MOVIE STAR INC /NY/ - 10-K Annual Report

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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, 2002 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.

Yes X No
----- ----

The aggregate market value of voting stock held by nonaffiliates of the
Registrant totaled $5,038,202 on August 30, 2002, based upon the closing price
of $.45 at the close of trading on August 30, 2002.

As of August 30, 2002, there were 15,084,975 common shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

SEE Item 14 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.

MOVIE STAR, INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

PART I Page No.

Item 1 Business....................................................I-1

Item 2 Properties..................................................I-5

Item 3 Legal Proceedings...........................................I-6

Item 4 Submission of Matters to a
Vote of Shareholders........................................I-6

PART II

Item 5 Market for Company's Common Stock and
Related Shareholder Matters................................II-1

Item 6 Selected Financial Data....................................II-3

Item 7 Management's Discussion and Analysis
of Financial Condition and
Results of Operations......................................II-5

Item 8 Financial Statements and
Supplementary Data..........................................F-1

Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................II-15

PART III

Item 10 Executive Officers and Directors
of the Company............................................III-1

Item 11 Executive Compensation....................................III-2

Item 12 Security Ownership of Certain Beneficial
Owners and Management.....................................III-6

Item 13 Certain Relationships and
Related Transactions......................................III-7

PART IV

Item 14 Exhibits, Financial Statement
Schedule and Reports on Form 8-K...........................IV-1

PART I
ITEM 1. BUSINESS

(a) Movie Star, Inc. ("the Company"), a New York corporation organized in
1935, designs, manufactures, markets and sells an extensive line of ladies'
sleepwear, robes, leisurewear, loungewear, panties and daywear. During fiscal
2001, the Company discontinued its retail operations.

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.

Between 1992 and 1997, as a result of consolidations in the retail industry, the
high cost of domestic manufacturing and difficulties the Company had encountered
in engaging reliable offshore contractors and obtaining sufficient quantities of
acceptable quality finished products from overseas, the Company experienced a
loss of sales to certain of its customers. In fiscal 1998, the Company began to
regain a portion of the sales it had lost by creating new designs at competitive
prices and by improving on-time delivery and the quality of its products. The
Company has shifted its production to offshore based contractors and has
developed infrastructures in these locations that has given the Company greater
control over its operations, quality and on-time delivery. The Company maintains
an in-house design staff which affords it the flexibility to work with
merchandise buyers on fashion design and price points.

(b) Intentionally omitted.

(c) (i) 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 $8.00 for certain of its
seductivewear products 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 39% of the Company's
sales are made to mass merchandisers, 19% to national chains, and 20% 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, 2002, 2001, and 2000 was approximately 28.0%, 29.4% and 28.3%,
respectively.

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

(i) Not applicable.

(ii) 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, 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.

I-1

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 has eliminated
its domestic production and increased its finished package purchases. Domestic
production decreased from 10% of total production in fiscal 2000 and 2.5% in
fiscal 2001 to less than 1% in fiscal 2002. There will be no domestic production
in fiscal 2003. The purchase of finished packages increased from 40% of total
production in fiscal 2000 and 49.5% in fiscal 2001 to 70% in fiscal 2002. CMT
production was 50% of total production in fiscal 2000, 48% in fiscal 2001 and
29.5% in fiscal 2002.

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

Currently, the Company has two employees in Mexico, two employees in Bangladesh
and seven 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 assist in maintaining quality
and on-time delivery. Management personnel travel to Mexico, Asia, Africa, the
Caribbean and Central America 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 has increased from 28% of total production in 2001 to 38% of total
production in 2002, the Company has opened an office and incorporated in the
Philippines. 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.

I-2

The Company believes it maintains adequate inventories to cover the needs of its
customers.

(iii) 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. There is no litigation with
respect to patents, licenses and trademarks.

(iv) 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. More than 50% of the Company's sales are made in the first six months
of its fiscal year.

(v) All sales are outright sales. Terms are generally net 10 days E.O.M. 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 twenty-one days or as long as
fifty days. It has become industry practice to extend payment terms up to an
additional thirty days for certain customers. Although sales are made without
the right of return, in certain instances the Company may accept returns or
agree to allowances. 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.

(vi) Wal-Mart accounted for 32% of sales for fiscal 2002, 27% of sales for
fiscal 2001, and 21% for fiscal 2000. Sears, Roebuck and Company accounted for
13% of sales for fiscal 2002, 13% of sales for fiscal 2001 and 12% for fiscal
2000. Target accounted for 7% sales for fiscal 2002, 11% of sales for fiscal
2001, and 14% for fiscal 2000.

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.

(vii) The backlog of orders was approximately $32,561,000 as of June 30,
2002, $31,700,000 as of June 30, 2001, and $33,600,000 as of June 30, 2000.
Orders are booked upon receipt. The Company believes that the current backlog is
firm and will be filled by the end of the current fiscal year.

(viii) There is no material portion of the business which may be
subject to renegotiation of profits or termination of contracts or subcontracts
at the election of the Government.

(ix) 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.

I-3

Owning manufacturing facilities has required the investment of substantial
capital and subjected the Company to the costs of maintaining excess capacity.
Competitive conditions in the industry have required the Company to place
greater reliance on obtaining raw materials and finished products from sources
outside the United States. As a result, the Company has eliminated the
production in its domestic plants. Between August 1990 and June 2000, the
Company has closed eighteen manufacturing plants in an effort to lower costs by
reducing excess manufacturing capacity and in response to the need to produce
and purchase products at a lower cost from sources outside the United States.

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.

(x) 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.

(xi) 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.

(xii) Of the approximately 233 full-time and 13 part-time employees of the
Company, approximately 25 are executive, design and sales personnel, 80 are
administrative personnel, and the balance are in distribution, warehousing and
offshore support.

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.

Most employees have an interest in the Company's Common Stock through the
Company's ESOP. The Company deems its relationship with its employees to be
good. The Company is not a party to any collective bargaining agreement with any
union.

Restriction on Dividends

Pursuant to the Company's secured revolving line of credit agreement with
Rosenthal and Rosenthal, Inc., as amended, the Company is prohibited from making
or declaring any dividend payments or setting apart any money for the purchase,
redemption, retirement or other acquisition of any shares of the Company's
stock.

I-4

ITEM 2. PROPERTIES

The following table sets forth all of the facilities owned or leased by
the Company as of June 30, 2002.

(1) Leased from municipalities.

(2) "Productive Capacity" is based on the total number of employees
that can be employed at a facility providing direct labor for the manufacture of
the Company's products based on existing machinery and equipment and plant
design. "Extent of Utilization" is the percentage obtained by dividing the
average number of employees actually employed at a facility during the fiscal
year providing direct labor for the manufacture of the Company's products by
Productive Capacity. The Company no longer manufactures products at any of its
facilities.

The following table sets forth the amount of space allocated to
different functions in shared facilities set forth in the preceding table.

I-5

ITEM 3. LEGAL PROCEEDINGS

There are no legal proceedings pending which are material.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

None.

I-6

PART II

ITEM 5. MARKET FOR COMPANY'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS

The Common Stock is traded on the American Stock Exchange. The following table
sets forth for the indicated periods the reported high and low prices per share.

High Low
---- ---
Year Ended June 30, 2002

First Quarter .................................... $.79 $.51

Second Quarter ................................... .72 .51

Third Quarter..................................... .57 .35

Fourth Quarter.................................... .65 .42

Year Ended June 30, 2001

First Quarter..................................... $.875 $.625

Second Quarter.................................... .875 .5625

Third Quarter..................................... .88 .5625

Fourth Quarter.................................... .72 .50

As of August 30, 2002, there were approximately 1,841 holders of record of the
Common Stock. For restrictions on dividends, see Item 1 at page I-4.

MARKET FOR COMPANY'S 12.875% SUBORDINATED DEBENTURE
(per $1,000 par value)
High Low
---- ---
Year Ended June 30, 2002

First Quarter .................................... $1,000.00 $ 990.00

Year Ended June 30, 2001

First Quarter..................................... $ 980.00 $ 942.50

Second Quarter.................................... 1,000.00 910.00

Third Quarter..................................... 983.75 910.00

Fourth Quarter.................................... 980.00 890.00

II-1

EQUITY COMPENSATION PLAN INFORMATION

The following sets forth certain information as of June 30, 2002 concerning the
Company's equity compensation plans:

II-2

ITEM 6. SELECTED FINANCIAL DATA

MOVIE STAR, INC. AND SUBSIDIARIES
ITEM 6. Selected Financial Data
(In Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------

II-3

MOVIE STAR, INC. AND SUBSIDIARIES
ITEM 6. Selected Financial Data
(In Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------

II-4

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

The following discussion contains certain forward-looking statements with
respect to anticipated results which are subject to a number of risks and
uncertainties. 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.

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 consolidated
financial statements.

Management believes 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, located in the Annual Report on Form 10-K filed with the
Securities and Exchange Commission. 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 - 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 our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. The Company
also estimates expenses for customer discounts, programs and incentive
offerings. If market conditions were to decline, the Company may take actions to
increase customer incentive offerings possibly resulting in an incremental
expense at the time the incentive is offered.

