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The following is an excerpt from a 10-Q SEC Filing, filed by NORTH FACE INC on 8/14/1998.
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NORTH FACE INC - 10-Q - 19980814 - FINANCIAL_STATEMENTS

ITEM 1. FINANCIAL STATEMENTS

THE NORTH FACE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

(unaudited)

<CAPTION>
                                                      June 30,      December 31,  June 30,
                                                      1998          1997          1997
                                                      ------------  ------------  ------------
<S>                                                   <C>           <C>           <C>
                             ASSETS
Current Assets:
Cash and cash equivalents.........................         $5,303        $4,511        $1,695
Trade accounts receivable, net....................         49,791        52,255        23,253
Other receivables.................................          6,445         6,112         4,405
Income tax receivable.............................          3,550         3,465         3,491
Advances to suppliers.............................            530           744           --
Inventories.......................................         62,369        44,697        47,326
Deferred taxes....................................          2,779         2,779           --
Other current assets..............................          7,752         4,390         4,799
                                                      ------------  ------------  ------------
  Total current assets............................        138,519       118,953        84,969

Property and equipment, net.......................         22,428        22,955        16,725
Trademarks and intangibles, net...................         28,405        29,066        29,460
Other assets......................................          6,461         3,306         2,452
                                                      ------------  ------------  ------------
  Total assets....................................       $195,813      $174,280      $133,606
                                                      ============  ============  ============

          LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued expenses, and other
  current liabilities.............................         27,420        34,102        19,327
Short term borrowings and current portion of
  long-term debt and capital lease obligations....         40,985        25,734        19,520
                                                      ------------  ------------  ------------
  Total current liabilities.......................         68,405        59,836        38,847

Long-term debt and obligations under capital
  leases..........................................          4,435         5,177           942
Other long-term liabilities.......................          5,854         5,974         6,576
                                                      ------------  ------------  ------------
  Total liabilities...............................         78,694        70,987        46,365
                                                      ------------  ------------  ------------
Stockholders' equity:
Common Stock, $.0025 par value - shares authorized
 50,000,000; issued and outstanding; 12,337,000
 at June 30, 1998 and 11,502,000 at December 31, 1997;         31            29            29
Additional paid-in capital........................         97,761        81,727        78,609
Subscriptions receivable..........................            --            --            (15)
Retained earnings.................................         19,010        21,220         8,341
Accumulated other comprehensive income -
  Translation adjustment..........................            317           317           277
                                                      ------------  ------------  ------------
  Total stockholders' equity......................        117,119       103,293        87,241
                                                      ------------  ------------  ------------
  Total liabilities and stockholders' equity......       $195,813      $174,280      $133,606
                                                      ============  ============  ============

See accompanying notes to consolidated financial statements


THE NORTH FACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

(unaudited)

<CAPTION>
                                      Three Months Ended      Six Months Ended
                                           June 30,               June 30,
                                     ---------------------   -------------------
                                     1998       1997         1998      1997
                                     ---------- ----------   --------- ---------
<S>                                  <C>        <C>          <C>       <C>
Net Sales..........................    $42,553    $31,087     $90,362   $70,429
Cost of Sales......................     23,564     18,046      50,381    40,173
                                     ---------- ----------   --------- ---------
Gross Profit.......................     18,989     13,041      39,981    30,256

Operating Expenses.................     20,801     15,975      40,712    32,748
Facility Closure Charge............      1,620          0       1,620         0
                                     ---------- ----------   --------- ---------
Operating Loss.....................     (3,432)    (2,934)     (2,351)   (2,492)

Interest Expense...................       (848)      (301)     (1,522)     (420)
Other Income (Expense), net........       (133)       (87)        220       (25)
                                     ---------- ----------   --------- ---------
Loss Before Benefit for
  Income Taxes ....................     (4,413)    (3,322)     (3,653)   (2,937)

