =======   ======     ======      ======      ----



                                       18





                                           Amount of Commitment Expiration Per Period
                                           ------------------------------------------
                                 Total
                                Amounts     Within                           After 5
                               Committed    1 Year   2-3 Years   4-5 Years    Years
                               ---------    ------   ---------   ---------   -------

Other Commercial Commitments
Letters of Credit                $5,985     $5,985      $--         $--        $--
                                 ------     ------      ---         ---        ---
Total Commercial Commitments     $5,985     $5,985      $--         $--        $--
                                 ======     ======      ===         ===        ===


OFF-BALANCE SHEET ARRANGEMENTS

We have not created, and are not party to, any special-purpose or off-balance
sheet entities for the purpose of raising capital, incurring debt or operating
our business. We do not have any arrangements or relationships with entities
that are not consolidated into our financial statements that are reasonably
likely to materially affect our liquidity or the availability of capital
resources.

LIQUIDITY AND CAPITAL RESOURCES

For the year ended June 30, 2005, working capital decreased by $5,870,000 to
$10,673,000, primarily due to the acquisition of the SB&S division and
unprofitable operations.

During the fiscal year ended June 30, 2005, cash decreased by $2,349,000. We
used cash of $3,478,000 in operations, $225,000 for the purchase of fixed assets
and $3,456,000 for the acquisition of the inventory and certain assets of SB&S.
The net proceeds from short-term borrowings of $4,794,000, the exercise of
employee stock options of $22,000 and the decrease in cash primarily funded
these activities.

Receivables, net of allowances, at June 30, 2005 decreased by $1,604,000 to
$5,973,000 from $7,577,000 at June 30, 2004. This decrease is due to lower sales
in the fourth quarter of 2005 as compared to the prior year.

Inventory at June 30, 2005 increased by $5,792,000 to $11,730,000 from
$5,938,000 at June 30, 2004. The increase is primarily due to the acquisition of
the SB&S division and the earlier receipt of finished goods for shipments in
fiscal 2006.

Effective July 1, 2005, we renewed our revolving line of credit of up to
$20,000,000. The revolving line of credit expires June 30, 2006 and is
sufficient for our projected needs for operating capital and letters of credit
to fund the purchase of imported goods through June 30, 2006. Direct borrowings
under this line bear interest at the prime rate less three quarters of one
percent per annum. Availability under the line of credit is subject to the
Company's compliance with certain agreed upon financial formulas. We were in
compliance with our current lender at June 30, 2005. This line of credit is
secured by substantially all of our assets.

We believe the available borrowing under our secured revolving line of credit,
along with anticipated internally generated funds, will be sufficient to cover
our working capital requirements through July 1, 2006.

We anticipate that capital expenditures for fiscal 2006 will be less than
$700,000.

EFFECT OF NEW ACCOUNTING STANDARDS

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4." SFAS No. 151 retains the general principle of ARB 43,
Chapter 4, "Inventory Pricing (AC Section I78)," that inventories are presumed
to be stated at cost; however, it amends ARB 43 to clarify that abnormal amounts
of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges and require the
allocation of fixed production overheads to inventories based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. Management has evaluated SFAS No. 151 and we
do not anticipate that the adoption of SFAS No. 151 will have a significant
impact on our overall results of operations or financial position.


                                       19



In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 20, Accounting for Nonmonetary
Transactions." The amendments made by SFAS No. 153 are based on the principle
that exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the narrow exception
for nonmonetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This statement shall be applied prospectively and is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. Earlier application is permitted for nonmonetary asset exchanges
occurring in fiscal periods beginning after the date of issuance. We do not
anticipate that the adoption of SFAS No. 153 will have a significant impact on
our overall results of operations or financial position.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment." SFAS 123(R) requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. The
amount of compensation cost will be measured based on the grant-date fair value
of the equity or liability instruments issued. SFAS 123(R) covers a wide range
of share-based compensation arrangements including share options, restricted
share plans, performance-based awards, share appreciation rights, and employee
share purchase plans. SFAS 123(R) replaces SFAS No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." This statement is effective as of the beginning of
our next fiscal year. We are required to implement this new standard in the
quarter ending September 30, 2005. The impact of this new standard, if it had
been in effect, on the net earnings and related per share amounts of our fiscal
years ended in June 2005, 2004 and 2003 are disclosed in Note 1, Summary of
Significant Accounting Policies, Stock Options of our Financial Statements. The
impact of this new standard on our earnings for fiscal 2006 is estimated to be
approximately $11,000 of expense, before the grants of any new options.

In May 2005, the FASB issued SFAS No. 154, "Accounting for Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS No. 154"). SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes,
and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. This Statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. SFAS No. 154 becomes
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.

INFLATION

We do not believe that our operating results have been materially affected by
inflation during the preceding three years. There can be no assurance, however,
that our operating results will not be affected by inflation in the future.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to changes in the prime rate based on the Federal Reserve actions
and general market interest fluctuations. We believe that moderate interest rate
increases will not have a material adverse impact on its results of operations,
or financial position, in the foreseeable future. For the fiscal year ended June
30, 2005, borrowings peaked during the year at $13,410,000 and the average
amount of borrowings was $6,335,000.

IMPORTS

Transactions with our foreign manufacturers and suppliers are subject to the
risks of doing business abroad. Our import and offshore operations are subject
to constraints imposed by agreements between the United States and a number of
foreign countries in which we do business. These agreements impose quotas on the
amount and type of goods that can be imported into the United States from these
countries. Such agreements also allow the United States to impose, at any time,
restraints on the importation of categories of merchandise that, under the terms
of the agreements, are not subject to specified limits. Our imported products
are also subject to United States customs duties


                                       20



and, in the ordinary course of business, we are from time to time subject to
claims by the United States Customs Service for duties and other charges. The
United States and other countries in which our products are manufactured may,
from time to time, impose new quotas, duties, tariffs or other restrictions, or
adversely adjust presently prevailing quotas, duty or tariff levels, which could
adversely affect our operations and its ability to continue to import products
at current or increased levels. We cannot predict the likelihood or frequency of
any such events occurring.


                                       21



ITEM 8. FINANCIAL STATEMENTS.

                                                                          PAGE
                                                                        --------

INDEX TO CONSOLIDATED STATEMENTS AND SUPPLEMENTARY DATA

   Report of Independent Registered Public Accounting Firm                 23

   Consolidated Balance Sheets at June 30, 2005 and 2004                   24

   Consolidated Statements of Operations for the fiscal
     years ended June 30, 2005, 2004 and 2003                              25

   Consolidated Statements of Shareholders' Equity for
      the fiscal years ended June 30, 2005, 2004 and 2003                  26

   Consolidated Statements of Cash Flows for the
      fiscal years ended June 30, 2005, 2004 and 2003                    27 - 28

   Notes to Consolidated Financial Statements                            29 - 43

SCHEDULE

   For the fiscal years ended June 30, 2005, 2004 and 2003:

         II - Valuation and Qualifying Accounts                            44


                                       22



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
   Movie Star, Inc.:

We have audited the accompanying consolidated balance sheets of Movie Star, Inc.
and subsidiary as of June 30, 2005 and 2004, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended June 30, 2005. Our audits also included the
financial statement schedule listed in the index at Item 15(a)(2) for each of
the three years in the period ended June 30, 2005. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company has determined that it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. 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 consolidated financial position of Movie Star, Inc.
and subsidiary as of June 30, 2005 and 2004, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2005 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.


/s/ Mahoney Cohen & Company, CPA, P.C.