II-5

Long-lived assets - In the evaluation of the fair value and future benefits of
long-lived assets, management performs an analysis of the anticipated
undiscounted future net cash flows of the related long-lived assets. If the
carrying value of the related asset exceeds the undiscounted cash flows, the
carrying value is reduced to its fair value. Various factors including future
sales growth and profit margins are included in this analysis. To the extent
these future projections or our strategies change, the conclusion regarding
impairment may differ from the current estimates.

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 would
be able to realize our deferred tax assets in the future, in excess of its
recorded amount, an adjustment to the deferred tax asset 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.

Fiscal 2002 Compared to Fiscal 2001
Results of Continuing Operations
- -----------------------------------

Net sales for the year ended June 30, 2002 were $54,359,000 as compared to
$62,462,000 in the comparable period in 2001. The decrease in sales was due
primarily to a soft retail environment and a reduction in programs with certain
customers.

The gross profit percentage was 28.0% for the year ended June 30, 2002 as
compared to 29.4% for the year ended June 30, 2001. The lower margins resulted
primarily from increased pricing pressures from certain customers and an
increase in the sale of excess inventory at discounted prices.

Selling, general and administrative expenses were $13,689,000, or 25.2% of net
sales, for the year ended June 30, 2002 as compared to $14,869,000, or 23.8% of
net sales, for the similar period in 2001. This decrease of $1,180,000 resulted
primarily from decreases in salary expense and salary related costs of $481,000,
shipping expense of $380,000, commissions of $175,000, bad debt expense of
$118,000, and a net decrease in general overhead expenses offset by an increase
in rent related expenses of $476,000. The decrease in shipping expense was
primarily due to the shutdown of the Company's Virginia distribution facility.
The increase in rent related expense was primarily due to an increase in rent at
the Company's new offices in New York.

During the second quarter of fiscal 2001, the Company implemented a plan to
close the distribution operation at its Virginia facility and to consolidate
these operations with the warehouse and distribution facility located in
Mississippi. This decision was made to increase the overall efficiencies of the
Mississippi facility and reduce overall shipping costs. The Company recorded a
charge $1,188,000 in connection with this closure. The charge consisted of a
non-cash charge for the impairment of assets of $915,000 and other charges
totaling $273,000.

Operating income from continuing operations decreased to $1,513,000 for the year
ended June 30, 2002, from $2,333,000 for the similar period in 2001. This
decrease was due to lower sales, a decrease in gross margins partially offset by
lower selling, general and administrative expenses and a charge for the closure
of the Virginia distribution facility in the prior year.

II-6

Interest income for the year ended June 30, 2002 was $3,000 as compared to
$6,000 for 2001.

Interest expense for the year ended June 30, 2002 was $695,000 as compared to
$1,476,000 for 2001. This reduction was due to lower borrowing levels and
interest rates.

For the year ended June 30, 2002, the Company provided for a deferred tax,
related to continuing operations of $360,000. For the year ended June 30, 2001,
the Company recorded an alternative minimum tax of $18,000, a deferred tax of
$331,000 and recognized a tax benefit of $1,237,000 related to the reversal of a
valuation allowance on the deferred tax asset. The Company reversed its deferred
tax valuation allowance because it was considered more likely than not that the
Company would utilize the entire asset.

The Company recorded net income from continuing operations before extraordinary
gains for the year ended June 30, 2002 of $461,000 as compared to net income of
$1,751,000 for the same period in 2001. This reduction was primarily due to a
decrease in sales and gross margins in the current year partially offset by a
decrease in selling, general and administrative expenses and net interest costs.
The Company also recorded a tax expense in the current year as compared to an
overall tax benefit in the prior year and recorded a loss on the disposal of the
Virginia distribution facility in the prior year.

Results of Discontinued Operations
- ----------------------------------

In December 2000, due to the continued decline in performance of the Company's
retail division, the Company decided to dispose of the majority of the assets of
this division. Accordingly, the operating results of this division have been
reclassified as income from discontinued operations.

In the second quarter ended December 31, 2000, the Company recorded a loss on
the disposal of the retail stores of $448,000, net of a benefit from income
taxes of $299,000. The estimated loss on disposal provided for the write-down of
assets to the estimated market value, the loss on fulfilling lease obligations
and the costs of disposal. At the end of March 2001, the Company had closed all
of its stores and had disposed of all of its inventory.

The retail division had income from discontinued operations of $86,000 for the
year ended June 30, 2002 as compared to $122,000 for the similar period in 2001.

Extraordinary Gain
- ------------------

During fiscal 2001, the Company purchased $167,000 in principal amount of its
12.875% Subordinated Debentures and $5,283,000 in principal amount of its 8%
Senior Notes. The 12.875% Subordinated Debentures were applied to the final
payment due on these debentures on October 1, 2001 and the 8% Senior Notes were
applied toward the reduction of the total amount due on these notes on September
1, 2001. As a result of these purchases, the Company recorded an extraordinary
gain of $289,000, net of related costs and income taxes.

II-7

Net Income
- ----------

The Company had net income of $547,000 for the year ended June 30, 2002 as
compared to $1,714,000 for the similar period in 2001. This reduction was
primarily due to a decrease in sales and gross margins in the current year
partially offset by a decrease in selling, general and administrative expenses
and net interest costs. The Company also recorded a tax expense in the current
year as compared to an overall tax benefit in the prior year, recorded a loss on
the disposal of the Virginia distribution facility in the prior year and a gain
in the prior year on the purchase of the Company's 12.875% Subordinated
Debentures and 8% Senior Notes. The results of the discontinued operations had a
positive effect on the current year's net income as compared to a loss in the
prior year.

Fiscal 2001 Compared to Fiscal 2000
Results of Continuing Operations
- -----------------------------------

Net sales for the year ended June 30, 2001 were $62,462,000 as compared to
$62,483,000 in the comparable period in 2000.

The gross profit percentage was 29.4% for the year ended June 30, 2001 as
compared to 28.3% for the year ended June 30, 2000. The higher margins resulted
primarily from the shift of production to offshore locations from the Company's
last fully operational domestic manufacturing facility.

At the end of January 2000, the Company completed the elimination of the sewing
operation at its manufacturing facility in Virginia. This action was taken to
correct the operational inefficiencies the Company experienced in the six months
ended December 31, 1999 and to lower overall manufacturing costs.

During the second quarter of fiscal 2001, the Company implemented a plan to
close the distribution operation at its Virginia facility and to consolidate
these operations with the warehouse and distribution facility located in
Mississippi. This decision was made to increase the overall efficiencies of the
Mississippi facility and reduce overall shipping costs. The Company recorded a
charge of $1,188,000 in connection with this closure. The charge consisted of a
non-cash charge for the impairment of assets of $915,000 and other charges
totaling $273,000. The Company completed the closure in the fourth quarter.

Selling, general and administrative expenses were $14,869,000, or 23.8% of net
sales, for the year ended June 30, 2001 as compared to $13,797,000, or 22.1% of
net sales, for the similar period in 2000. This increase resulted primarily from
an increase in shipping expense of $699,000, an increase in rent related
expenses of $175,000, an increase in bad debt expense of $175,000 and a net
increase in other general overhead expenses. The increase in shipping expense
was primarily due to the inefficiencies at the Company's Virginia facility
during the shutdown of that facility, the duplication of personnel between
Virginia and Mississippi during the transition and the cost of transferring
inventory from Virginia to the Company's facility in Mississippi. The increase
in rent related expense was primarily due to an increase in rent at the
Company's new offices in New York. The increase in bad debt expense was
primarily related to the bankruptcy of Montgomery Ward.

Operating Income from continuing operations decreased to $2,333,000 for the year
ended June 30, 2001, from $3,903,000 for the similar period in 2000. This
decrease was due to lower sales, higher selling, general and administrative
expenses and the loss resulting from the charge of $1,188,000 incurred in
connection with the disposal of the Virginia distribution facility partially
offset by an increase in gross margins.

II-8

During fiscal 2000, the Company purchased $3,737,000 of its 12.875% Subordinated
Debentures which were used to satisfy its sinking fund requirement due October
1, 2000. As a result of the purchase of these debentures, the Company recorded a
pre-tax gain of $164,000, net of related costs.

Interest income for the year ended June 30, 2001 was $6,000 as compared to
$145,000 for 2000.

Interest expense for the year ended June 30, 2001 was $1,476,000 as compared to
$1,856,000 for 2000. This reduction was due to reduced overall borrowing needs,
a lower interest rate on the Company's revolving line of credit and the
purchases of its 12.875% Subordinated Debentures and 8% Senior Notes.

For the year ended June 30, 2001, the Company provided for an alternative
minimum tax of $18,000, a deferred tax of $331,000 and recognized a tax benefit
of $1,237,000 related to the reversal of a valuation allowance on the deferred
tax asset as compared to an alternative minimum tax of $27,000 for the similar
period in 2000. The Company reversed its deferred tax valuation allowance
because it was considered more likely than not that the Company would utilize
the entire asset.

The Company recorded net income from continuing operations before extraordinary
gains for the year ended June 30, 2001 of $1,751,000 as compared to net income
of $2,329,000 for the same period in 2000. This reduction was due to an increase
in selling, general and administrative expenses, a loss on the disposal of the
Virginia distribution facility and a gain, in the prior year, on the purchases
of the Company's 12.875% Subordinated Debentures offset partially by an increase
in gross margins, lower net interest costs and an overall tax benefit in the
current year as compared to a tax expense in the prior year.