Benefit for Income Taxes...........     (1,743)    (1,315)     (1,443)   (1,165)
                                     ---------- ----------   --------- ---------
Net Loss...........................    ($2,670)   ($2,007)    ($2,210)  ($1,772)
                                     ========== ==========   ========= =========

Net Loss Per Share:
     Basic.........................     ($0.22)    ($0.18)     ($0.19)   ($0.16)
     Diluted.......................     ($0.22)    ($0.18)     ($0.19)   ($0.16)

Weighted Average Shares Outstanding:
     Basic.........................     11,968     11,222      11,752    11,220
     Diluted.......................     11,968     11,222      11,752    11,220

See accompanying notes to consolidated financial statements


THE NORTH FACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

(unaudited)

<CAPTION>
                                                    Six Months Ended
                                                        June 30,
                                                 ----------------------
                                                 1998        1997
                                                 ----------  ----------
<S>                                              <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME.......................................  ($2,210)    ($1,772)
Adjustments to reconcile net loss to cash
 used in operating activities:
  Depreciation and amortization..................    3,081       1,886
  Provision for doubtful accounts................      723         736
  Tax benefit of exercise of stock options.......    1,306       2,339
  Other..........................................      (43)          2
Effect of changes in:
  Accounts receivable............................    1,741      (2,584)
  Inventories....................................  (17,672)    (15,851)
  Income tax receivable..........................      (85)     (2,197)
  Other assets...................................   (3,930)     (4,073)
  Accounts payable, accrued liabilities, and..........
    other liabilities............................   (2,492)        684
                                                 ----------  ----------
NET CASH USED IN OPERATING ACTIVITIES...           (19,581)    (20,830)
                                                 ----------  ----------
INVESTING ACTIVITIES:
Deposit for acquisition of business..............   (2,488)          0
Purchase of fixed assets.........................   (6,379)     (6,109)
                                                 ----------  ----------
NET CASH USED IN INVESTING ACTIVITIES............   (8,867)     (6,109)
                                                 ----------  ----------
FINANCING ACTIVITIES:
Borrowings on long term debt.....................       64       1,793
Long term debt repayments........................     (688)       (134)
Proceeds from revolver, net......................   15,134      18,573
Payment of debt acquisition costs................        0         (88)
Proceeds from issuance of stock..................   14,730         220
                                                 ----------  ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES...        29,240      20,364
                                                 ----------  ----------
Effect of foreign currency fluctuations on cash..        0         (45)
                                                 ----------  ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.      792      (6,620)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...    4,511       8,315
                                                 ----------  ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.........   $5,303      $1,695
                                                 ==========  ==========

See accompanying notes to consolidated financial statements.


THE NORTH FACE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of The North Face, Inc. and its subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Operating results for the six month period ended June 30, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1998. Accordingly, the interim unaudited financial statements should be read in conjunction with the financial statements included in the Form 10-K.

These financial statements have been prepared by the Company in a manner consistent with that used in the preparation of the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "Form 10-K"). In the opinion of management, the accompanying financial statements reflect all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior year amounts to conform with current year presentation.

The financial statements included herein are unaudited. The Condensed Consolidated Balance Sheet as of December 31, 1997, has been derived from the Consolidated Balance Sheet as of December 31, 1997 included in the Form 10-K.

NOTE 2. RECENTLY ISSUED ACCOUNTING STANDARDS

In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which established standards for reporting and displaying comprehensive income and its components in financial statements. Comprehensive income is defined as net income and all nonowner changes in shareholders' equity. Accumulated other comprehensive income consists entirely of foreign currency translation adjustments. Total comprehensive loss for the quarters ended June 30, 1998 and 1997 was $2,735,000 and $1,882,000, respectively and $2,210,000 and $1,817,000 for the six months ended June 30, 1998 and 1997, respectively.

NOTE 3. FACILITY CLOSURE CHARGE

During the quarter ended June 30, 1998 the Company recorded a one-time charge of $1,620,000, or $.08 per share (basic and diluted), related to the closing of an out-dated manufacturing facility in Scotland and the integration of its Canadian subsidiary into a combined North American business operation.