New York, New York
August 17, 2005


                                       23



MOVIE STAR, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND 2004
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
--------------------------------------------------------------------------------



ASSETS                                                                   2005      2004
                                                                       -------   -------

CURRENT ASSETS:
   Cash                                                                $   178   $ 2,527
   Receivables, net                                                      5,973     7,577
   Inventory                                                            11,730     5,938
   Deferred income taxes                                                 2,260     2,571
   Prepaid expenses and other current assets                               372       588
                                                                       -------   -------
      Total current assets                                              20,513    19,201
PROPERTY, PLANT AND EQUIPMENT - Net                                        755     1,021
DEFERRED INCOME TAXES                                                    2,473       148
GOODWILL                                                                   537        --
ASSETS HELD FOR SALE                                                       174        --
OTHER ASSETS                                                               455       409
                                                                       -------   -------
TOTAL ASSETS                                                           $24,907   $20,779
                                                                       =======   =======

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Note payable                                                        $ 4,794   $    --
   Accounts payable                                                      3,579     1,937
   Accrued expenses and other current liabilities                        1,467       721
                                                                       -------   -------
      Total current liabilities                                          9,840     2,658
                                                                       -------   -------
DEFERRED LEASE LIABILITY
                                                                           315       283
                                                                       -------   -------
OTHER LONG-TERM LIABILITY                                                   75        91
                                                                       -------   -------
COMMITMENTS AND CONTINGENCIES                                               --        --

SHAREHOLDERS' EQUITY:
   Common stock, $.01 par value - authorized, 30,000,000 shares;
      issued 17,657,000 shares in 2005 and 17,617,000 shares in 2004       177       176
   Additional paid-in capital                                            4,747     4,706
   Retained earnings                                                    13,361    16,483
    Accumulated other comprehensive income                                  10        --
   Less treasury stock, at cost - 2,017,000 shares                      (3,618)   (3,618)
                                                                       -------   -------
      Total shareholders' equity                                        14,677    17,747
                                                                       -------   -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                             $24,907   $20,779
                                                                       =======   =======


See notes to consolidated financial statements.


                                       24



MOVIE STAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------



                                                            2005      2004      2003
                                                          -------   -------   -------

Net sales                                                 $58,533   $53,691   $64,916
Cost of sales                                              44,304    37,581    44,345
                                                          -------   -------   -------
   Gross profit                                            14,229    16,110    20,571
Selling, general and administrative expenses               19,024    15,824    14,623
                                                          -------   -------   -------
   (Loss) income from operations                           (4,795)      286     5,948
Interest income                                                (1)      (12)       (4)
Interest expense                                              282        76       351
                                                          -------   -------   -------
   (Loss) income before income tax (benefit) provision     (5,076)      222     5,601
Income tax (benefit) provision                             (1,954)       94     2,170
                                                          -------   -------   -------
Net (loss) income                                         $(3,122)  $   128   $ 3,431
                                                          =======   =======   =======
BASIC NET (LOSS) INCOME PER SHARE                           $(.20)  $   .01   $   .23
                                                          =======   =======   =======
DILUTED NET (LOSS) INCOME PER SHARE                         $(.20)  $   .01   $   .22
                                                          =======   =======   =======
Basic weighted average number of shares outstanding        15,625    15,574    15,133
                                                          =======   =======   =======
Diluted weighted average number of shares outstanding      15,625    16,199    15,407
                                                          =======   =======   =======


See notes to consolidated financial statements.


                                       25



MOVIE STAR, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(IN THOUSANDS)
--------------------------------------------------------------------------------



                                                                             ACCUMULATED
                                    COMMON STOCK    ADDITIONAL                  OTHER        TREASURY STOCK
                                  ---------------     PAID-IN    RETAINED   COMPREHENSIVE   ----------------
                                  SHARES   AMOUNT     CAPITAL    EARNINGS       INCOME      SHARES    AMOUNT    TOTAL
                                  ------   ------   ----------   --------   -------------   ------   -------   -------

BALANCE, JUNE 30, 2002            17,102    $171      $4,147      $12,924          $--       2,017   $(3,618)  $13,624
   Net income                         --      --          --        3,431           --          --        --     3,431
   Exercise of stock options         310       3         206           --           --          --        --       209
                                  ------    ----      ------      -------          ---       -----   -------   -------

BALANCE, JUNE 30, 2003            17,412     174       4,353       16,355           --       2,017    (3,618)   17,264
   Net income                         --      --          --          128           --          --        --       128
   Exercise of stock options         205       2         131           --           --          --        --       133
   Tax benefit from exercise of
      Stock options                   --      --         222           --           --          --        --       222
                                  ------    ----      ------      -------          ---       -----   -------   -------

BALANCE, JUNE 30, 2004            17,617     176       4,706       16,483                    2,017    (3,618)   17,747
   Net loss                           --      --          --       (3,122)                      --        --    (3,122)
   Cumulative translation
   adjustment                         --      --          --           --           10          --        --        10
                                                                                                               -------

      Comprehensive loss                                                                                        (3,112)
   Exercise of stock options          20      --          22           --                       --        --        22
   Issuance of common stock for
      directors' fees                 20       1          19           --           --          --        --        20
                                  ------    ----      ------      -------          ---       -----   -------   -------

BALANCE, JUNE 30, 2005            17,657    $177      $4,747      $13,361          $10       2,017   $(3,618)  $14,677
                                  ======    ====      ======      =======          ===       =====   =======   =======



See notes to consolidated financial statements.


                                       26



MOVIE STAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2005, 2004, AND 2003
(IN THOUSANDS)
--------------------------------------------------------------------------------



                                                                                2005      2004      2003
                                                                              -------   -------   -------

CASH FLOWS FROM OPERATING ACTIVITIES:
   Net (loss) income                                                          $(3,122)  $   128   $ 3,431
   Adjustments to reconcile net (loss) income to net cash
      (used in) provided by operating activities
      Depreciation and amortization                                               406       410       403
      Provision for sales allowances and doubtful accounts                       (539)      316        69
      Deferred income taxes                                                    (2,014)       64     1,943
      Deferred lease liability                                                     32        59        84
      Issuance of common stock for directors' fees                                 20        --        --
      Loss on disposal of property, plant and equipment                            --        --        19
   (Increase) decrease in operating assets, net of acquisition of business:
      Receivables                                                               2,154     1,099    (2,060)
      Inventory                                                                (2,919)    4,454    (1,595)
      Prepaid expenses and other current assets                                   218      (223)     (163)
      Other assets                                                                (91)      (71)     (114)
   Increase (decrease) in operating liabilities:
      Accounts payable                                                          1,637      (951)     (467)
      Accrued expenses and other liabilities                                      740      (597)      321
                                                                              -------   -------   -------
         Net cash (used in) provided by operating activities                   (3,478)    4,688     1,871
                                                                              -------   -------   -------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property, plant and equipment                                    (225)     (209)     (181)
   Acquisition of Sidney Bernstein & Son business                              (3,456)       --        --
                                                                              -------   -------   -------
         Net cash used in investing activities                                 (3,681)     (209)     (181)
                                                                              -------   -------   -------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayments of capital lease obligations                                         --       (27)      (43)
   Net proceeds from (repayments of) revolving line of credit                   4,794    (2,277)   (1,852)
   Proceeds from exercise of employee stock options                                22       133       209
                                                                              -------   -------   -------
         Net cash provided by (used in) financing activities                    4,816    (2,171)   (1,686)
                                                                              -------   -------   -------
Effect of exchange rate changes on cash                                            (6)       --        --
                                                                              -------   -------   -------

NET (DECREASE) INCREASE IN CASH                                                (2,349)    2,308         4
CASH, BEGINNING OF YEAR                                                         2,527       219       215
                                                                              -------   -------   -------

CASH, END OF YEAR                                                             $   178   $ 2,527   $   219
                                                                              =======   =======   =======


                                                                     (Continued)


                                       27



MOVIE STAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2005, 2004, AND 2003
(IN THOUSANDS)
--------------------------------------------------------------------------------



                                                                                2005      2004      2003
                                                                              -------   -------   -------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
   INFORMATION:
   Cash paid during year for:
      Interest                                                                $   282   $    76   $   358
                                                                              =======   =======   =======
      Income taxes                                                            $    60   $   343   $    43
                                                                              =======   =======   =======
SUPPLEMENTAL DISCLOSURES OF NONCASH
   FINANCING ACTIVITIES:
   Tax benefit from exercise of employee stock options                        $    --   $   222   $    --
                                                                              =======   =======   =======


                                                                     (Concluded)

See notes to consolidated financial statements.


                                       28



MOVIE STAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
--------------------------------------------------------------------------------

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Business - Movie Star, Inc. is a New York corporation organized in 1935,
     which designs, manufactures, markets and sells an extensive line of ladies'
     sleepwear, robes, leisurewear, loungewear, panties and daywear.