Results of Discontinued Operations
- ----------------------------------

Due to the continued decline in performance of the Company's retail division, in
December 2000, the Company determined to dispose of the majority of the assets
of this division. Accordingly, the operating results of this division have been
reclassified as income from discontinued operations.

In the second quarter ended December 31, 2000, the Company recorded a loss on
the disposal of the retail stores of $448,000, net of a benefit from income
taxes of $299,000. The estimated loss on disposal provided for the write-down of
assets to the estimated market value, the loss on fulfilling lease obligations
and the costs of disposal. At the end of March 2001, the Company had closed all
of its stores and had disposed of all of its inventory.

The retail division had income from discontinued operations of $122,000 for the
year ended June 30, 2001 as compared to $398,000 for the similar period in 2000.

Extraordinary Gain
- ------------------

During fiscal 2001, the Company purchased $167,000 in principal amount of its
12.875% Subordinated Debentures and $5,283,000 in principal amount of its 8%
Senior Notes. The 12.875% Subordinated Debentures were applied to the final
payment due on these debentures on October 1, 2001 and the 8% Senior Notes were
applied toward the reduction of the total amount due on these notes on September
1, 2001. As a result of these purchases, the Company recorded an extraordinary
gain of $289,000, net of related costs and income taxes.

II-9

During fiscal 2000, the Company purchased $1,903,000 of its 12.875% Subordinated
Debentures which were applied to the final payment on these debentures on
September 1, 2001. As a result of the purchase of these debentures in fiscal
2000, the Company recorded an extraordinary gain of $152,000, net of related
costs and income taxes.

During fiscal 2000, the Company purchased $2,984,000 in principal amount of its
8% Senior Notes which were applied toward the reduction of the total amount due
on these notes on September 1, 2001. As a result of the purchase of these Senior
Notes in fiscal 2000, the Company recorded an extraordinary gain of $241,000,
net of related costs and income taxes.

Net Income
- ----------

The Company had net income of $1,714,000 for the year ended June 30, 2001 as
compared to $3,120,000 for the similar period in 2000. The reduction was due to
an increase in selling, general and administrative expenses, a loss on the
disposal of the Virginia distribution facility, a loss on the disposal of its
retail stores and a larger gain, in the prior year, on the purchases of the
Company's 12.875% Subordinated Debentures and 8% Senior Notes offset partially
by an increase in gross margins, lower net interest costs, and an overall tax
benefit in the current year as compared to a tax expense in the prior year.

Contractual Obligations and Commercial Commitments
- --------------------------------------------------

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

II-10

Liquidity and Capital Resources
- -------------------------------

For the year ended June 30, 2002, the Company's working capital increased by
$1,513,000 to $9,529,000, primarily from profitable operations and the sale of
non-operating assets.

During the fiscal year ended June 30, 2002, cash decreased by $46,000. The
Company used cash of $6,537,000 for the repayment of its 12.875% Subordinated
Debentures and 8% Senior Notes, $205,000 for the purchase of fixed assets and
$38,000 in its discontinued operations. These activities were funded by cash
generated from operating activities of $5,602,000, the net proceeds from
short-term borrowings of $395,000 and the sale of certain non-operating assets
aggregating $737,000.

Receivables at June 30, 2002 decreased by $858,000 to $7,001,000 from $7,859,000
at June 30, 2001. This decrease was primarily due lower sales in the fourth
quarter as compared to the prior year.

Inventory at June 30, 2002 decreased by $3,150,000 to $8,797,000 from
$11,947,000 at June 30, 2001. The decrease was primarily the result of better
inventory management and the continued reduced need for raw materials due to the
increase in the amount of finished goods being purchased by the Company in
fiscal 2002.

During fiscal 2001, the Company purchased $167,000 in principal amount of its
12.875% Subordinated Debentures and $5,283,000 in principal amount of its 8%
Senior Notes. As a result of these purchases, the Company recorded an
extraordinary gain of $289,000, net of related costs and income taxes.

In June 2001, holders of $15,000 in principal amount of the Company's 8%
Convertible Senior Notes converted their Notes into 40,000 shares of the
Company's common stock, par value $.01.

At June 30, 2001, the Company had remaining $4,180,000 of its 12.875%
Subordinated Debentures, $2,283,000 of its 8% Senior Notes, and $56,500 of its
8% Convertible Senior Notes. Subsequent to June 30, 2001, holders of $55,500 in
principal amount of the Company's 8% Convertible Senior Notes converted their
Notes into 148,000 shares of the Company's common stock, par value $.01. In
September 2001, the Company paid the remaining balance on the 12.875%
Subordinated Debentures and 8% Senior Notes and paid $1,000 (the unconverted
portion) of the 8% Convertible Senior Notes. The Company utilized its secured
revolving line of credit to make these payments.

The Company has a secured revolving line of credit of up to $30,000,000. The
revolving line of credit expires July 1, 2004 and is sufficient for the
Company's projected needs for operating capital and letters of credit to fund
the purchase of imported goods through July 1, 2004. Direct borrowings under
this line bear interest at the prime rate of Chase Manhattan Bank but not less
than 5.75% per annum. Availability under the line of credit is subject to the
Company's compliance with certain agreed upon financial formulas. Under the
terms of this financing, the Company has agreed to pledge substantially all of
its assets, except the Company's real property.

Management believes the available borrowing under its secured revolving line of
credit, along with anticipated internally generated funds, will be sufficient to
cover its working capital requirements through July 1, 2004.

The Company anticipates that capital expenditures for fiscal 2003 will be less
than $300,000.

II-11

Effect of New Accounting Standards
- ----------------------------------

In June 2001, the Financial Accounting Standards Board ("FASB") issued two new
pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets."

SFAS No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB No. 16, "Business Combinations" and FASB
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." All business combinations in the scope of this Statement are to be
accounted for using one method, the purchase method. SFAS No. 141 is effective
as follows: a) use of the pooling-of-interest method is prohibited for business
combinations initiated after June 30, 2001; and b) the provisions of SFAS No.
141 also apply to all business combinations accounted for by the purchase method
that are completed after June 30, 2001 (that is, the date of the acquisition is
July 2001 or later). The adoption of this statement did not have a material
impact on our results of operations.

SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB No. 17, "Intangible Assets." It
changes the accounting for goodwill from an amortization method to an impairment
only approach. SFAS No. 142 is effective for fiscal years beginning December 15,
2001 to all goodwill and other intangible assets recognized in an entity's
statement of financial position at that date, regardless of when those assets
were initially recognized. The Company has determined that the adoption of this
Statement did not have an impact on the consolidated financial statements.

In April 2001, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-25, "Vendor Income Statement Characteristics of
Consideration Paid to a Reseller of the Vendor's Products" ("EITF No. 00-25").
In November 2001, EITF No. 00-25 was codified in EITF Issue No. 01-09,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)." EITF No. 01-09 concluded that consideration
from a vendor to a reseller of the vendor's products is presumed to be a
reduction of the selling prices of the vendor's products and, therefore, should
be characterized as a reduction of revenue when recognized in the vendor's
income statement. That presumption is overcome and the consideration
characterized as a cost incurred if a benefit is or will be received from the
recipient of the consideration if certain conditions are met. The Company
adopted this pronouncement in our fourth quarter in the fiscal year ended June
30, 2002 and there was no impact on our consolidated results of operations.

Accounting Standards Not Yet Adopted
- -------------------------------------

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. The provisions of SFAS No. 143 are effective for fiscal years
beginning after June 15, 2002. The Company will adopt SFAS No. 143 beginning in
the first fiscal quarter of fiscal 2003. The Company believes that the adoption
of SFAS No. 143 will not have a material impact on our results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The primary objectives of SFAS No. 144 were to develop one
accounting model based on the framework established in SFAS No. 121, and to
address significant implementation issues. The provisions of SFAS No. 144 are
effective for fiscal years beginning after December 15, 2001. The Company will
adopt SFAS No. 144 in the first fiscal quarter of fiscal 2003. The Company
believes that the adoption of SFAS No. 144 will not have a material impact on
our results of operations.

II-12

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding the Motor Carrier Act
of 1980 and amends the provisions of SFAS No. 13 to require that certain lease
modifications be treated as sale leaseback transactions. The provisions of SFAS
No. 145 related to the classification of debt extinguishment is effective for
fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 is not
expected to have a material impact on the Company's financial position.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is currently
evaluating the impact of SFAS No. 146 on its consolidated financial statements.

Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------

The Company is subject to changes in the prime rate based on the Federal Reserve
actions and general market interest fluctuations. The Company believes 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, 2002, borrowings peaked during the year at
$15,783,000 and the average amount of borrowings was $7,806,000.

Imports
- -------

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.

II-13

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE SECURITIES
LITIGATION REFORM ACT OF 1995 Except for historical information contained
herein, this Report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 which involve
certain risks and uncertainties. The Company's actual results or outcomes may
differ materially from those anticipated. Important factors that the Company
believes might cause differences are discussed in the cautionary statement under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in this Form 10-K. In assessing forward-looking
statements contained herein, readers are urged to carefully read those
statements.