NOTE 4. SUBSEQUENT EVENTS

On July 2, 1998, the Company acquired a 51% interest in La Sportiva S.r.L., a premier manufacturer and distributor of trekking, mountaineering, and climbing footwear located in Ziano di Fiemme, Italy for a total purchase price of $6.4 million. Of the $6.4 million purchase price, the Company paid $2.5 million in cash and will pay the balance of $3.9 million, in either cash or in the Company's common stock, in two to five years. In a related transaction, the Company acquired 100% of La Sportiva USA on July 2, 1998 for a purchase price of $3.0 million which was paid in 133,335 shares of the Company's common stock. Both acquisitions will be recorded in the third quarter of 1998 under the purchase method of accounting. The Company will consolidate the results of La Sportiva S.r.L. and La Sportiva USA beginning on July 2, 1998.

In July 1998, the Company announced plans to relocate a portion of its corporate headquarters to Carbondale, Colorado in August 1998. In addition, the Company announced its intention to establish a Hong Kong operation to facilitate its sourcing of products in Asia and a planned reorganization of its San Leandro facility. The Company expects the costs relating to these announcements to be approximately $6 to $7 million of which $4.2 million is estimated to be incurred in 1998.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview - Factors That May Affect Future Results

When used below in connection with matters that may occur in the future, the words "anticipate," "estimate," "expect" or similar words identify forward looking statements within the meaning of federal securities laws. Forward looking statements below are based on the Company's current expectations of future events. The matters described in the forward looking statements are subject to risks and uncertainties. The actual results of these matters may differ substantially from the results anticipated by the Company. The Company cannot assure that future results will meet its current expectations. Risks and uncertainties relating to forward looking statements and to the Company's business include, but are not limited to, those described below, under "Factors That May Affect Our Business", in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and in other documents that may be subsequently filed with the Commission.

RESULTS OF OPERATIONS

The following tables set forth, for the periods indicated, certain items in the Company's consolidated statements of operations as a percentage of net sales (except for income taxes, which are shown as a percentage of pretax income). The results of operations for the three and six month periods ended June 30, 1998 and 1997 are not necessarily indicative of future results to be expected for the full year.

<CAPTION>
                                      Three Months Ended      Six Months Ended
                                           June 30,               June 30,
                                     ---------------------   -------------------
                                     1998       1997         1998      1997
                                     ---------- ----------   --------- ---------
<S>                                  <C>        <C>          <C>       <C>
Net Sales..........................      100.0 %    100.0 %     100.0 %   100.0
Gross Profit.......................       44.6       42.0        44.2      43.0
Operating Expenses.................       48.9       51.4        45.1      46.5
Facility Closure Charge............        3.8        0.0         1.8       0.0
Operating Loss.....................       (8.1)      (9.4)       (2.6)     (3.5)
Interest Expense...................        2.0        1.0         1.7       0.6
Loss Before Benefit for
  Income Taxes ....................      (10.4)     (10.7)       (4.0)     (4.2)
Benefit for Income Taxes...........      (39.5)     (39.6)      (39.5)    (39.7)
Net Loss...........................       (6.3)      (6.5)       (2.4)     (2.5)

Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997

Net Sales. Net sales increased by 36.9% to $42.6 million from $31.1 million for the three months ended June 30, 1998 (the "Second Quarter 1998") over the three months ended June 30, 1997 (the "Second Quarter 1997").

Net sales to wholesale customers increased by 40.7% to $36.0 million from $25.6 million for the Second Quarter 1998 compared to the Second Quarter 1997. This increase was primarily a result of increased unit sales to the Company's existing wholesale customers resulting from (i) continued strong sales of existing products, (ii) increased sales through the Summit Shop program, and
(iii) a shift in timing of Fall sales from July to June due to requested customer delivery dates.