     In May 2004, Movie Star, Inc. formed a wholly-owned subsidiary, Cinejour
     Lingerie, Inc., in Montreal, Canada which began marketing and selling Movie
     Star's products throughout Canada in fiscal 2005.

     Principles of Consolidation - The consolidated financial statements include
     the accounts of Movie Star, Inc. and its wholly-owned subsidiary, Cinejour
     Lingerie, Inc. (collectively, the "Company"). All significant intercompany
     balances and transactions have been eliminated in consolidation.

     Use of Estimates - The preparation of financial statements in conformity
     with accounting principles generally accepted in the United States of
     America requires management to make estimates and assumptions that affect
     the reported amounts of assets and liabilities at the date of the financial
     statements, and the reported amounts of revenues and expenses during the
     reporting period. The preparation of financial statements in conformity
     with accounting principles generally accepted in the United States of
     America also requires management to make estimates and assumptions that
     affect the disclosures of contingent assets and liabilities at the date of
     the financial statements. Significant estimates include provision for
     inventory obsolescence, deferred tax assets, allowances for doubtful
     accounts and sales discounts. Actual results could differ from those
     estimates.

     Allowances for Doubtful Accounts/Sales Discounts - The Company maintains
     allowances for doubtful accounts for estimated losses resulting from the
     inability of its customers to make required payments. If the financial
     condition of the Company's customers were to deteriorate, resulting in an
     impairment of their ability to make payments, additional allowances may be
     required. The Company also estimates allowances for customer discounts,
     orders and incentive offerings. If market conditions were to decline, the
     Company may take actions to increase customer incentive offerings possibly
     resulting in an incremental allowance at the time the incentive is offered.

     Inventory - Inventory is valued at lower of cost (first-in, first-out) or
     market. The Company writes down inventory for estimated obsolescence or
     unmarketable inventory equal to the difference between the cost of
     inventory and the estimated market value based upon assumptions about
     future demand and market conditions.

     Property, Plant and Equipment - Property, plant and equipment are stated at
     cost. Depreciation and amortization are provided by the straight-line
     method over the following estimated useful lives:

     Buildings and improvements       15 - 30 years
     Machinery & Equipment            5 years
     Office furniture and equipment   3 - 5 years
     Leasehold improvements           Lesser of life of the asset or life
                                      of lease


                                       29



     Impairment of Long-lived Assets - The Company follows Statement of
     Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
     Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
     long-lived assets, including property and equipment, be reviewed for
     impairment whenever events or changes in circumstances indicate that their
     carrying amount may not be recoverable. The Company assesses its assets for
     impairment based on the estimated future undiscounted cash flows expected
     to result from the use of the asset and records impairment losses when this
     amount is less than the carrying amount. Impairment losses are recorded for
     the excess of the assets' carrying amount over their fair value, which is
     generally determined based on the estimated future discounted cash flows
     over the remaining useful life of the asset using a discount rate
     determined by management at the date of the impairment review. Management
     believes at this time that the carrying value and useful life of long-lived
     assets continue to be appropriate.

     Goodwill and Intangible Assets - Goodwill represents the excess of the
     purchase price over the fair value of the net assets acquired in a business
     combination accounted for under purchase method of accounting (see Note 2).
     The Company follows SFAS No. 142, "Goodwill and Other Intangible Assets,"
     whereby goodwill is not amortized and the Company conducts impairment
     testing in the fourth quarter of each fiscal year, or sooner if events and
     changes in circumstances suggest that the carrying amount may not be
     recoverable from its estimated future cash flows. No amortization or
     impairment charges relating to goodwill have been recorded for the fiscal
     year ended June 30, 2005. Intangible assets at June 30, 2005 consist of a
     covenant not to compete of $31,000, which is included in "Other assets" and
     is being amortized by the straight-line method over the contract life.
     Amortization is expected to be $10,000 in each of the next three years.

     Deferred Rent - The Company accounts for scheduled rent increases contained
     in its leases on a straight-line basis over the non-cancelable lease term.

     Stock Options - Pursuant to Accounting Principles Board Opinion No. 25,
     "Accounting for Stock Issued to Employees," the Company accounts for
     stock-based employee compensation arrangements using the intrinsic value
     method. Accordingly, no compensation expense has been recorded in the
     financial statements with respect to option grants. The Company has adopted
     the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
     Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
     Compensation - Transition and Disclosure, an amendment of SFAS No. 123."

     Had the Company elected to recognize compensation expense for stock-based
     compensation using the fair value method net (loss) income, basic net
     (loss) income per common share and net (loss) income per diluted common
     share would have been as follows:



                                                                   YEARS ENDED JUNE 30,
                                                                 -----------------------
                                                                   2005    2004    2003
                                                                 -------   ----   ------

     Net (loss) income, as reported                              $(3,122)  $128   $3,431
     Add (deduct) net stock-based employee forfeitures (cost),
        net of taxes                                                 (30)   (15)     146
                                                                 -------   ----   ------
     Pro forma net (loss) income                                 $(3,152)  $113   $3,577
                                                                 =======   ====   ======
     Basic net (loss) income per share, as reported              $  (.20)  $.01   $  .23
     Add (deduct) net stock-based employee forfeitures (cost)
        per share                                                     --     --      .01
                                                                 -------   ----   ------
     Pro forma basic net (loss) income per share                 $  (.20)  $.01   $  .24
                                                                 =======   ====   ======



                                       30





                                                                YEARS ENDED JUNE 30,
                                                                --------------------
                                                                 2005   2004   2003
                                                                -----   ----   ----

     Diluted net (loss) income per share, as reported           $(.20)  $.01   $.22
     Add (deduct) net stock-based employee forfeitures (cost)
        per share                                                  --     --    .01
                                                                -----   ----   ----
     Pro forma diluted net (loss) income per share              $(.20)  $.01   $.23
                                                                =====   ====   ====


     The fair value of option grants were calculated with the following
     weighted-average assumptions:

                                  2005        2003
                               ----------   -------
     Risk-free interest rate   3.5% - 4.0%    4.0%
     Expected life               7 years    7 years
     Expected volatility        36% - 63%     70%
     Expected dividends           None        None

     No options were granted in 2004.

     The fair values generated by the Black-Scholes model may not be indicative
     of the future benefit, if any, that may be received by the option holder.

     Revenue Recognition - Revenue is recognized upon shipment. Although sales
     are made without the right of return, in certain instances, the Company may
     accept returns or agree to allowances. Sales returns, discounts and
     allowances are recorded as a component of net sales in the period in which
     the related sales are recognized. The customer takes title and assumes the
     risks and rewards of ownership of the products when the merchandise leaves
     the Company's warehouse. The Company expenses the costs of advertising to
     customers under cooperative advertising as a reduction of revenue and
     component of net sales. Cooperative advertising amounted to $236,000,
     $160,000 and $176,000 for the years ended June 30, 2005, 2004 and 2003,
     respectively.

     Cost of Sales and Selling Costs - Cost of sales includes the expenses
     incurred to acquire and produce inventory for sale, including product
     costs, freight-in, inspection costs, labor associated with quality repairs,
     internal transfer costs, purchasing and receiving costs, and travel and
     entertainment related to product sourcing."

     Selling costs include the costs of selling the merchandise, including
     preparing the merchandise for sale, picking and packing costs, and shipping
     and handling costs, such as warehousing, freight-out and other direct costs
     to deliver inventory to customers. Shipping and handling costs aggregated
     approximately $2,808,000 in 2005, $1,869,000 in 2004 and $1,917,000 in
     2003. In addition, selling costs include the costs for apparel design and
     development activities, including sample designs and patterns. The Company
     expenses these costs as incurred. Selling costs are a component of selling,
     general and administrative expenses.


                                       31



     Deferred tax valuation allowance - In assessing the need for a deferred tax
     valuation allowance, the Company considers future taxable income and
     ongoing prudent and feasible tax planning strategies. Since the Company was
     able to determine that it should be able to realize its deferred tax assets
     in the future, in excess of its recorded amount, a deferred tax valuation
     allowance was not deemed necessary. Likewise, should the Company determine
     that it would not be able to realize all or part of the Company's net
     deferred tax asset in the future, an adjustment to the deferred tax asset
     would be charged to income in the period such determination was made.