II-14

ITEM 8. INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of Movie Star, Inc.
and subsidiaries as of June 30, 2002 and 2001, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended June 30, 2002. Our audits also included the financial
statement schedule listed in the index at Item 14(a)(2). 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 accounting standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Movie Star, Inc. and subsidiaries
as of June 30, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 2002 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 consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

Deloitte & Touche LLP

August 20, 2002
Parsippany, New Jersey

F-1

MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
(In Thousands, Except Number of Shares)
- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

F-2

MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(In Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

F-3

MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(In Thousands)
- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

F-4

MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
(In Thousands)
- --------------------------------------------------------------------------------

F-5

MOVIE STAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
(In Thousands)
- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

F-6

MOVIE STAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business - Movie Star, Inc. and its subsidiaries (the "Company") 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.

Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated.

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, 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 inventory provision,
sales return, allowance for doubtful accounts, allowance for sales
discounts and lives of long-lived assets. 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 expenses for customer
discounts, programs and incentive offerings. If market conditions were
to decline, the Company may take actions to increase customer incentive
offerings possibly resulting in an incremental expense at the time the
incentive is offered.

Inventory - Inventory is valued at lower of cost (first-in, first-out)
or market.

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

Impairment of Long-lived Assets - The Company follows Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets
are less than the assets' carrying amount. In evaluating the fair value
and future benefits of long-lived assets, the Company performs an
analysis of the anticipated undiscounted future net cash flows of the
related long-lived assets and reduces their carrying value by the
excess, if any, of the result of such calculation. Management believes
at this time that the carrying value and useful life of long-lived
assets continue to be appropriate.

F-7

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 - As permitted under SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company has elected not to adopt the fair
value based method of accounting for its stock-based compensation plans.
The Company will continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." See Note No. 13.

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.

Shipping and Handling Costs - Shipping and handling costs include
warehousing, freight-out and other direct costs to deliver inventory to
customers. Such amounts, which are included in selling, general and
administrative expenses in the consolidated statements of income,
aggregated approximately $1,984,000 in 2002, $2,371,000 in 2001 and
$1,636,000 in 2000.

Income Taxes - The Company follows SFAS No. 109, "Accounting for Income
Taxes."

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

Comprehensive Income - Comprehensive income, representing the change in
equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources, includes all
changes in equity except those resulting from investments by owners and
distributions to owners. To date, the Company's comprehensive income
approximates net income.

Effect of New Accounting Standards

In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements: SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets."

SFAS No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB No. 16, "Business Combinations" and FASB
Statement No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." All business combinations in the scope of this
Statement are to be accounted for using one method, the purchase method.
SFAS No. 141 is effective as follows: a) use of the pooling-of-interest
method is prohibited for business combinations initiated after June 30,
2001; and b) the provisions of SFAS No. 141 also apply to all business
combinations accounted for by the purchase method that are completed
after June 30, 2001 (that is, the date of the acquisition is July 2001
or later). The adoption of this Statement did not have a material impact
on our results of operations.

F-8

SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB No. 17,
"Intangible Assets." It changes the accounting for goodwill from an
amortization method to an impairment only approach. SFAS No. 142 is
effective for fiscal years beginning December 15, 2001 to all goodwill
and other intangible assets recognized in an entity's statement of
financial position at that date, regardless of when those assets were
initially recognized. The Company has determined that the adoption of
this Statement did not have an impact on the consolidated financial
statements.

In April 2001, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-25, "Vendor Income Statement Characteristics
of Consideration Paid to a Reseller of the Vendor's Products" ("EITF No.
00-25"). In November 2001, EITF No. 00-25 was codified in EITF Issue No.
01-09, "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)." EITF No. 01-09
concluded that consideration from a vendor to a reseller of the vendor's
products is presumed to be a reduction of the selling prices of the
vendor's products and, therefore, should be characterized as a reduction
of revenue when recognized in the vendor's income statement. That
presumption is overcome and the consideration characterized as a cost
incurred if a benefit is or will be received from the recipient of the
consideration if certain conditions are met. The Company adopted this
pronouncement in our fourth quarter in the fiscal year ended June 30,
2002 and there was no impact on our consolidated results of operations.

Accounting Standards Not Yet Adopted

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the
fair value of a liability for an asset retirement obligation in the
period in which it is incurred. The provisions of SFAS No. 143 are
effective for fiscal years beginning after June 15, 2002. The Company
will adopt SFAS No. 143 beginning in the first fiscal quarter of fiscal
2003. The Company believes that the adoption of SFAS No. 143 will not
have a material impact on our results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of". The primary objectives of
SFAS No. 144 were to develop one accounting model based on the
framework established in SFAS No. 121, and to address significant
implementation issues. The provisions of SFAS No. 144 are effective for
fiscal years beginning after December 15, 2001. The Company will adopt
SFAS No. 144 in the first fiscal quarter of fiscal 2003. The Company
believes that the adoption of SFAS No. 144 will not have a material
impact on our results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds the provisions of SFAS
No. 4 that requires companies to classify certain gains and losses from
debt extinguishments as extraordinary items, eliminates the provisions
of SFAS No. 44 regarding the Motor Carrier Act of 1980 and amends the
provisions of SFAS No. 13 to require that certain lease modifications
be treated as sale leaseback transactions. The provisions of SFAS No.
145 related to the classification of debt extinguishment is effective
for fiscal years beginning after May 15, 2002. The adoption of SFAS No.
145 is not expected to have a material impact on the Company's
financial position.

F-9

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. This Statement also established that
fair value is the objective for initial measurement of the liability.
The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is
currently evaluating the impact of SFAS No. 146 on its consolidated
financial statements.

Reclassification - Certain items in prior years in specific captions of
the accompanying consolidated financial statements and notes to
consolidated financial statements have been reclassified for comparative
purposes.

2. INVENTORY

Inventory consists of the following:

June 30,
2002 2001
(In Thousands)

Raw materials $1,499 $ 2,204
Work-in process 640 692
Finished goods 6,658 9,051
------ -------
$8,797 $11,947
====== =======

3. RECEIVABLES

Receivables are comprised of the following:

June 30,
2002 2001
(In Thousands)

Trade $8,321 $9,241
Other 1 5
------ ------
8,322 9,246

Less allowance for doubtful
accounts and sales discounts (1,321) (1,387)
------ ------

$7,001 $7,859
====== =======

F-10

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

June 30,
2002 2001
(In Thousands)

Land, buildings and improvements $ 1,890 $ 4,777
Machinery and equipment 553 630
Office furniture and equipment 1,239 1,116
Leasehold improvements 248 245
------- -------
3,930 6,768
Less accumulated depreciation
and amortization (2,580) (4,551)
------- -------
$ 1,350 $ 2,217
======= =======

In August 2000, the Company sold a non-operating manufacturing facility
located in Mississippi for $105,000.

In September 2001, the Company sold its two non-operating facilities
located in Virginia and a retail store from discontinued operations for
$729,000 and $52,000, respectively.

Depreciation expense of $336,000, $391,000 and $462,000 was recorded in
fiscal 2002, 2001 and 2000, respectively.

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities are comprised of the
following:

June 30,
2002 2001
(In Thousands)

Insurance $ 512 $ 565
Salary, commissions and employee benefits 274 412
Other 218 257
Interest on long-term debt - 181
------ ------
$1,004 $1,415
====== ======

F-11

6. NOTES PAYABLE

The Company amended and restated its credit agreement (the "Amended
Credit Agreement"), effective June 30, 2001. The Amended Credit
Agreement matures on July 1, 2004 and is subject to annual renewals
thereafter. Under the agreement, the Company may borrow, in the
aggregate, revolving loans and letters of credit, up to $30,000,000.
Availability under the line of credit is subject to the Company's
compliance based on financial formulas as outlined in the agreement.
Pursuant to the terms of the agreement, the Company has pledged
substantially all of its assets, except the Company's real property.
Interest on outstanding borrowings is payable at the prime rate, but not
less than 5.75 percent per annum.

The Amended Credit Agreement contains financial covenants, with respect
to consolidated tangible net worth, as defined, and working capital.
Management expects to be in compliance through fiscal 2003. Because
compliance is based on management's estimates and actual results can
differ from these estimates, compliance through fiscal 2003 cannot be
assured. The Company believes the assumptions used are appropriate.
Furthermore, the Company is prohibited from paying dividends or
incurring additional indebtedness, as defined, outside the normal course
of business.

For the fiscal year ended June 30, 2002, under the credit agreement, the
borrowings peaked at $15,783,000 and the average amount of borrowings
was $7,806,000, with the weighted average interest rate of 5.99%. For
the fiscal year ended June 30, 2001, under the credit agreement, the
borrowings peaked at $8,346,000 and the average amount of borrowings was
$3,426,000, with the weighted average interest rate of 8.82%.

At June 30, 2002, the Company had borrowings of $4,129,000 outstanding
under this line of credit at an interest rate of 5.75 percent and also
had approximately $6,184,000 of outstanding letters of credit.

At June 30, 2001, the Company had borrowings of $3,655,000 outstanding
under this line of credit at an interest rate of 6.75 percent and also
had approximately $7,769,000 of outstanding letters of credit.