Retail sales in the US and Canada increased by 19.2% to $6.6 million from $5.5 million for the Second Quarter 1998 compared to the Second Quarter 1997. On a comparable store basis, retail sales increased by 12.7% (approximately 9.6% for retail stores and 17.2% for outlets). This increase is primarily the result of a successful sale held at the outlets in May and a better merchandising mix of inventory at both the outlets and retail stores, and a more volume oriented pricing strategy at the outlets.

Gross Profit. Gross profit as a percentage of net sales for the Second Quarter 1998 was 44.6% compared to 42.0% for the Second Quarter 1997. The increase in gross margin was primarily attributable to continued management of non-profitable products, improved pricing in production and operating leverage.

Operating Expenses. Operating expenses, which include selling, marketing, and general administrative expenses, increased by 30.2% to $20.8 million from $16.0 million for the Second Quarter 1998 compared to the Second Quarter 1997. The increase of $4.8 million is primarily due to increases in variable and fixed costs to support the growth of the Company's business. However, operating expenses, as a percentage of net sales declined from 51.4% to 48.9%, reflecting the Company's improved operating expense leverage.

Facility Closure Charge. During the Second Quarter 1998 the Company recorded a one-time charge of $1.6 million related to the closing of an out-dated manufacturing facility in Scotland and the integration of its Canadian subsidiary into a combined North American business operation.

Interest Expense. Interest expense for the Second Quarter 1998 increased to $0.8 million from $0.3 million for the Second Quarter 1997. The low level of interest in the Second Quarter 1997 was primarily a result of the Company using the proceeds from its two public offerings in 1996 to repay debt which allowed the Company to maintain a low level of debt in early 1997.

Provision for Income Taxes. Income taxes as a percent of pretax loss was approximately 39.5% for the Second Quarter 1998 compared to 39.6% for the Second Quarter 1997. This fluctuation relates to the estimated mix of the Company's pretax earnings in the U.S., Canada, and the United Kingdom, which have different tax rates.

Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997

Net Sales. Net sales increased by 28.3% to $90.4 million from $70.4 million for the six months ended June 30, 1998 (the "First Six Months 1998") compared to the six months ended June 30, 1997 (the "First Six Months 1997").

Net sales to wholesale customers increased by 33.4% to $75.9 million from $56.9 million for the First Six Months 1998 compared to the First Six Months 1997. This increase was primarily a result of increased unit sales to the Company's existing wholesale customers resulting from continued strong sales of existing products and increased sales through the Summit Shop program.

Retail sales in the US and Canada increased by 7.0% to $14.5 million from $13.5 million for the First Six Months 1998 compared to First Six Months 1997. On a comparable store basis, retail sales increased by 2.3% (approximately 1.0% for retail stores and 4.7% for outlets). This increase is due to a successful sale held at the outlets in May and a better merchandising mix of inventory during the Second Quarter 1998, offset by poor sales in January and early February due to inadequate inventory levels of retail product in that period.

Gross Profit. Gross profit as a percentage of net sales for the First Six Months 1998 was 44.2% compared to 43.0% for the First Six Months 1997. The higher gross margin was primarily attributable to continued management of non-profitable products, improved pricing in production and operating leverages.

Operating Expenses. Operating expenses, which include selling, marketing, and general and administrative expenses, increased by 24.3% to $40.7 million from $32.7 million for the First Six Months 1998 compared to the First Six Months 1997. The increase of $8.0 million is primarily due to increases in variable and fixed costs to support the growth of the Company's business. However, operating expenses as a percentage of net sales declined from 46.5% to 45.1%, reflecting the Company's improved operating expense leverage.

Facility Closure Charge. During the First Six Months 1998 the Company recorded a one-time charge of $1.6 million related to the closing of an out-dated manufacturing facility in Scotland and the integration of its Canadian subsidiary into a combined North American business operation.