     Net (Loss) Income Per Share - Basic net (loss) income per share is computed
     by dividing net (loss) income by the weighted average number of common
     shares outstanding for the period. Diluted net income per share also
     includes the dilutive effect of potential common shares outstanding during
     the period.

     Foreign Currency Translation - The assets and liabilities of the Company's
     Canadian subsidiary are translated into U.S. dollars at current exchange
     rates on the balance sheet date and revenue and expenses are translated at
     average exchange rates for the respective years. The net exchange
     differences resulting from these translations are recorded as a translation
     adjustment which is a component of shareholders' equity. Cinejour Lingerie,
     Inc.'s functional currency is the Canadian Dollar.

     Foreign Currency Transactions - The Company considers the United States
     Dollar to be the functional currency of its overseas offices. Foreign
     currency gains and losses, which are immaterial, are recorded in selling,
     general and administrative expenses on the consolidated statement of
     operations.

     Segment Reporting - The Company operates in one segment.

     EFFECT OF NEW ACCOUNTING STANDARDS

     In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
     amendment of ARB No. 43, Chapter 4." SFAS No. 151 retains the general
     principle of ARB 43, Chapter 4, "Inventory Pricing (AC Section I78)," that
     inventories are presumed to be stated at cost; however, it amends ARB 43 to
     clarify that abnormal amounts of idle facility expense, freight, handling
     costs, and wasted materials (spoilage) should be recognized as
     current-period charges and require the allocation of fixed production
     overheads to inventories based on the normal capacity of the production
     facilities. The guidance is effective for inventory costs incurred during
     fiscal years beginning after June 15, 2005. Earlier application is
     permitted for inventory costs incurred during fiscal years beginning after
     November 23, 2004. The Company has evaluated SFAS No. 151 and it does not
     anticipate that the adoption of SFAS No. 151 will have a significant impact
     on the Company's overall results of operations or financial position.


                                       32



     In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
     Assets, an amendment of APB Opinion No. 20, Accounting for Nonmonetary
     Transactions." The amendments made by SFAS No. 153 are based on the
     principle that exchanges of nonmonetary assets should be measured based on
     the fair value of the assets exchanged. Further, the amendments eliminate
     the narrow exception for nonmonetary exchanges of similar productive assets
     and replace it with a broader exception for exchanges of nonmonetary assets
     that do not have commercial substance. A nonmonetary exchange has
     commercial substance if the future cash flows of the entity are expected to
     change significantly as a result of the exchange. This statement shall be
     applied prospectively and is effective for nonmonetary asset exchanges
     occurring in fiscal periods beginning after June 15, 2005. Earlier
     application is permitted for nonmonetary asset exchanges occurring in
     fiscal periods beginning after the date of issuance. The Company does not
     anticipate that the adoption of SFAS No. 153 will have a significant impact
     on the Company's overall results of operations or financial position.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
     Payment." SFAS 123(R) requires that the compensation cost relating to
     share-based payment transactions be recognized in financial statements. The
     amount of compensation cost will be measured based on the grant-date fair
     value of the equity or liability instruments issued. SFAS 123(R) covers a
     wide range of share-based compensation arrangements including share
     options, restricted share plans, performance-based awards, share
     appreciation rights, and employee share purchase plans. SFAS 123(R)
     replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
     supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
     This statement is effective as of the beginning of the Company's next
     fiscal year. The Company is required to implement this new standard in the
     quarter ending September 30, 2005. The impact of this new standard, if it
     had been in effect, on the net earnings and related per share amounts of
     our fiscal years ended in June 2005, 2004 and 2003 are disclosed above in
     Note 1, Summary of Significant Accounting Policies, Stock Options. The
     impact of this new Standard on the Company's net earnings for fiscal 2006
     is estimated to be approximately $11,000 of expense, before the grants of
     any new options.

     In May 2005, the FASB issued SFAS No. 154, "Accounting for Changes and
     Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement
     No. 3" ("SFAS No. 154"). SFAS No. 154 replaces APB Opinion No. 20,
     Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes
     in Interim Financial Statements, and changes the requirements for the
     accounting for and reporting of a change in accounting principle. This
     Statement applies to all voluntary changes in accounting principle. It also
     applies to changes required by an accounting pronouncement in the unusual
     instance that the pronouncement does not include specific transition
     provisions. When a pronouncement includes specific transition provisions,
     those provisions should be followed. SFAS No. 154 becomes effective for
     accounting changes and corrections of errors made in fiscal years beginning
     after December 15, 2005.

2.   ACQUISITION

     On August 3, 2004, the Company completed its acquisition of certain assets
     of Sidney Bernstein & Son Lingerie, Inc. ("SB&S"), a New York based company
     engaged in the design, marketing and sale of women's lingerie and related
     apparel accessories, pursuant to an Asset Purchase Agreement, dated as of
     July 28, 2004. The transaction allows the Company to expand its offerings,
     as well as diversify its sales distribution.


                                       33



     The assets were purchased for an aggregate price of $3,379,000, excluding
     transaction related fees, and included, among other assets, $2,873,000 of
     inventory and $500,000 of intangible assets. The Company also assumed
     $3,012,000 of SB&S' open purchase orders and received $7,408,000 of open
     customer orders. Pursuant to the Asset Purchase Agreement, the Company had
     also agreed to pay up to an additional $1,000,000 in the aggregate based
     upon certain gross profit levels generated by the Company's
     newly-established Sidney Bernstein & Son Division during the next three
     fiscal years (see below).

     The acquisition was accounted for by the purchase method of accounting and
     the acquisition consideration was allocated among the tangible and
     intangible assets in accordance with their estimated fair value on the date
     of acquisition. In accordance with SFAS No. 142, goodwill will be subject
     to impairment testing at least annually. The results of operations of SB&S
     since August 3, 2004, are included in the Company's consolidated statement
     of operations. The total amount of goodwill is expected to be deductible
     for income tax purposes. The acquisition consideration and allocation of
     that consideration are as follows:

     ACQUISITION CONSIDERATION:
        Cash consideration paid                 $3,379,000
        Transaction related fees                    77,000
                                                ----------
           Total acquisition consideration      $3,456,000
                                                ==========

     ALLOCATION OF ACQUISITION CONSIDERATION:
        Inventory                               $2,873,000
        Goodwill related to acquisition            537,000
        Covenant not to compete                     40,000
        Property and equipment                       4,000
        Other current assets                         2,000
                                                ----------
           Total                                $3,456,000
                                                ==========

     On August 3, 2004, the Company entered into an employment agreement with
     Daniel Bernstein, a former employee of SB&S, which was to expire on June
     30, 2007. Pursuant to the agreement, Mr. Bernstein was to receive a base
     compensation of $350,000 annually plus commission based on formulas, as
     defined, in the agreement. In addition, the Company was to issue Mr.
     Bernstein options to purchase 75,000 shares of common stock under the
     Company's 2000 Performance Equity Plan in both fiscal 2005 and 2006.

     Effective June 10, 2005, Mr. Bernstein terminated his employment agreement
     with the Company. In addition, due to Mr. Bernstein's termination, he is no
     longer entitled to be issued options and the Company is no longer required
     to pay the additional $1,000,000 under the Asset Purchase Agreement.