7. LONG-TERM DEBT

Long-term debt consists of the following:
June 30,
2002 2001
(In Thousands)

12.875% Subordinated Debentures $ - $ 4,180
8% Senior Notes - 2,283
8% Senior Convertible Notes - 57
Capital Lease Obligations 70 143
------- -------
70 6,663
Less current portion 40 6,593
------- -------

Long-term debt $ 30 $ 70
======= =======

12.875% Subordinated Debentures - During fiscal 2000, the Company
purchased $5,640,000 in principal amount of its 12.875% Subordinated
Debentures. With $3,737,000 of the 12.875% Subordinated Debentures
purchased during fiscal 2000 and in conjunction with previously acquired
debentures, the Company satisfied its sinking fund requirement due
October 1, 2000. As a result of the purchase of these debentures, the
Company recorded a pre-tax gain of $164,000, net of related costs. The
remaining $1,903,000 of the 12.875% Subordinated Debentures was applied
to the final payment on these debentures. As a result of the purchase of
these debentures in fiscal 2000, the Company recorded an extraordinary
gain of $152,000, net of related costs and income taxes.

F-12

During fiscal 2001, the Company purchased an aggregate of $167,000 in
principal of its 12.875% Subordinated Debentures. As a result of these
purchases, the Company recorded an extraordinary gain of $5,000, net of
related costs and income taxes. The Company applied the principal amount
of the 12.875% Subordinated Debentures against the final payment on
these debentures.

In September 2001, the Company paid the remaining balance on its 12.875%
Subordinated Debentures of $4,180,000 one-month early utilizing its
Amended Credit Agreement.

8% Senior Notes - In fiscal 2000, the Company purchased $2,984,000 in
principal of its 8% Senior Notes due September 1, 2001. As a result of
this purchase, the Company recorded an extraordinary gain of $241,000,
net of related costs and income taxes.

During fiscal 2001, the Company purchased $5,283,000 in principal amount
of its 8% Senior Notes. As a result of these transactions, the Company
recorded an extraordinary gain of $284,000 net of related costs and
income taxes. The Company applied the principal amount of the 8% Senior
Notes against the final payment.

In January 2000, holders of $6,000 in principal amount of the 8%
Convertible Senior Notes converted their Notes into 17,000 shares of the
Company's common stock.

In June 2001, holders of $15,000 in principal amount of the 8%
Convertible Senior Notes converted their Notes into 40,000 shares of the
Company's common stock.

In July 2001, holders of $55,500 in principal amount of the 8%
Convertible Senior Notes converted their Notes into approximately
148,000 shares of the Company's common stock.

In September 2001, the Company paid the remaining balance on its 8%
Senior Notes of $2,284,000 at maturity utilizing its Amended Credit
Agreement.

The maturities of long-term debt at June 30, 2002, including current
maturities, are as follows (in thousands):

Fiscal Year Amount

2003 $40
2004 30
---
$70
===

F-13

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.

Long-Term Debt and Capital Lease Obligations- 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 fair value estimates presented herein are based on pertinent
information available to management as of June 30, 2002 and 2001.
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 losses. In fiscal 2001, the Company
recognized an income tax benefit of $1,237,000 in connection with the
complete reversal of the valuation allowance on its deferred tax assets.
In the opinion of management, it is more likely than not that such
deferred tax assets will be recovered.

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

F-14

The provision for income taxes on continuing operations is comprised
as follows:

Years Ended June 30,
2002 2001 2000
(In Thousands)

Current:
Federal $ (15) $ (9) $ 4
State and local 22 2 23
------ ------ -----
7 (7) 27
------ ------ -----
Deferred
Federal 300 (705) -
State and local 53 (176) -
------ ------ -----
353 (881) -
------ ------ -----

$ 360 $ (888) $ 27
====== ======= ======

A tax provision (benefit) of $58,000, $(218,000) and $8,000 was
allocated to discontinued operations for the years ended June 30, 2002,
2001 and 2000, respectively, and a tax provision of $193,000 and $8,000
was allocated to extraordinary gains for the years ended June 30, 2001
and 2000, respectively.

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

As of June 30, 2002, the Company has net operating loss carryforwards of
approximately $7,249,000 for federal income tax purposes that expire
between the years 2009 and 2012 and credit carryforwards of
approximately $103,000.

10. COMMITMENTS AND CONTINGENCIES

Operating Leases --The Company has operating leases expiring in various
years through fiscal 2010.

Future minimum payments under these leases at June 30, 2002 are as
follows (in thousands):

Fiscal Year Amount

2003 $ 1,145
2004 1,173
2005 1,199
2006 1,189
2007 1,136
Thereafter 4,199
-------
$10,041
=======

F-15

Rental expense for 2002, 2001 and 2000 was approximately $1,210,000,
$734,000 and $559,000, respectively.

Employment Agreement - As of June 30, 2002, the Company has an
employment agreement with one key executive expiring June 2004. The
financial liability for this agreement is approximately $975,000.

Consulting Agreement - Upon the retirement of Mark M. David as Chief
Executive Officer, the Company entered into a five-year consulting
agreement with Mr. David on July 1, 1999, pursuant to which annual
compensation payments of approximately $200,000 are required.

11. RELATED PARTY

Upon the retirement of its Chief Executive Officer, in July 1999, the
Company entered into an agreement, expiring in October 2011, to provide
for future medical benefits. As of June 30, 2002 and 2001, the current
portion, included in "Accrued expenses and other current liabilities,"
amounted to $10,000 and $9,000, respectively and the long-term portion,
classified as "Other long-term liability," amounted to $$84,000 and
$83,000, 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 are not concentrated in any specific
geographic region but are concentrated in the retail industry. One
customer accounted for 32%, 27%, and 21% of the Company's net sales in
fiscal 2002, 2001 and 2000, respectively. Another customer accounted for
13%, 13%, and 12% of the Company's net sales in fiscal 2002, 2001 and
2000, respectively, while another customer accounted for 7%, 11%, and
14% of the Company's net sales in fiscal 2002, 2001 and 2000,
respectively. The Company performs ongoing credit evaluations of its
customers' financial condition. The Company establishes an allowance for
doubtful accounts based upon 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 permits 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
reserves 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 1,730,000 shares at an exercise price ranging from
$.50 to $1.125 per share are outstanding at June 30, 2002. Of the total
options granted, 1,520,000 are presently exercisable.

F-16

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 490,000
shares at an exercise price ranging from $.625 to $1.0625 per share are
outstanding at June 30, 2002. Of the total options granted, 226,000 are
presently exercisable.

The Company also has a Key Employee Stock Option Plan covering the
issuance of up to 1,667,000 shares of the Company's common stock.
Options to purchase 200,000 shares at an exercise price of $.625 per
share are outstanding at June 30, 2002. Of the total options granted,
120,000 are presently exercisable.

SFAS No. 123, "Accounting Stock-Based Compensation" was effective for
the Company for fiscal 1997. SFAS No. 123 encourages (but does not
require) compensation expense to be measured based on the fair value of
the equity instrument awarded. In accordance with APB No. 25, no
compensation cost has been recognized in the Consolidated Statements of
Income for the Company's stock option plans. If compensation cost for
the Company's stock option plans had been determined in accordance with
the fair value method prescribed by SFAS No. 123, the Company's net
income would have been $479,000, $1,648,000 and $2,626,000 for 2002,
2001 and 2000, respectively. Basic net income per share would have been
$.03, $.11 and $.18 for 2002, 2001 and 2000, respectively and diluted
net income per share would have been $.03, $.11 and $.17 for 2002, 2001
and 2000, respectively. This pro forma information may not be
representative of the amounts to be expected in future years as the
fair value method of accounting prescribed by SFAS No. 123 has not been
applied to options granted prior to 1995.

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

The fair value of each option-pricing model with the following
weighted-average assumptions used for grants in 2002, 2001 and 2000,
respectively; risk-free interest rate 4.0%, 4.2% and 6.2 %; expected
life 7 years; expected volatility of 69.22%, 59.12% and 106.0%. 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.

F-17

The following table summarizes information about stock options
outstanding at June 30, 2002 (options in thousands):

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. No expense related to such warrant
was recorded since it was not material.

14. NET INCOME PER SHARE

The Company's calculation of Basic and Diluted Net Income Per Share are
as follows (in thousands, except per share amounts):

F-18

15. LOSS ON CLOSING OF DISTRIBUTION FACILITY

During fiscal 2001, the Company recorded facility closing costs of
$273,000 relating to a plan to close the distribution facility in
Lebanon, Virginia. The action was taken by the Company to enhance the
Company's competitiveness, to reduce expenses and to improve
efficiencies. The charges and related accruals consist of the following
(in thousands):

The Company periodically reviews the recorded value of its long-lived
assets to determine if the carrying amount of those assets may not be
recoverable based upon the future operating cash flows expected to be
generated by those assets. In accordance with SFAS No. 121, during the
second quarter of fiscal 2001, based upon management's decision to close
the distribution facility, the Company recorded a non-cash impairment
charge of $915,000 related to the write-down of a portion of the recorded
property, plant and equipment values. Since the sum of the undiscounted
expected future cash flows was less than the carrying amount of the
asset, the asset was considered impaired. An impairment loss was measured
as the amount by which the carry amount of the asset exceeds the fair
value of the asset, which was based upon quoted market price, less the
cost to sell the property. The value of the asset was included in
property, plant and equipment as assets held for sale, based upon the
expected sale price of the building. The Company discontinued
depreciating this asset and was sold for $630,000 in September 2001.

F-19

In conjunction with the closing of the facility, the Company eliminated
sixty-three positions and provided severance to certain employees. The
Company recorded severance and related taxes of $138,000 during fiscal
2001. The Company paid the remaining severance costs in fiscal 2002.