Interest Expense. Interest expense increased to $1.5 million from $.4 million for the First Six Months 1998 compared to the First Six Months 1997. The low level of interest in the First Six Months 1997 was primarily a result of the Company using the proceeds from its two public offerings in 1996 to repay debt which allowed the Company to maintain a low level of debt in early 1997.

Provision for Income Taxes. Income taxes as a percent of pretax loss was approximately 39.5% for the First Six Months 1998 compared to 39.7% for the First Six Months 1997. This fluctuation related to the estimated mix of the Company's pretax earnings in the United States, Canada, and the United Kingdom, which have different tax rates.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company's ability to maintain adequate levels of inventory was constrained by its capital resources. As a result of increases in its credit facility, as well as the Company's public offerings in 1996, the Company has increased its levels of inventory in order to better meet demand for its key products. The Company anticipates that inventory levels will continue to increase as the Company expands its business and continues to improve its core inventory replenishment program. Such inventory increases are expected to be financed by borrowings under the Company's credit facility. The Company's current credit facility provides for borrowings up to $60.0 million under its revolving line of credit. In addition, the Company has a term note for capital expenditures of $4.8 million at June 30, 1998. The credit facility also provides a sub-limit for letters of credit of up to $25.0 million to finance the Company's purchases of product from foreign suppliers. As of June 30, 1998, the Company had approximately $6.3 million of letters of credit outstanding under the credit facility. The credit facility contains certain financial covenants that the Company was in compliance with as of June 30, 1998.

In the Second Quarter 1998 the Company received $14.0 million resulting from the issuance of 665,060 shares of the Company's common stock which were purchased by James G. Fifield, the Company's President and Chief Executive Officer.

The Company estimates that its capital expenditures in 1998 will be approximately $18.0 million. This amount is expected to be used principally for investment in Summit Shops, the upgrade of management information systems, the expansion of the Company's administration and distribution facilities, the establishment of operating facilities in Colorado, the expansion of its European sales and marketing operations and the remodeling of existing retail stores.

The Company anticipates that cash generated from operations, cash available under the Company's credit facility and through increased bank financing, will be sufficient to satisfy its cash requirements for at least the next 12 months.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to accept only six digit entries in the date code field. These date code fields will need to accept eight digit entries to distinguish 21st century dates from 20th century dates. As a result, in less that two years, computer systems and software used by many companies may need to be upgraded to comply with such "Year 2000" requirements.

The Company has conducted an internal review of its information systems and is involved in an enterprise wide project to upgrade or modify portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. The Company has been using both external and internal resources to reprogram or upgrade its software for the Year 2000 issue. The Company plans to complete the modifications and upgrades, including testing, by the end of 1998. The total cost for addressing the Year 2000 issue of approximately $400,000, which is based on management's current estimates, is not expected to be material to the Company's operations. The Company believes that with modifications and upgrades of its software the Year 2000 issue can be mitigated. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company.

The Company has surveyed significant vendors and others on whom it relies to assure that their systems will be converted in a timely manner. The Company is currently in the process of analyzing the responses to this survey. There can be no assurance that the systems of other companies will be converted on time or that a failure to convert by another company would not have a material adverse effect on the Company. In addition, the purchasing patterns of customers and potential customers may be affected by Year 2000 issues as companies expend significant resources to upgrade their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase products such as those offered by the Company, which could have a material adverse effect on the Company's business, operating results, and financial condition.

FACTORS THAT MAY AFFECT OUR BUSINESS

Certain statements set forth herein which refer to future financial items, economic performance or operations are forward looking, and actual results may differ materially from the result expected by the Company. The Company's future growth and operating results may be adversely effected by a number of factors, including those set forth below and elsewhere herein. There may also be important, unforeseen risks not described herein.

Consumer Preferences. Consumer demand for the Company's products may be adversely affected if consumer interest in outdoor activities declines or does not grow. If the Company is unable to respond successfully to changes in consumer preferences, or if consumer preferences shift toward competing products or away from the Company's product categories altogether, the Company's business would be adversely effected. The Company cannot assure future growth or consumer demand for its products.