                                       34



3.   INVENTORY

     Inventory consists of the following:

                                                                JUNE 30,
                                                           -----------------
                                                             2005      2004
                                                           -------   -------
                                                             (IN THOUSANDS)

     Raw materials                                         $ 1,574   $1,166
     Work-in process                                           382      323
     Finished goods                                          9,774    4,449
                                                           -------   ------
                                                           $11,730   $5,938
                                                           =======   ======

4.   RECEIVABLES

     Receivables consist of the following:

                                                                JUNE 30,
                                                           -----------------
                                                             2005      2004
                                                           -------   -------
                                                             (IN THOUSANDS)

     Trade                                                 $ 7,086   $ 9,272
     Other                                                      41        10
                                                           -------   -------
                                                             7,127     9,282
     Less allowance for doubtful accounts and
        sales discounts                                     (1,154)   (1,705)
                                                           -------   -------
                                                           $ 5,973   $ 7,577
                                                           =======   =======

5.   PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consist of the following:

                                                                JUNE 30,
                                                           -----------------
                                                             2005      2004
                                                           -------   -------
                                                             (IN THOUSANDS)

     Land, buildings and improvements                      $   989   $ 1,951
     Machinery and equipment                                   566       527
     Office furniture and equipment                          1,188     1,036
     Leasehold improvements                                    277       265
                                                           -------   -------
                                                             3,020     3,779
     Less accumulated depreciation and amortization         (2,265)   (2,758)
                                                           -------   -------
                                                           $   755   $ 1,021
                                                           =======   =======

     During fiscal year ended June 30, 2005, the Company reclassified the land
     and building, with a net carrying value of $174,000, at its Petersburg, PA
     facility to "Assets held for sale." See Note 15.


                                       35



     Depreciation expense of $321,000, $340,000 and $359,000 was recorded in
     fiscal 2005, 2004 and 2003, respectively.

6.   ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

     Accrued expenses and other current liabilities consist of the following:

                                                                     JUNE 30,
                                                                  --------------
                                                                   2005    2004
                                                                  ------   ----
                                                                  (IN THOUSANDS)

     Insurance                                                    $  129   $170
     Salary, commissions and employee benefits                       559    380
     Consulting fees                                                 450     --
     Other                                                           329    171
                                                                  ------   ----
                                                                  $1,467   $721
                                                                  ======   ====

7.   NOTE PAYABLE

     The Company has a secured line of credit with an international bank which
     matures on June 30, 2006 and is subject to annual renewals thereafter.
     Under the terms of this line of credit, the Company may borrow up to
     $20,000,000, in the aggregate, including revolving loans and letters of
     credit. As of June 30, 2005, the Company had outstanding borrowings of
     $4,794,000 under the facility and had approximately $5,985,000 of
     outstanding letters of credit. Availability under this line of credit is
     subject to the Company's compliance with certain financial formulas as
     outlined in the agreement. As of June 30, 2005, the Company was in
     compliance. Pursuant to the terms of the agreement, the Company pledged
     substantially all of it assets. Interest on outstanding borrowings is
     payable at a variable rate per annum, equal to the prime rate less 0.75
     percent (5.50 percent as of June 30, 2005).

     For the fiscal year ended June 30, 2005, under the credit agreement, the
     borrowings peaked at $13,410,000 and the average amount of borrowings was
     $6,335,000, with the weighted average interest rate of 4.40 percent. For
     the fiscal year ended June 30, 2004, under the credit agreement, the
     borrowings peaked at $5,021,000 and the average amount of borrowings was
     $1,275,000, with the weighted average interest rate of 4.25 percent.

     At June 30, 2004, the Company had no borrowings outstanding under this line
     of credit and had approximately $9,485,000 of outstanding letters of
     credit.

     The Company believes that the available borrowing under this agreement,
     along with anticipated internally generated funds, will be sufficient to
     cover its working capital requirements through June 30, 2006.


                                       36



8.   FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following disclosure of the estimated fair value of financial
     instruments is made in accordance with the requirements of SFAS No. 107,
     "Disclosures about Fair Value of Financial Instruments." The estimated fair
     value amounts have been determined by the Company, using available market
     information and appropriate valuation methodologies.

     Cash, Accounts Receivable, Accounts Payable, Accrued Expenses and Other
     Current Liabilities - The carrying value of these items approximates fair
     value, based on the short-term maturities of these instruments.

     Note Payable and Other Long-term Liabilities - The fair value of these
     securities are estimated based on quoted market prices. If no market quotes
     are available, interest rates that are currently available to the Company
     for issuance of the debt with similar terms and remaining maturities are
     used to estimate fair value of debt issues. The carrying value approximates
     the fair value.

     The fair value estimates are based on pertinent information available to
     management as of June 30, 2005 and 2004. Although management is not aware
     of any factors that would significantly affect the estimated fair value
     amounts, such amounts have not been comprehensively revalued for purposes
     of these financial statements since those respective dates, and current
     estimates of fair value may differ significantly from the amounts presented
     herein. Accordingly, the estimates presented herein are not necessarily
     indicative of the amounts the Company could realize in a current market
     exchange.

9.   INCOME TAXES

     Deferred income taxes reflect the net tax effects of (a) temporary
     differences between the carrying amounts of assets and liabilities for
     financial reporting purposes and the amounts used for income tax purposes,
     and (b) operating loss and credit carryforwards.

     The income tax effects of significant items, comprising the Company's net
     deferred tax assets and liabilities, are as follows:

                                                                     JUNE 30,
                                                                 ---------------
                                                                  2005     2004
                                                                 ------   ------
                                                                  (IN THOUSANDS)

     Deferred tax liabilities:
        Differences between book and tax basis of goodwill       $   13   $   --
                                                                 ------   ------
     Deferred tax assets:
        Difference between book and tax basis of inventory          691      544
        Reserves not currently deductible                           834      832
        Operating loss carry forwards                             2,931    1,083
        Other                                                       290      260
                                                                 ------   ------
                                                                  4,746    2,719
                                                                 ------   ------
     Net deferred tax asset                                      $4,733   $2,719
                                                                 ======   ======


                                       37



     The provision for (benefit from) income taxes on continuing operations is
     comprised as follows:

                                                           YEARS ENDED JUNE 30,
                                                         -----------------------
                                                           2005    2004    2003
                                                         -------   ----   ------
                                                              (IN THOUSANDS)

     Current:
        Federal                                          $    10   $(12)  $  126
        State and local                                       50     42      101
                                                         -------   ----   ------
                                                              60     30      227
                                                         -------   ----   ------
     Deferred
        Federal                                           (1,712)    54    1,652
        State and local                                     (302)    10      291
                                                         -------   ----   ------
                                                          (2,014)    64    1,943
                                                         -------   ----   ------

                                                         $(1,954)  $ 94   $2,170
                                                         =======   ====   ======

     Reconciliation of the U.S. statutory rate with the Company's effective tax
     rate (benefit) is summarized as follows:

                                                           YEARS ENDED JUNE 30,
                                                          ---------------------
                                                           2005     2004   2003
                                                          -----    -----   ----
                                                              (IN THOUSANDS)

     Federal statutory rate (benefit)                     (34.0)%   34.0%  34.0%
     Increase (decrease) in tax resulting from:
        State income taxes (net of federal tax benefits)   (3.3)    17.6    4.6
        Other                                              (1.2)    (9.3)    .1
                                                          -----     ----   ----
     Effective rate                                       (38.5)%   42.3%  38.7%
                                                          =====     ====   ====

     As of June 30, 2005, the Company has net operating loss carryforwards of
     approximately $7,327,000 for federal income tax purposes that expire
     between the years 2011 and 2025 and credit carryforwards of approximately
     $216,000.


                                       38



10.  COMMITMENTS AND CONTINGENCIES

     Operating Leases --The Company has operating leases expiring in various
     years through fiscal 2011.

     Future minimum payments under these leases at June 30, 2005 are as follows
     (in thousands):

     FISCAL YEAR   AMOUNT
     -----------   ------
      2006         $1,233
      2007          1,175
      2008          1,180
      2009          1,193
      2010          1,223
      Thereafter      619
                   ------
                   $6,623
                   ======

     Rental expense for 2005, 2004 and 2003 was approximately $1,313,000,
     $1,255,000 and $1,240,000, respectively.

     Employment Agreement - In January 2003, the Company and Mr. Knigin, the
     Company's CEO and President, finalized their negotiations regarding an
     extension of Mr. Knigin's employment agreement, which was to expire on June
     30, 2004. Under the terms of the extended agreement, Mr. Knigin is to
     receive total base compensation of $2,625,000 over the five-year term of
     the agreement, effective as of July 1, 2002 and continuing through June 30,
     2007. As of June 30, 2005, the remaining financial liability of this
     agreement is $1,125,000. Mr. Knigin may also be entitled to certain
     severance payments at the conclusion of the term of his agreement, provided
     the Company attains specified financial performance goals. The severance
     obligations of the Company, if any, will be reduced by the lump sum payment
     paid to Mr. Knigin in connection with the sale, by the David family, of its
     shares of the Company's common stock, as discussed below.