The Company recorded exit costs of $135,000 associated with the shutdown
of the distribution facility during fiscal 2001. Such costs include
employee salaries and benefits and other costs to be incurred after
operations cease. The Company completed the closure in the fourth
quarter of fiscal 2001. The Company paid the remaining exit costs in
fiscal 2002.

16. DISCONTINUED OPERATIONS

In December 2000, management authorized the shutdown of the retail
segment and ceased all operations in March 2001. Accordingly, operating
results of this segment, for the years ended June 30, 2002, 2001 and
2000, have been reclassified as income from discontinued operations.

The estimated loss on disposal provided for the write-down of assets to
the estimated market value of $102,000, the loss on fulfilling lease
obligations of $94,000, the costs of disposal of $201,000 and future
operating losses of $350,000. Accordingly, the Company had recorded an
estimated loss on disposal of $448,000, net of a benefit from income
taxes of $299,000, for the year ended June 30, 2001.

In fiscal 2002, the Company recorded income on the disposal of its
discontinued operations of $144,000. This related primarily to the sale
of a retail store in excess of its estimated realizable value and the
favorable negotiation on its lease terminations.

The Company also reclassified the income from discontinued operations of
$86,000, $122,000 and $398,000, net of income taxes of $58,000, $81,000
and $8,000 for the years ended June 30, 2002, 2001 and 2000,
respectively, to income from operations of discontinued retail stores.

Operating results of discontinued operations are as follows (in
thousands):

Years Ended June 30,
2002 2001 2000

Net sales $ - $4,342 $8,292
Costs and expenses (144) 4,886 7,886
Income taxes 58 (218) 8
----- ------ ------
Net income (loss) from
discontinued operations $ 86 $ (326) $ 398
===== ====== ======

F-20

The net assets and liabilities of discontinued operations included in the
accompanying consolidated balance sheets are as follows (in thousands):

June 30,
2002 2001

Cash $ - $ 12
Property, plant and equipment, net - 106
Deferred income taxes 160 218
------ ------
Total assets of discontinued operations $ 160 $ 336
====== ======

Accounts payable $ 6 $ 6
Accrued liabilities - 99
------ ------
Total liabilities of discontinued operations $ 6 $ 105
====== ======

17. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA

F-21

(a) In the fourth quarter of fiscal 2001, the Company recognized an income
tax benefit from continuing and discontinuing operations of $922,000 and
$207,000, respectively. In addition, the Company recorded an income tax
expense of $186,000 related to its extraordinary gains in fiscal 2001.
These transactions were primarily related to the reversal of the
valuation allowance on the deferred tax assets.

* * * * * *

F-22

Schedule II
MOVIE STAR, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
- ------------------------------------------------------------------------------

(a) Uncollectible accounts written off.
(b) Reclassification of accounts.

S-1

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

None

II-14

PART III

ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

Director Since Name Age Position
-------------- ---- --- --------

1981 Mark M. David 55 Chairman of the Board

1997 Melvyn Knigin 59 President, Chief Executive
Officer and Director

1983 Saul Pomerantz 53 Executive Vice President, Chief
Operating Officer, Secretary
and Director

1996 Joel M. Simon 57 Director

1996 Gary W. Krat 54 Director

2001 Michael A. Salberg 50 Director

Officer Since
-------------
1999 Thomas Rende 41 Chief Financial Officer

Mark M. David was re-elected Chairman of the Board on December 3, 2001.
Effective as of July 1, 1999, Mr. David retired as a full-time executive
employee of the Company. Mr. David relinquished the position of Chief Executive
Officer in February 1999, but remained as Chairman of the Board. He had been
Chairman of the Board and Chief Executive Officer from December 1985 to August
1995 and from April 1996 until February 1999, President from April 1983 to
December 1987 and Chief Operating Officer of the Company since the merger with
Stardust Inc. in 1981 until December 1987. Prior to the merger, he was founder,
Executive Vice President and Chief Operating Officer of Sanmark Industries Inc.

Melvyn Knigin was re-elected Chief Executive Officer and to the Board of
Directors on December 3, 2001. Mr. Knigin had been appointed Chief Executive
Officer in February 1999. Mr. Knigin was appointed to fill a vacancy on the
Board of Directors and promoted to Senior Vice President and Chief Operating
Officer on February 5, 1997 and was promoted to President on September 4, 1997.
Since joining the Company in 1987, he was the President of Cinema Etoile, the
Company's upscale intimate apparel division. Prior to joining the Company, he
had spent most of his career in the intimate apparel industry.

Saul Pomerantz, CPA, was re-elected to the Board of Directors and Chief
Operating Officer on December 3, 2001. Mr. Pomerantz had been appointed Chief
Operating Officer in February 1999. Mr. Pomerantz was elected Senior Vice
President on December 3, 1987 and was promoted to Executive Vice President on
September 4, 1997. Previously, he was Vice President-Finance since 1981. He was
Chief Financial Officer from 1982 to February 1999 and has been Secretary of the
Company since 1983.

Thomas Rende was re-elected Chief Financial Officer on December 3, 2001. Mr.
Rende had been appointed Chief Financial Officer in February 1999. Since joining
Movie Star in 1989, Mr. Rende has held various positions within the finance
department.

Gary W. Krat was re-elected to the Board of Directors on December 3, 2001. Mr.
Krat is currently Chairman Emeritus of SunAmerica Financial Network. From 1990
and until his retirement in 1999, Mr. Krat was Senior Vice President of
SunAmerica Inc. and Chairman and Chief Executive Officer of SunAmerica Financial
Network, Inc. and its six NASD broker dealer companies with nearly ten thousand
registered representatives. From 1977 until 1990, Mr. Krat was a senior
executive with Integrated Resources, Inc. Prior to joining Integrated Resources,
Mr. Krat was a practicing attorney. He has a law degree from Fordham University
and a Bachelor of Arts degree from the University of Pittsburgh.

III-1

Joel M. Simon was re-elected to the Board of Directors on December 3, 2001. Mr.
Simon is a principal of Crossroads, LLC, a financial consulting firm. Mr. Simon
was the President and Chief Executive Officer of Starrett Corporation, a real
estate construction, development and management company from March to December
1998. From 1996 to 1998, Mr. Simon was self-employed as a private investor.

Michael A. Salberg was elected to the Board of Directors on December 3, 2001.
Mr. Salberg was appointed to fill a vacancy on the Board of Directors on May 25,
2001. Mr. Salberg is a practicing attorney in New York and was admitted to the
New York bar in 1977. Since 1989, he has been a partner in the New York law firm
of Graubard Miller and its predecessors. The Graubard Miller firm and its
predecessors have represented the Company as legal counsel for many years. Mr.
Salberg received his Juris Doctor degree from New York Law School in 1976 and a
Bachelor of Arts degree from the University of Cincinnati in 1973.

ITEM 11. EXECUTIVE COMPENSATION

Report of the Compensation Committee on Executive Compensation
- --------------------------------------------------------------

Joel M. Simon, Gary W. Krat and Mark M. David were appointed by the Board of
Directors, and each of them agreed to serve, as members of the Compensation
Committee (the "Committee").

The employment of the Company's President and Chief Executive Office, Melvyn
Knigin, is governed by the terms of a written employment agreement which expires
on June 30, 2004. Saul Pomerantz, Executive Vice President and Chief Operating
Officer and Thomas Rende, Chief Financial Officer of the Company do not have
written employment agreements. However, Mr. Pomerantz and the Company entered
into a written agreement providing for the payment of severance benefits to Mr.
Pomerantz in the event his employment is terminated under certain circumstances.

Compensation Policies
- ---------------------

In determining the appropriate levels of executive compensation for fiscal year
2002, the Committee based its decisions on (1) the success of the Company's
restructuring of its manufacturing operations, (2) the Company's improved
financial condition, (3) the need to retain experienced individuals with proven
leadership and managerial skills, (4) the executives' motivation to enhance the
Company's performance for the benefit of its shareholders and customers, and (5)
the executives' contributions to the accomplishment of the Company's annual and
long-term business objectives.

Salaries generally are determined based on the Committee's assessment of the
value of each executive's contribution to the Company, the results of recent
past fiscal years in light of prevailing business conditions, the Company's
goals for the ensuing fiscal year and, to a lesser extent, prevailing levels at
companies considered to be comparable to and competitors of the Company.

In addition to base salary compensation, the Committee has also, from time to
time, recommended that stock options be granted to the executive officers in
order to reward and reinforce their commitment to maximizing shareholder return
and long-term results.

Base Salary Compensation
- ------------------------

Based on recommendations from the Company's Chairman of the Board, the
collective business experience of the other Committee members and negotiations
with Messrs. Knigin, Pomerantz and Rende, the Committee established the base
salaries for each of Messrs. Knigin, Pomerantz and Rende. Mr. Knigin's base
salary is set forth in the written employment agreement and is fixed at
$475,000.00 for fiscal year 2003 and $500,000.00 for fiscal year 2004. Mr.
Pomerantz's base salary for fiscal year 2003 will remain at $250,000 and Mr.
Rende's base salary for fiscal year 2003 is $165,000.00. The Committee does not
utilize outside consultants to obtain comparative salary information, but
believes that the salaries paid by the Company are competitive, by industry
standards, with those paid by companies with similar sales volume to the
Company. The Committee places considerably more weight on each executive's
contribution to the Company's development and maintenance of its sources of
supply, manufacturing capabilities, marketing strategies and customer
relationships than on the compensation policies of the Company's competitors;
however, the Committee does not establish or rely on target levels of
performance in any of these areas to arrive at its recommendations.