Managing Growth. If the Company's business grows, the Company may have increased difficulties in managing product design, hiring, marketing, distribution, management information and other resources, and in obtaining and effectively managing supplies, manufacturing services and working capital. The Company's future profitability will be critically dependent on its ability to achieve and manage potential future growth effectively.

Wholesale Strategy. The Company's wholesale customers consist almost exclusively of specialty outdoor product retailers. The Company cannot assure that its existing customers will increase their purchases of the Company's products, that future preseason wholesale orders will increase, or that the Company will be able to fill reorders during each season. Because the Company expects its wholesale business to constitute an increasing percentage of total sales going forward, overall gross margins may decline in the future. The Company's wholesale strategy also depends on its ability to achieve increased sales through its Summit Shop program. Risks of this program include sourcing and managing higher inventory levels, funding all or most of the cost of the Summit Shop fixtures without assurance of additional sales and profits, and the need to supply products that maintain consumer demand on a year round basis. There can be no assurance that additional Summit Shops will be opened in a timely manner or that their cost or performance will meet the Company's expectations. If the Summit Shop program is unsuccessful, the Company risks write-offs of inventory and fixtures that could have a material adverse effect on the Company's business. The Company believes that the success of its Summit Shop program will be highly dependent on market acceptance of its Tekware? line of products, which was introduced in 1996.

Dependence on New Products. To continue its growth, the Company must successfully introduce new products and improvements to existing products on an ongoing basis. Risks of new product introductions include targeting new markets involving more casual outdoor uses, offering products in wider price ranges, product obsolescence, increased costs and competition, possible consumer rejection of new products or styles and possible dilution of the Company's product image. In May 1998, the Company announced its intention to design and contract for the manufacturing of a line of outdoor performance footwear, scheduled to launch in Spring 1999. There can be no assurance that this new effort by the Company will be successful.

Reliance on Unaffiliated Manufacturers. The Company currently relies on approximately 50 unaffiliated manufacturers to produce nearly all of its products, with 10 of the manufacturers producing approximately 75% of the Company's products in 1997 and early 1998. The Company has no long-term contracts with its manufacturing sources, and it competes with other companies for production facilities and import quota capacity. Any disruption in the Company's ability to obtain manufacturing services could have a material adverse effect on the Company's business. None of the manufacturers used by the Company produces the Company's products exclusively. The Company has occasionally received, and may in the future receive, shipments of products from manufacturers that fail to conform to the Company's quality control standards. The Company established its core inventory replenishment program to facilitate reorders of core products, and cannot assure that this program will meet reorder requirements or avoid excess inventory.

The Company requires its independent manufacturers to operate in compliance with applicable laws and regulations. Although the Company's internal and vendor operating guidelines promote ethical business practices and the Company's sourcing personnel periodically visit and monitor the operations of its independent manufacturers, the Company does not control these vendors or their labor practices. The violation of labor or other laws by an independent manufacturer of the Company, or the divergence of an independent manufacturer's labor practices from those generally accepted as ethical in the United States, could result in adverse publicity for the Company and could have a material adverse effect on the Company.

Key Suppliers. Certain important material used in the Company's products are only available from one or a limited number of independent suppliers. The Company's future success may depend upon the Company's continued ability to purchase supplies of technically advanced textiles developed by third parties. The Company cannot assure that it will be able to obtain in the future adequate supplies of technically advanced materials or that desired purchase terms or other benefits of past purchases, such as a supplier's funding of development costs and co-op advertising arrangements, will continue.

Fluctuation in Sales. Sales of the Company's products historically have fluctuated due to external conditions such as weather and economic recessions or other conditions which reduce consumer spending, which are beyond the Company's control.