     On January 28, 2003, Mr. Knigin voluntarily surrendered and forfeited his
     options to purchase 1,000,000 shares of the Company's common stock, par
     value $.01 and relinquished any further rights he may have had under the
     existing option agreements, which have now been terminated.

     On February 10, 2004, Mark M. David, the Company's then Chairman, and
     members of his family, entered into an agreement to sell all of their
     shares of common stock of the Company, an aggregate of 3,532,644 shares, or
     approximately 22.7% of the total shares outstanding, to TTG Apparel, LLC,
     for a purchase price of $1.70 per share. At the request of the purchaser,
     the purchase of the shares was approved by the Company's Board of
     Directors. Upon the closing of the transaction, Mark M. David and Gary W.
     Krat resigned from the Company's Board of Directors. This transaction
     closed on February 17, 2004. This transaction activated a provision under
     the Company's employment agreement with Mr. Knigin, which required the
     Company to make a lump sum payment to Mr. Knigin. As a result, a special
     charge of approximately $1,084,000 was recorded in the third quarter of
     fiscal 2004. Under the terms of the agreement with Mr. Knigin, the payment
     is to be applied against any severance obligations of the Company owed to
     Mr. Knigin under his employment contract, which, in accordance with its
     terms, expires on June 30, 2007. The payment was made on April 8, 2004.


                                       39



     Consulting Agreements - As of January 1, 2003, the Company and Mark M.
     David, the Company's then Chairman of the Board, renegotiated Mr. David's
     consulting agreement with the Company that was to expire on June 30, 2004.
     The new agreement was with Mr. David's consulting firm. Under the terms of
     the new agreement, Mr. David's consulting firm was to provide the
     consulting services of Mr. David and was to receive annual consulting fees
     of $225,000 through June 30, 2007. As of June 30, 2005, the services of Mr.
     David have been terminated and the Company has accrued the remaining
     liability under the agreement of $450,000 which is included in "Accrued
     expenses and other current liabilities."

     As of May 3, 2004, the Company and LLI, Inc. ("LLI"), a corporation
     organized under the law of the Province of Quebec, Canada, entered into a
     consulting agreement whereby LLI will provide the sales representation for
     the Company in Canada and supervise the operations of the Company's office
     in Montreal. The agreement expires on August 31, 2005 and will be
     automatically renewed in one-year increments provided that LLI meets
     certain net sales, as defined in the agreement. LLI will receive annual
     consulting fees of $125,000 through August 31, 2005, plus additional
     consulting fees for sales in excess of targets, as defined in the
     agreement. As of August 31, 2005, the agreement has been renewed through
     August 31, 2006.

     Licensing Agreement - In February 2004, the Company entered into a
     licensing agreement with Maidenform Inc. Pursuant to the agreement, the
     Company is obligated to pay licensing fees, based upon a percentage of net
     sales, subject to an annual minimum guaranteed royalty. Future minimum
     guaranteed royalty payments under the non-cancelable agreement as of June
     30, 2005 are as follows (in thousands):

     FISCAL YEAR   AMOUNT
     -----------   ------
         2006       $115
         2007        170
         2008         95
                    ----
                    $380
                    ====

     Guarantees - The Company has not provided any financial guarantees as of
     June 30, 2005.

11.  RELATED PARTY

     Upon the retirement of its then Chief Executive Officer, Mark M. David, in
     July 1999, the Company entered into an agreement, expiring in October 2011,
     to provide for future medical benefits. As of June 30, 2005 and 2004, the
     current portion, included in "Accrued expenses and other current
     liabilities," amounted to $14,000 and $13,000, respectively and the
     long-term portion, classified as "Other long-term liability," amounted to
     $75,000 and $91,000, respectively.

12.  CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

     Financial instruments, which potentially expose the Company to
     concentrations of credit risk, consist primarily of trade accounts
     receivable. The Company's customers, of which 99% are located throughout
     the United States, are not concentrated in any specific geographic region,
     but are concentrated in the retail industry. One customer accounted for
     20%, 38%, and 42% of the Company's net sales in fiscal 2005, 2004, and
     2003, respectively. Another customer accounted for 15%, 3% and 4% of the
     Company's net sales in fiscal 2005, 2004 and 2003, respectively, while
     another customer accounted for 6%, 10% and 10% of the Company's net sales
     in fiscal 2005, 2004 and 2003, respectively. The Company performs ongoing
     credit evaluations of its customers' financial condition. The Company
     establishes an allowance for doubtful accounts based upon


                                       40



     factors surrounding the credit risk of specific customers, historical
     trends and other information.

13.  STOCK PLANS, OPTIONS AND WARRANT

     Stock Options - On December 8, 1994, the Company's shareholders approved a
     new Incentive Stock Option Plan (the "1994 ISOP") to replace the 1983 ISOP.
     Options granted, pursuant to the plan, are not subject to a uniform vesting
     schedule. The plan permitted the issuance of options to employees to
     purchase common stock of the Company at a price not less than fair market
     value on the date of the option grant. The plan reserved 2,000,000 shares
     of common stock for grant and provides that the term of each award be
     determined by the Compensation Committee with all awards made within the
     ten-year period following the effective date. Options to purchase 620,000
     shares at an exercise price ranging from $.625 to $.875 per share are
     outstanding and exercisable as of June 30, 2005. Options to purchase
     555,000 shares have been exercised under this plan through June 30, 2005.
     Effective July 15, 2004, options can no longer be granted under the 1994
     ISOP.

     On February 21, 2000, the Committee adopted a new Performance Equity Plan
     (including a new Incentive Stock Option Plan) (the "2000 Plan") and on
     November 28, 2000, the Company's shareholders approved the plan. The 2000
     Plan authorizes the Company to grant qualified and non-qualified options to
     participants for the purchase of up to an additional 750,000 shares of the
     Company's common stock and to grant other stock-based awards to eligible
     employees of the Company. Options to purchase 338,000 shares at an exercise
     price ranging from $.625 to $1.36 per share are outstanding at June 30,
     2005. Of the total options granted, 328,000 are presently exercisable.

     The Company also has a Key Employee Stock Option Plan covering the issuance
     of up to 1,666,666 shares of the Company's common stock. Options to
     purchase 200,000 shares at an exercise price ranging from $.625 to $1.45
     per share are outstanding at June 30, 2005. Of the total options granted,
     75,000 are presently exercisable.

     The options typically vest over five years.

     Information with respect to stock options is as follows (shares in
     thousands):



                                                  2005                2004                  2003
                                          ------------------   -----------------    ------------------
                                                   WEIGHTED-            WEIGHTED-            WEIGHTED-
                                                    AVERAGE              AVERAGE              AVERAGE
                                                    EXERCISE             EXERCISE             EXERCISE
               FIXED OPTIONS              SHARES     PRICE     SHARES     PRICE     SHARES      PRICE
     ----------------------------------   ------   ---------   ------   ---------   ------   ---------

     Outstanding - beginning of year       1,005     $ .71      1,210      $.70      2,420      $.68
     Granted                                 248      1.42         --        --        100       .54
     Exercised                               (20)     1.13       (205)      .65       (310)      .67
     Canceled                                (75)     1.40         --        --     (1,000)      .65
                                           -----     -----      -----      ----     ------      ----
     Outstanding - end of year             1,158     $ .81      1,005      $.71      1,210      $.70
                                           =====     =====      =====      ====     ======      ====
     Exercisable - end of year             1,023     $ .73        945      $.71      1,043      $.69
                                           =====     =====      =====      ====     ======      ====
     Weighted-average fair value of
        options granted during the year              $ .73                 $ --                 $.28
                                                     =====                 ====                 ====



                                       41





                             OPTIONS OUTSTANDING                                  OPTIONS EXERCISABLE
     --------------------------------------------------------------------   -------------------------------
                                        WEIGHTED-AVERAGE
                           NUMBER          REMAINING          WEIGHTED-                         WEIGHTED-
        RANGE OF       OUTSTANDING AT     CONTRACTUAL          AVERAGE      EXERCISABLE AT       AVERAGE
     EXERCISE PRICES   JUNE 30, 2005      LIFE IN YRS      EXERCISE PRICE    JUNE 30, 2005   EXERCISE PRICE
     ---------------   --------------     -------------    --------------   --------------   --------------

     $.625 - $.6875           785             2.64              $ .63              775            $.63
      $.875 - $1.45           373             6.83               1.18              248            1.04
                            -----             ----              -----            -----            ----
                            1,158             3.99              $ .81            1,023            $.73
                            =====             ====              =====            =====            ====


     Warrant - In October 1998, in connection with an agreement with a financial
     consulting firm, the Company granted a warrant to purchase 50,000 shares of
     its common stock at $.4375 per share to the consultants. The warrant is
     exercisable at anytime within ninety days following written notice from the
     Company of the Company's intention to file a Registration Statement other
     than on Form S-4 and S-8, under the Securities Act of 1933, as amended.