III-2

The current senior executives of the Company have been associated with the
Company in senior management positions for periods ranging from thirteen to more
than twenty-three years. They have been primarily responsible for the
formulation and implementation of the Company's recent financial and operational
restructuring and provide the Company with a broad range of management skills
which are considered by the Committee to be an essential source of stability and
a base for the Company's future growth.

Stock Option Grants
- -------------------

On July 15, 1994, the Committee adopted a new Incentive Stock Option Plan (the
"1994 ISOP") to replace the expired 1983 ISOP. The 1994 ISOP authorized the
grant of options to purchase up to 2,000,000 shares of the Company's Common
Stock. Options for all of the shares of the Company's Common Stock under the
1994 ISOP have been granted. As a result of forfeitures by participants, there
are presently 160,000 shares available to be granted. All of the Company's
management and administrative employees are eligible to receive grants under the
1994 ISOP. Subject to shareholder approval of the 1994 ISOP, options under the
1994 ISOP were granted to each of the Company's senior executives (except Mark
M. David) on July 15, 1994 at fair market value at that date. As a condition to
the grant of options to the Company's senior executives, the Committee required
each of the recipients to surrender for cancellation any interest in options
granted prior to July 15, 1994. The 1994 ISOP was approved by the Company's
shareholders at the Company's Annual Meeting on December 8, 1994.

On February 21, 2000, the Committee adopted a new Performance Equity Plan
(including a new Incentive Stock Option Plan) (the "2000 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. The 2000 Plan was approved by the Company's
shareholders at the Annual Meeting on November 28, 2000.

In addition to the ISOP, in 1988, the Committee recommended and the Board of
Directors adopted a non-qualified Management Option Plan (the "1988
Non-qualified Plan") to provide an additional continuing form of long-term
incentive to selected officers of the Company. The 1988 Non-qualified Plan was
approved by the Company's shareholders at the Company's Annual Meeting on
December 13, 1988. Generally, options under the 1988 Non-qualified Plan are
issued with a 5-year exercise period in order to encourage the executive
officers to take a long-term approach to the formulation and accomplishment of
the Company's goals.

In January 1997, the independent directors serving on the Committee recommended
that the Company grant new options under the 1994 ISOP to Melvyn Knigin, Saul
Pomerantz and Thomas Rende at a price equal to the market price for the
Company's shares on the date of the grant. The grant of new options to Messrs.
Knigin and Pomerantz was also subject to the condition that they surrender for
cancellation any interest in options granted to them prior to January 29, 1997.

In November 1998, the independent directors serving on the Committee recommended
that the Company grant new options to Messrs. Knigin and Pomerantz under the
1994 ISOP and the 1988 Non-qualified Plan and to Mr. Rende under the 1994 ISOP.

In February 2000, the Committee recommended that the Company grant additional
options to Messrs. Knigin and Pomerantz in conjunction with their respective
employment agreements and to Mr. Rende in connection with his promotion to Chief
Financial Officer.

III-3

Pursuant to Mr. Knigin's employment agreement, he was granted an additional
option to purchase an aggregate of 300,000 shares of the Company's Common Stock.
These additional options are to be issued in allotments of 100,000 each on July
1, 2001, July 1, 2002 and July 1, 2003 at a price per share equal to the closing
market price of the Company's shares on the American Stock Exchange on the
trading day preceding the date of issuance. The first two allotments have been
issued to Mr. Knigin. The additional options granted to Mr. Knigin are intended
to be qualified options under the 1994 ISOP or the 2000 Plan and the Company has
agreed that if there are not sufficient shares available under the 2000 Plan,
the Company will seek the approval of its shareholders for an amendment of the
2000 Plan providing for an appropriate increase in the number of shares
available under the 2000 Plan in order to meet the contractual obligation to Mr.
Knigin.

Incentive Compensation
- ----------------------

In September 1998, the Compensation Committee adopted an incentive compensation
plan for senior executives, other than Mr. David (the "1998 Incentive Plan").
Under the 1998 Incentive Plan, the Compensation Committee had the discretion to
award bonus compensation to senior executives in an amount not to exceed five
(5%) percent of any increases in net income before taxes over the base amount of
$1,200,000 (the "Bonus Pool"). Based on the collective efforts of Messrs. Knigin
and Pomerantz, the Compensation Committee determined to award bonuses to them
under the 1998 Incentive Plan for fiscal year 1999. Mr. Knigin was eligible to
receive incentive compensation equal to three (3%) percent and Mr. Pomerantz was
eligible to receive two (2%) of net income before taxes in excess of $1,200,000.

In fiscal 2000, the Committee amended the 1998 Incentive Plan to increase the
Bonus Pool from 5% to 6.75%. Pursuant to their respective employment agreements,
Mr. Knigin was eligible to receive incentive compensation equal to three (3%)
percent and Mr. Pomerantz was eligible to receive two (2%) percent of net income
before taxes in excess of $1,200,000 for fiscal year 2000. In addition, the
Committee determined that Mr. Rende was eligible to participate in the Bonus
Pool and awarded him incentive compensation equal to 0.25% of net income before
taxes in excess of $1,200,000 for fiscal year 2000. In fiscal year 2001and 2002,
Messrs. Knigin, Pomerantz and Rende were eligible to receive incentive
compensation in the same percentages as the prior fiscal year. No incentive
compensation was paid to the senior executives of the Company for fiscal year
2002.

Compensation of the Chief Executive Officer
- -------------------------------------------

For fiscal year 2002, the annual base salary paid to the Company's Chief
Executive Officer, Melvyn Knigin, pursuant to his employment agreement was
$450,000. Mr. Knigin's employment agreement provides for an annual base salary
of $475,000 in fiscal year 2003.

Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------

There are no Compensation Committee interlocks or insider participation.

Mark M. David
Gary W. Krat
Joel M. Simon

III-4

Summary Compensation Table

(1) Represents options to purchase shares of Common Stock under the 1994
Incentive Stock Option Plan (the "1994 Plan") of which 350,000 shares were
granted on January 29, 1997, 125,000 shares granted on November 4, 1998;
125,000 shares granted on November 4, 1998 and 100,000 shares were granted
on July 2, 2001 under the Company's Non-Qualified Stock Option Plan (the
"1988 Plan") and 200,000 shares granted on February 22, 2000 pursuant to
the 2000 Incentive Stock Option Plan (the "2000 Plan").

(2) Represents options to purchase shares of Common Stock under the 1994
Incentive Stock Option Plan (the "1994 Plan") of which 350,000 shares were
granted on January 29, 1997 and 75,000 shares were granted on November 4,
1998; 75,000 shares granted on November 4, 1998 under the Company's
Non-Qualified Stock Option Plan (the "1988 Plan") and 130,000 shares
granted on February 22, 2000 pursuant to the 2000 Incentive Stock Option
Plan (the "2000 Plan").

(3) Represents options to purchase shares of Common Stock under the 1994
Incentive Stock Option Plan (the "1994 Plan") of which 20,000 shares were
granted on July 15, 1994, 50,000 shares were granted on January 29, 1997,
35,000 shares were granted on November 4, 1998; and 70,000 shares granted
on February 22, 2000 pursuant to the 2000 Incentive Stock Option Plan (the
"2000 Plan").

III-5

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AS OF August 30, 2002.

The following table sets forth certain information as of August 30, 2002 with
respect to the stock ownership of (i) those persons or groups (as that term is
used in Section 13(d)(3) of the Securities Exchange Act of 1934) who
beneficially own more than 5% of the Company's Common Stock, (ii) each director
of the Company and (iii) all directors and officers of the Company as a group.

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

(1) Based upon 15,084,975 shares (excluding 2,016,802 treasury shares)
outstanding and options, where applicable, to purchase shares of Common
Stock, exercisable within 60 days.

(2) Includes 336,072 shares owned by his spouse.

(3) Includes options granted to Melvyn Knigin for 445,000 shares pursuant
to the 1994 Plan, 75,000 pursuant to the 1988 Non-Qualified Plan and
100,000 pursuant to the 2000 Plan exercisable within 60 days and
100,000 shares owned by Mr. Knigin's wife.

III-6

(4) Includes options granted to Saul Pomerantz for 395,000 shares and
Shelley Pomerantz for 60,000 shares (his wife who also is employed by
the Company) pursuant to the 1994 Plan, 45,000 pursuant to the 1988
Non-Qualified Plan and 65,000 pursuant to the 2000 Plan exercisable
within 60 days, and 244 shares owned by his spouse and 74,666 shares
held jointly with his spouse.

(5) Represents options granted to Thomas Rende for 91,000 shares, pursuant
to the 1994 Plan, and 35,000 pursuant to the 2000 Plan exercisable
within 60 days, 162,000 shares held jointly with his spouse, and 3,300
shares owned by his spouse.

(6) Represents 93,333 shares owned by Mr. Salberg's wife.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

(a) Effective as of July 1, 1999, Mr. David retired as a full-time
executive employee of the Company.