International Operations. The Company's business is subject to the risks generally associated with doing business abroad. The Company imports more than 60% of its merchandise from contract manufacturers located outside of the United States, primarily in the Far East. A significant portion of the Company's products is produced in China. From time to time, the U.S. government has considered imposing punitive tariffs on apparel and other exports from China. The imposition of any such tariff could disrupt the supply or substantially increase the cost of the Company's products, either of which could have a material adverse effect on the Company's results of operations.

Competition and Trademarks. The Company faces intense competition from major brand name apparel companies, other large companies, and smaller businesses specializing in outdoor products. The Company owns and uses a number of trademarks, some of which may be important in maintaining or creating a competitive advantage and consumer demand. Certain competitors in the United States and abroad have copied and may in the future copy certain of the Company's trademarks and designs. The Company is also aware of certain counterfeiting of the Company's products. Without authorization from the Company, a third party has filed an application in China to register as a trademark the Chinese characters for "North Face" and a copy of the Company's "N" design, and, unless successfully opposed, this application could result in material adverse consequences to the Company's business. There is no assurance that the Company's efforts to stop or reduce the copying or counterfeiting of its trademarks or products will be successful, that the Company's trademarks will not violate the proprietary rights of others, or that the Company will be able to avoid or successfully defend challenges to its trademarks or other intellectual property in the United States or abroad.

Key Personnel. The Company's future success will depend, in part, upon the continued efforts of its key executive officers and other key personnel and upon the Company's ability to successfully retain current personnel and recruit and retain new personnel. There can be no assurance that any of such persons will remain executive officers or employees of the Company in the future. The unanticipated loss of one or more current senior executives or key employees, or the failure to adequately replace any departed executive or key employee on a timely basis, could have a significant adverse effect on the Company's business. During the Second Quarter 1998, William N. Simon resigned from his position as President and Chief Executive Officer and assumed the position of Vice Chairman and James G. Fifield was appointed as the Company's new President and Chief Executive Officer. In addition, James P. Reilly has recently joined the Company as its Chief Operating Officer. There can be no assurance that any newly-hired executive or key employee can successfully manage the Company's operations.

Product and Warranty Liability. The Company's products are used often in severe weather conditions. In 1997 the Company began selling portaledges used as sleeping platforms in big wall rock climbing. There is no assurance that insurance maintained by the Company will cover possible future losses from product liability claims. The Company maintains a warranty reserve for the lifetime warranty offered on its products, but cannot assure that future claims will not exceed this reserve. Further, in the event that the Company experiences problems with product quality or reliability, its reputation as a provider of high quality products could suffer, which could have a material adverse effect on the Company's business.

Stock Market Risks. The trading price of the Company's Common Stock has fluctuated significantly since the Company's initial public offering in July 1996, and may fluctuate in the future as a result of many factors, including the Company's operating results, new products introduced by the Company or its competitors, market conditions for the Company's products, changes in earnings estimates by analysts, results reported by the Company which are more or less than estimates by analysts, and speculation in the trade or business press. The trading price may also be effected by retail industry, stock market, or economic factors unrelated to the Company's performance. Future sales of substantial amounts of Common Stock by existing stockholders may also adversely effect prevailing market prices for the Common Stock and could impair the Company's ability to raise equity capital in the future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None material.

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

The following matters were approved at the Company's annual meeting of stockholders on March 31, 1998:

(a) The following class II Directors were elected:

<DERIVED>
Name                     For                      Withheld
James Fifield          10,746,749                    18,021
William Simon          10,746,955                    17,815

(b) The ratification of an amendment to the Company's 1996 Stock Incentive Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 600,000 shares to a total of 1,283,950.

For Against Abstain 5,036,653 3,310,404 11,612

(c) The ratification of the selection of Deloitte & Touche LLP as independent auditors of the Company for its fiscal year ending December 31, 1998.