     In 1983, the Company adopted an Employee Stock Ownership and Capital
     Accumulation Plan (the "Plan"). The Plan covers the Company's employees who
     meet the minimum credited service requirements of the Plan. The Plan is
     funded solely from employer contributions and income from investments. The
     Company has made no contributions to the Plan since July 1996 and at that
     time all employees became 100% vested in their shares. Upon an employee's
     termination, or in certain other limited circumstances, the employee's
     shares are distributed to the employee according to his or her direction
     and the applicable Plan rules. As of June 30, 2005 and 2004, the Plan owned
     439,336 and 459,091 shares of common stock of the Company, respectively.
     The amount of shares eligible for distribution at June 30, 2005 and 2004
     were 187,607 and 193,089, respectively.

14.  NET (LOSS) INCOME PER SHARE

     The Company's calculation of basic and diluted net (loss) income per share
     are as follows (in thousands, except per share amounts):



                                                                        YEARS ENDED JUNE 30,
                                                                 --------------------------------
                                                                      2005      2004      2003
                                                                    -------   -------   -------
                                                                 (IN THOUSANDS, EXCEPT PER SHARE)

     BASIC:
        Net (loss) income                                           $(3,122)  $   128   $ 3,431
                                                                    =======   =======   =======
        Weighted average number of shares outstanding                15,625    15,574    15,133
                                                                    =======   =======   =======
        Basic net (loss) income per share                           $  (.20)  $   .01   $   .23
                                                                    =======   =======   =======

     DILUTED:
        Net (loss) income                                           $(3,122)  $   128   $ 3,431
                                                                    =======   =======   =======
        Weighted average number of shares outstanding                15,625    15,574    15,133
        Shares issuable upon conversion of stock options                 --       588       258
        Shares issuable upon conversion of warrants                      --        37        16
                                                                    -------   -------   -------
        Total average number of equivalent shares outstanding        15,625    16,199    15,407
                                                                    =======   =======   =======
        Diluted net (loss) income per share                         $  (.20)  $   .01   $   .22
                                                                    =======   =======   =======



                                       42



     For the year ended June 30, 2005, shares issuable upon conversion of stock
     options and warrants of 388,000 and 31,000, respectively, were excluded
     from diluted net loss per share because their effect would be
     anti-dilutive.

15.  CLOSING OF DISTRIBUTION FACILITY

     During fiscal year ended June 30, 2005, the Company recorded facility
     closing costs of $108,000, which includes severance and related salary and
     benefit costs of $58,000, relating to a plan to close the distribution
     facility in Petersburg, Pennsylvania. The action was taken by the Company
     to enhance the Company's competitiveness, to reduce expenses and to improve
     efficiencies. During fiscal 2005, the Company reclassified certain property
     and equipment at its Petersburg, Pennsylvania facility to assets held for
     sale, as the Company expects to sell this facility in fiscal 2006. In
     connection with the Company's plan of disposal, management estimates that
     they will not incur a loss in liquidating these assets.

16.  UNAUDITED SELECTED QUARTERLY FINANCIAL DATA

                                                     QUARTER
                                      -------------------------------------
                                       FIRST     SECOND    THIRD     FOURTH
                                      -------   -------   -------   -------
                                         (IN THOUSANDS, EXCEPT PER SHARE)

FISCAL YEAR ENDED JUNE 30, 2005
   Net sales                          $12,830   $22,990   $14,659   $ 8,054
   Gross profit                         3,830     5,030     3,473     1,896
   Net loss                              (230)      (75)     (761)   (2,056)
   Basic net loss per share (a)          (.01)      --       (.05)     (.13)
   Diluted net loss per share (a)        (.01)      --       (.05)     (.13)

FISCAL YEAR ENDED JUNE 30, 2004
   Net sales                          $16,826   $14,166   $12,175   $10,524
   Gross profit                         5,282     4,277     3,831     2,720
   Net income                             853       417      (636)     (506)
   Basic net income per share (a)         .06       .03      (.04)     (.03)

   Diluted net income per share (a)       .05       .03      (.04)     (.03)

     (a)  Quarterly net (loss) income per share amounts may not add to the total
          for the full year amount, due to rounding.

                                   * * * * * *


                                       43



                                                                     SCHEDULE II

MOVIE STAR, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
--------------------------------------------------------------------------------



                  COLUMN A                      COLUMN B     COLUMN C     COLUMN D     COLUMN E

                                                            ADDITIONS
                                               BALANCE AT   CHARGED TO                BALANCE AT
                                                BEGINNING    COSTS AND                  END OF
                 DESCRIPTION                    OF PERIOD    EXPENSES    DEDUCTIONS     PERIOD
                 -----------                   ----------   ----------   ----------   ----------



FISCAL YEAR ENDED JUNE 30, 2005:
Allowance for doubtful accounts                   $   --      $   --     $    12(b)     $   12
Allowance for sales discounts and allowances       1,705       4,774      (5,337)        1,142
                                                  ------      ------     -------        ------
                                                  $1,705      $4,774     $(5,325)       $1,154
                                                  ======      ======     =======        ======

FISCAL YEAR ENDED JUNE 30, 2004:
Allowance for doubtful accounts                   $  339      $   --     $   (91)(a)
                                                                            (248)(b)    $   --
Allowance for sales discounts and allowances       1,051       5,759      (5,105)        1,705
                                                  ------      ------     -------        ------
                                                  $1,390      $5,759     $(5,444)       $1,705
                                                  ======      ======     =======        ======
FISCAL YEAR ENDED JUNE 30, 2003:
Allowance for doubtful accounts                   $  406      $   --     $   (26)(a)
                                                                             (41)(b)    $  339
Allowance for sales discounts and allowances         915       4,698      (4,562)        1,051
                                                  ------      ------     -------        ------
                                                  $1,321      $4,698     $(4,629)       $1,390
                                                  ======      ======     =======        ======


(a)  Uncollectible accounts written off.

(b)  Increase (reduction) in allowance.


                                       44



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

None

ITEM 9A. CONTROLS AND PROCEDURES

An evaluation of the effectiveness of the Company's disclosure controls and
procedures as of June 30, 2005 was made under the supervision and with the
participation of the Company's management, including the chief executive officer
and chief financial officer. Based on that evaluation, they concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. During the most recently completed fiscal
quarter, there has been no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.


                                       45



                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

See Item 14.

ITEM 11. EXECUTIVE COMPENSATION

See Item 14.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
     RELATED STOCKHOLDER MATTERS

See Item 14.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See Item 14

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Items 10, 11, 12, 13 and 14 is incorporated by
reference to the information included in the Company's definitive proxy
statement in connection with the 2005 Annual Meeting of Shareholders.


                                       46



                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)   The following documents are filed as part of this report:

      1. FINANCIAL STATEMENTS:

            Report of Independent Registered Public Accounting Firm

            Consolidated Balance Sheets at June 30, 2005 and 2004

            Consolidated Statements of Operations for the fiscal years ended
            June 30, 2005, 2004 and 2003

            Consolidated Statements of Shareholders' Equity for the fiscal years
            ended June 30, 2005, 2004 and 2003

            Consolidated Statements of Cash Flows for the fiscal years ended
            June 30, 2005, 2004 and 2003

            Notes to Consolidated Financial Statements

      2. FINANCIAL STATEMENT SCHEDULE:

            For the fiscal years ended June 30, 2005, 2004 and 2003:

               II - Valuation and Qualifying Accounts

Schedules other than those listed above are omitted for the reason that they are
not required or are not applicable, or the required information is shown in the
financial statements or notes thereto. Columns omitted from schedules filed have
been omitted because the information is not applicable.