The Company and Mr. David have entered into a series of written
agreements which provide for the payment to Mr. David of a lump sum retirement
benefit of $500,000, the continuation of health insurance benefits and a split
dollar life insurance policy on Mr. David's life and the retention of Mr.
David's services as a consultant to the Company for a term of five years.
Pursuant to the consulting agreement, Mr. David is prohibited from disclosing
any confidential information of the Company and from engaging in any business
which is competitive with the business of the Company.

III-7

PART IV

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.

IV-1

a) 3. EXHIBITS

Exhibit
Number Exhibit Method of Filing

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

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

3.1.2 Amended Certificate of Incorporated by reference
Incorporation to Form 8 Amendment to
Form 10-K or fiscal
year ended June 30,
1992 and filed on
January 19, 1993.

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

4.1 Instruments defining the Incorporated by reference
rights of security holders to Exhibits to
including indentures Registration Statement on
Form S-2 (No. 33-7837)
filed October 10, 1986.

4.1.1 Indenture dated as of October Incorporated by reference
1, 1996 between the to Exhibits to Application
Company, as Issuer and for Qualification of
American Stock Transfer & Indenture under the Trust
Trust Company, as Trustee Indenture Act of 1939 on
Form T-3 (Commission File
No. 22-22243) filed on
September 13, 1996.

4.2 Plan of Merger dated November Incorporated by reference
18, 1980, between Stardust to Exhibits to
Inc. and Sanmark Industries Registration Statement on
Inc. whereby Sanmark Form S-14 (Registration
Industries Inc. was merged No. 2-70365) filed by
into Stardust Inc. Company's predecessor
corporation, Stardust Inc.
on February 12, 1981.

IV-2

10.1 Agreement of Sale dated Incorporated by reference
December 12, 1983, as amended to Exhibits to
January 31, 1984, among Registration Statement
Industrial Development Form S-2 (No. 33-7837)
Authority of Russell County filed October 10, 1986.
(Virginia), the Company and the
Bankers Trust Company, with attendant
Deed and Bill of Sale, Deed of Trust,
Assignment, and Promissory Note
in the sum of $3,000,000.

10.2 Employee Stock Ownership and Incorporated by reference
Capital Accumulation Plan to Exhibits to
dated April 17, 1984 as Registration Statement
amended on July 1, 1984 Form S-2 (No. 33-7837)
between Republic National filed October 10, 1986.
Bank of New York, as trustee,
and the Company.

10.3 Incentive Stock Option Plan Incorporated by reference
Agreement dated June 28, to Exhibits to
1983, as amended on January Registration Statement
13, 1986. Form S-2 (No. 33-7837)
filed October 10, 1986.

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

10.4 Form of Non-Qualified Stock Incorporated by reference
Option granted to several to Exhibits to
persons who are Registration Statement
manufacturer's Form S-2 (No. 33-7837)
representatives for the filed October 10, 1986.
Company.

10.5 Financing Agreement dated as Incorporated by reference
of April 24, 1996 between to Form 10-Q for the
Rosenthal & Rosenthal, Inc. quarter ended March 31,
and the Company. 1996 and filed on May 15,
1996.

10.5.1 Side Letter re Covenants Incorporated by reference
dated as of April 24, 1996 to Form 10-Q for the
with Rosenthal & Rosenthal, quarter ended March 31,
Inc. 1996 and filed on
May 15, 1996.

10.5.2 Security Agreement dated as Incorporated by reference
of April 24, 1996 between to Form 10-Q for the
Rosenthal & Rosenthal, Inc. quarter ended March 31,
and the Company. 1996 and filed on
May 15, 1996.

IV-3

10.5.3 Security Agreement - Incorporated by reference
Inventory dated as of April to Form 10-Q for the
24, 1996 between Rosenthal & quarter ended March 31,
Rosenthal, Inc. and the 1996 and filed on
Company. May 15, 1996.

10.5.4 Security Agreement and Incorporated by reference
Mortgage - Trademarks dated to Form 10-Q for the
as of April 24, 1996 between quarter ended March 31,
Rosenthal & Rosenthal, inc. 1996 and filed on
and the Company. May 15, 1996.

10.5.5 Negative Pledge - Real Incorporated by reference
property dated as of April to Form 10-Q for the
24, 1996 between Rosenthal & quarter ended March 31,
Rosenthal, Inc. and the 1996 and filed on
Company. May 15, 1996.

10.5.6 Assignment of Leases, Rents Incorporated by reference
and Security Deposits dated to Form 10-Q for the
as of April 24, 1996 between quarter ended March 31,
Rosenthal & Rosenthal, Inc. 1996 and filed on
and the Company. May 15, 1996.

10.5.7 Letter Agreement dated as of Incorporated by reference
June 28, 1999 between Rosenthal & to Form 10-K for the
Rosenthal,Inc. and the Company fiscal year ended June 30,
modifying and extending the 1999 and filed on
Financing Agreement dated September 28, 1999.
April 24, 1996.

10.5.8 Letter Agreement dated as of September Filed Herewith.
13, 2000 between Rosenthal & Rosenthal
and the Company amending Financing
Agreement dated April 24, 1996.

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

10.8 License Agreement dated Incorporated by reference
July 26, 1990 between PGH to Form 8 Amendment to
Company, Licensor and Form 10-K for fiscal year
Sanmark-Stardust Inc. ended June 30, 1992 and
Licensee. filed on January 19, 1993.

10.9 License Agreement dated Incorporated by reference
November 14, 1991 between to Form 8 Amendment to
BonJour Group, Ltd., Licensor Form 10-K for fiscal year
and Sanmark-Stardust Inc., ended June 30, 1992 and
Licensee. filed on January 19, 1993.

IV-4

10.10 Prototype of Contract of Purchase Incorporated by reference
periodically entered into between the to Form 10-K for fiscal
Company and Sears, Roebuck and Company. year ended June 30, 1993
and filed on September
18, 1993.

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

10.12 Agreement dated as of July 1, 1999 Incorporated by reference
between Mark M. David and the Company to Form 10-K for fiscal
for Mr. David's consulting services. year ended June 30, 1999
and filed on September
28, 1999.

10.13 Employment Agreement dated as of Incorporated by reference
February 22, 2000 between Saul Pomerantz to Form 10-Q for the
and the Company. quarter ended March 31,
2000 and filed on
May 15, 2000.

10.14 Employment Agreement dated as of Incorporated by reference
February 22, 2000 between Melvyn Knigin to Form 10-Q for the
and the Company. quarter ended March 31,
2000 and filed on May
15, 2000.

21 Subsidiaries of the Company. Filed herewith.

23 Independent Auditors' Consent Filed herewith.

28.1 Tender Offer Statement and Incorporated by reference
Rule 13E-3 Transaction to Schedule 14D-1 and Rule
Statement with respect to 13E-3 Transaction
Movie Star, Inc. Acquisition. Statement (No. 1-4585)
filed December 18, 1987.

(a) 4. Report on Form 8-K

None.

IV-5

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 26, 2002

MOVIE STAR, INC.

By: /s/ MARK M. DAVID
-----------------------------------
MARK M. DAVID
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/ MARK M. DAVID Chairman of the Board September 26, 2002
- ----------------------
MARK M. DAVID

/s/ MELVYN KNIGIN President; Chief Executive September 26, 2002
- ---------------------- Officer; Director
MELVYN KNIGIN

/s/ SAUL POMERANTZ Executive Vice President; September 26, 2002
- ---------------------- Chief Operating Officer;
SAUL POMERANTZ Secretary & Director

/s/ THOMAS RENDE Principal Financial & September 26, 2002
- ---------------------- Accounting Officer
THOMAS RENDE

/s/ GARY W. KRAT Director September 26, 2002
- ----------------------
GARY W. KRAT

/s/ JOEL M. SIMON Director September 26, 2002
- ----------------------
JOEL M. SIMON

/s/ MICHAEL A. SALBERG Director September 26, 2002
- ----------------------
MICHAEL A. SALBERG

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Movie Star, Inc.. (the "Company") on
Form 10-K for the period ended June 30, 2002 as filed with the Securities and
Exchange Commission (the "Report"), each of the undersigned, in the capacities
and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:

1. the Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

2. the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of the
Company.

Dated: September 26, 2002 /s/ Melvyn Knigin
----------------------
Melvyn Knigin
Chief Executive Officer

Dated: September 26, 2002 /s/ Thomas Rende
----------------------
Thomas Rende
Chief Financial Officer
(Principal Financial and
Accounting Officer)

CERTIFICATION
PURSUANT TO RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

CERTIFICATIONS

I, Melvyn Knigin, Chief Executive Officer of Movie Star, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Movie Star, Inc.;

2. based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and

3. based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.

Dated: September 26, 2002 /s/ Melvyn Knigin
--------------------------------------
Name: Melvyn Knigin
Title: Chief Executive Officer

CERTIFICATION
PURSUANT TO RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

CERTIFICATIONS

I, Thomas Rende, Chief Financial Officer of Movie Star, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Movie Star, Inc.;

2. based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and

3. based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.

Dated: September 26, 2002 /s/ Thomas Rende
--------------------------------------
Name: Thomas Rende
Title: Chief Financial Officer
(Principal Financial and
Accounting Officer)

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION

21 SUBSIDIARIES OF THE COMPANY
23 INDEPENDENT AUDITORS' CONSENT