For Against Abstain 10,751,568 6,449 6,753

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits
(11.1) Computation of Per Share Earnings

(27.1) Financial Data Schedule

(b) Reports on Form 8-K Form 8-K dated June 30, 1998 was filed on July 7, 1998 disclosing recent acquisitions, the plan to relocate a portion of the Company's executive offices and reorganize other operations of the Company, the plan to establish a facility in Hong Kong to manage the Company's relationship with certain third party manufacturers, and the adoption of a Stockholder Rights Plan.

SIGNATURES

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

THE NORTH FACE, INC.
(Registrant)

<SIGNATURE>
Dated:  August 14, 1998 By:     /s/ James G. Fifield_____________
                                James G. Fifield
                                Chief Executive Officer



Dated:  August 14, 1998 By:     /s/ Christopher F. Crawford_
                                Christopher F. Crawford
                                Chief Financial Officer
                                (Principal Financial and Accounting
                                Officer of the Registrant)

INDEX OF EXHIBITS

The following exhibits are included herein:

11.1 Computation of Net Income Per Share

27.1 Financial Data Schedule


EXHIBIT 11.1
THE NORTH FACE, INC.

COMPUTATION OF NET LOSS PER SHARE
(In thousands, except per share amounts)

<CAPTION>
                                                Three Months Ended  Six Months Ended
                                                     June 30,           June 30,
                                               ------------------- ------------------
                                               1998      1997      1998     1997
                                               --------- --------- -------- ---------

<S>                                           <C>       <C>       <C>      <C>
Weighted average shares outstanding
  during the period:

Weighted average shares outstanding - basic   11,968    11,222   11,752    11,220

Incremental shares from assumed
  exercise of stock options............ .          0         0        0         0
                                             --------- --------- -------- ---------
Weighted average common and common
  equivalent shares outstanding - diluted     11,968    11,222   11,752    11,220
                                             ========= ========= ======== =========

Net Loss................................     ($2,670)  ($2,007) ($2,210)  ($1,772)
                                             ========= ========= ======== =========

Net Loss Per Share
     Basic..............................      ($0.22)   ($0.18)  ($0.19)   ($0.16)

     Diluted............................      ($0.22)   ($0.18)  ($0.19)   ($0.16)


ARTICLE 5
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED STATEMENT OF OPERATIONS, THE CONDENSED BALANCE SHEET AND THE ACCOMPANYING NOTES TO THE CONDENSED FINANCIAL STATEMENTS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH.
MULTIPLIER: 1,000
S
PERIOD TYPE 3 MOS 3 MOS
FISCAL YEAR END DEC 31 1998 DEC 31 1997
PERIOD START APR 01 1998 APR 01 1997
PERIOD END JUN 30 1998 JUN 30 1997
CASH 5,303 1,695
SECURITIES 0 0
RECEIVABLES 56,236 1 27,658 1
ALLOWANCES 0 0
INVENTORY 62,369 47,326
CURRENT ASSETS 138,519 84,969
PP&E 22,428 1 16,725 1
DEPRECIATION 0 0
TOTAL ASSETS 195,813 133,606
CURRENT LIABILITIES 68,405 38,847
BONDS 0 0
PREFERRED MANDATORY 0 0
PREFERRED 0 0
COMMON 31 29
OTHER SE 117,088 87,212
TOTAL LIABILITY AND EQUITY 195,813 133,606
SALES 42,553 31,087
TOTAL REVENUES 42,553 31,087
CGS 23,564 18,046
TOTAL COSTS 23,564 18,046
OTHER EXPENSES 20,801 15,975
LOSS PROVISION 0 0
INTEREST EXPENSE 848 301
INCOME PRETAX (4,413) (3,322)
INCOME TAX (1,743) (1,315)
INCOME CONTINUING (2,670) (2,007)
DISCONTINUED 0 0
EXTRAORDINARY 0 0
CHANGES 0 0
NET INCOME (2,670) (2,007)
EPS PRIMARY ($0.22) ($0.18)
EPS DILUTED ($0.22) ($0.18)
N
1 REPRESENTS NET AMOUNT
BROKERAGE PARTNERS