      3. EXHIBITS

      EXHIBIT
       NUMBER   EXHIBIT                           METHOD OF FILING
      -------   -------                           ----------------

      2.1       Asset Purchase Agreement dated    Incorporated by reference as
                July 28, 2004, among the          Exhibit 2.1 to Form 8-K for
                Company, Sidney Bernstein & Son   the quarter ended September
                Lingerie, Inc., Irwin Bernstein   30, 2004 and filed on August
                and Daniel Bernstein.             6, 2004

      3.1       Certificate of Incorporation      Incorporated by reference as
                                                  Exhibit 3.1 to Form 10-K for
                                                  fiscal year ended June 30,
                                                  1988 and filed on October 13,
                                                  1988.

      3.2       Amended Certificate of            Incorporated by reference as
                Incorporation                     Exhibit 3.1.1 to Form 10-K for
                                                  fiscal year ended June 30,
                                                  1992 and filed on September
                                                  25, 1992.


                                       47



      EXHIBIT
       NUMBER   EXHIBIT                           METHOD OF FILING
      -------   -------                           ----------------

      3.3       Amended Certificate of            Incorporated by reference as
                Incorporation                     Exhibit 3.1.2 to Amendment to
                                                  Form 10-K for fiscal year
                                                  ended June 30, 1992 and filed
                                                  on January 19, 1993.

      3.4       By-Laws                           Incorporated by reference as
                                                  Exhibit 3.2 to Form 10-K for
                                                  fiscal year ended June 30,
                                                  1988 and filed on October 13,
                                                  1988.

      10.1      1994 Incentive Stock Option       Incorporated by reference as
                Plan.                             Exhibit 10.3.1 to Form 10-K
                                                  for fiscal year ended June 30,
                                                  1994 and filed on October 12,
                                                  1994.

      10.2      1988 Non-Qualified Stock Option   Incorporated by reference as
                Plan.                             Exhibit 10.7 to Form 10-K for
                                                  fiscal year ended June 30,
                                                  1989 and filed on September
                                                  27, 1989.

      10.3      2000 Performance Equity Plan      Incorporated by reference as
                                                  Exhibit 4.1 to Form S-8 and
                                                  filed on April 1, 2005.

      10.4      Agreement dated as of July 1,     Incorporated by reference as
                1999 between Mark M. David and    Exhibit 10.11 to Form 10-K for
                the Company providing for         fiscal year ended June 30,
                retirement benefits to Mr.        1999 and filed on September
                David.                            28, 1999.

      10.5      Agreement dated as of January     Incorporated by reference as
                1, 2003 between BENJAM            Exhibit 10.17 to Form 10-Q for
                Consulting LLC and the Company    the quarter ended December 31,
                replacing the Agreement dated     2002 and filed on February 13,
                as of July 1, 1999 between Mark   2003.
                M. David and the Company for
                Mr. David's consulting
                services.

      10.6      Employment Agreement dated as     Incorporated by reference as
                of July 1, 2002 between Melvyn    Exhibit 10.18 to Form 10-Q for
                Knigin and the Company            the quarter ended December 31,
                replacing the Agreement dated     2002 and filed on February 13,
                as of February 22, 2000.          2003.

      10.7      Letter dated January 28, 2003     Incorporated by reference as
                from Melvyn Knigin to the         Exhibit 10.19 to Form 10-Q for
                Company for the surrender and     the quarter ended December 31,
                forfeiture of Mr. Knigin's        2002 and filed on February 13,
                stock options.                    2003.

      10.8      Continuing Letter of Credit       Incorporated by reference as
                Agreement effective July 1,       Exhibit 10.11 to Form 10-K for
                2004 between HSBC Bank USA and    fiscal year ended June 30,
                the Company.                      2004 and filed on September
                                                  27, 2004.

      10.9      Continuing General Security       Incorporated by reference as
                Agreement effective July 1,       Exhibit 10.12 to Form 10-K for
                2004 between HSBC Bank USA and    fiscal year ended June 30,
                the Company.                      2004 and filed on September
                                                  27, 2004.

      10.10     Non-Employee Director             Incorporated by reference as
                Compensation Plan effective       Exhibit 10.13 to Form 8-K
                January 1, 2005 between the       dated December 6, 2004 and
                Directors and the Company.        filed on December 14, 2004.

      10.11     Form of Non-Employee Director     Incorporated by reference as
                Non-Qualified Stock Option        Exhibit 10.14 to Form 8-K
                Agreement                         dated December 6, 2004 and
                                                  filed on December 14, 2004.


                                       48



      EXHIBIT
       NUMBER   EXHIBIT                           METHOD OF FILING
      -------   -------                           ----------------

      10.12     Employment Agreement effective    Incorporated by reference as
                July 1, 2004 between Saul         Exhibit 10.15 to Form 8-K
                Pomerantz and the Company.        dated December 10, 2004 and
                                                  filed on December 15, 2004.

      10.13     Non-Qualified Stock Option        Incorporated by reference as
                Agreement dated as of December    Exhibit 10.16 to Form 8-K
                10, 2004 between Saul Pomerantz   dated December 10, 2004 and
                and the Company.                  filed on December 15, 2004.

      10.14     Employment Agreement effective    Incorporated by reference as
                July 1, 2004 between Thomas       Exhibit 10.17 to Form 8-K
                Rende and the Company.            dated December 10, 2004 and
                                                  filed on December 15, 2004.

      10.15     Non-Qualified Stock Option        Incorporated by reference as
                Agreement dated as of December    Exhibit 10.18 to Form 8-K
                10, 2004 between Thomas Rende     dated December 10, 2004 and
                and the Company.                  filed on December 15, 2004.

      10.16     Line of Credit Agreement          Filed herewith.
                effective July 1, 2005 between
                HSBC Bank USA and the Company.

      10.17     Demand Grid Note effective July   Filed herewith.
                1, 2005 between HSBC Bank USA
                and the Company.

      10.18     Amendment dated as of September   Filed herewith.
                19, 2005 to Agreement dated as
                of January 1, 2003 between
                BENJAM Consulting LLC
                and the Company.

      14        Code of Ethics                    Incorporated by Reference as
                                                  Appendix A to Definitive Proxy
                                                  Statement filed October 22,
                                                  2004

      21        Subsidiary of the Company.        Filed herewith.

      23        Consent of Independent            Filed herewith.
                Registered Public Accounting
                Firm

      31.1      Certification by Chief            Filed herewith.
                Executive Officer.

      31.2      Certification by Principal        Filed herewith.
                Financial and Accounting
                Officer.

      32        Section 1350 Certification.       Filed herewith.


                                       49



                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this document to be signed on
its behalf by the undersigned, thereunto duly authorized.

September 27, 2005

MOVIE STAR, INC.

                                        By: /s/ MELVYN KNIGIN
                                            ------------------------------------
                                            MELVYN KNIGIN
                                            Chairman of the Board

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


/s/ MELVYN KNIGIN        Chairman of the Board;               September 27, 2005
----------------------   President; Chief Executive
MELVYN KNIGIN            Officer


/s/ SAUL POMERANTZ       Executive Vice President;            September 27, 2005
----------------------   Chief Operating Officer;
SAUL POMERANTZ           Secretary & Director


/s/ THOMAS RENDE         Chief Financial Officer (Principal   September 27, 2005
----------------------   Financial & Accounting Officer);
THOMAS RENDE             Director


/s/ JOEL M. SIMON        Director                             September 27, 2005
----------------------
JOEL M. SIMON


/s/ MICHAEL A. SALBERG   Director                             September 27, 2005
----------------------
MICHAEL A. SALBERG


/s/ PETER COLE           Director                             September 27, 2005
----------------------
PETER COLE


/s/ JOHN L. EISEL        Director                             September 27, 2005
----------------------
JOHN L. EISEL