UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-K/A
                                 AMENDMENT NO. 1


            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2004

                                       or

          [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                For the transition period from ______ to _______

                         Commission File Number: 0-26006

                              TARRANT APPAREL GROUP
             (Exact name of registrant as specified in its charter)

            CALIFORNIA                                        95-4181026
   (State or other jurisdiction                            (I.R.S. Employer
 of incorporation or organization)                      Identification Number)

                         3151 EAST WASHINGTON BOULEVARD
                          LOS ANGELES, CALIFORNIA 90023
               (Address of principal executive offices) (Zip code)

       Registrant's telephone number, including area code: (323) 780-8250

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

                                      NONE

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

                                  COMMON STOCK

         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. [ ]

         Indicate by check mark whether the registrant is an  accelerated  filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]

         The aggregate  market value of the Common Stock held by  non-affiliates
of the Registrant is approximately  $23,495,688  based upon the closing price of
the Common Stock on June 30, 2004.

         Number of shares of Common Stock of the  Registrant  outstanding  as of
March 31, 2005: 28,814,763.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the  Registrant's  definitive  Proxy  Statement to be filed
with the  Securities  and  Exchange  Commission  pursuant to  Regulation  14A in
connection  with the 2005 Annual Meeting of  Shareholders  are  incorporated  by
reference into Part III of this Report.


<PAGE>


                                EXPLANATORY NOTE

         We are  filing  this  Annual  Report on Form  10-K/A for the year ended
December 31, 2004 (the "Amended Annual  Report"),  to amend our Annual Report on
Form 10-K for the year ended December 31, 2004 (the "Original  Annual  Report"),
which was  originally  filed with the Securities  and Exchange  Commission  (the
"SEC") on April 15, 2005.  The Company is filing this Amended  Annual  Report in
response  to  comments  received  from the SEC.  The  following  Items amend the
Original  Annual Report,  as permitted by the rules and  regulations of the SEC.
Unless otherwise stated, all information contained in this Amended Annual Report
is as of March 31, 2005.  All  capitalized  terms used herein but not  otherwise
defined shall have the meanings ascribed to them in the Original Annual Report.


                                        i
<PAGE>


ITEM 2.  PROPERTIES

         At March 31, 2005, we conducted our operations from 9 facilities,  7 of
which were leased. Our leased facilities included:

                                                                Annual
Location              Purpose                 Rental Amount     Expiration
------------------    --------------------    -------------     --------------
Los Angeles, CA       Executive offices       $656,000          Monthly
(Washington Blvd.)

New York, NY          Showroom                $150,000          August 2007

Bentonville, AK       Office --               $35,000           September 2005
                      Wal-Mart Business

Ruleville, MS         Office and warehouse    Own

Hong Kong             Office and warehouse    $674,000          Monthly

Hong Kong             Warehouse               $12,000           September 2005

Bangkok               Office                  $6,000            March 2006

Tehuacan, Mexico      Storage                 $18,000           Monthly


         We lease our executive  offices in Los Angeles,  California from GET, a
corporation  which is owned by Gerard Guez and Todd Kay,  our  Chairman and Vice
Chairman, respectively. Additionally, we lease our warehouse and office space in
Hong Kong from Lynx International Limited, a Hong Kong corporation that is owned
by Messrs. Guez and Kay.

         On April 18,  1999,  we  acquired a 250,000  square  foot denim mill in
Puebla,  Mexico with an annual  capacity of  approximately  18 million meters of
denim.  On March 29, 2001, we completed the  acquisition of a sewing facility in
Ajalpan,  Mexico.  This  facility  contains  98,702 square feet. On December 31,
2002, we completed the acquisition of a twill mill facility, which has 1,700,000
square feet, and a capacity of 18 million  meters of denim or twill.  Commencing
on September 1, 2003, we leased a substantial  majority of these  premises to an
affiliate of Mr. Kamel Nacif,  for an annual rental of $11 million.  In November
2004, we sold our Mexican assets,  including these facilities,  to affiliates of
Mr. Kamel Nacif.

         We own two  facilities in Ruleville,  Mississippi  with an aggregate of
70,000 square feet.

         We recently  extended our lease for the facility in Bangkok until March
2006. We intend to extend the lease for our Hong Kong warehouse facility, and we
are currently in  negotiations  for an extension.  We do not intend to renew our
lease for the facility in Arkansas and we plan to relocate  these  operations to
our existing Los Angeles offices.

         We believe that all of our existing facilities are well maintained,  in
good operating condition and adequate to meet our current and foreseeable needs.


                                       1
<PAGE>


                                     PART II

ITEM 6.  SELECTED FINANCIAL DATA

         The following  selected financial data is qualified in its entirety by,
and should be read in  conjunction  with,  the other  information  and financial
statements, including the notes thereto, appearing elsewhere herein.

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                    -------------------------------------------------------------
                                      2000         2001         2002          2003         2004
                                    ---------    ---------    ---------    ---------    ---------
                                                (in thousands, except per share data)
<S>                                 <C>          <C>          <C>          <C>          <C>
INCOME STATEMENT DATA:
Net sales .......................   $ 395,169    $ 330,253    $ 347,391    $ 320,423    $ 155,453
Cost of sales ...................     332,333      277,525      302,082      288,445      134,492
                                    ---------    ---------    ---------    ---------    ---------
   Gross profit .................      62,836       52,728       45,309       31,978       20,961
Selling and distribution expenses      17,580       14,345       10,757       11,329        9,291
General and administrative
   expenses .....................      40,327       33,136       30,082       31,767       32,084
Amortization of intangibles(1)(3)       2,840        3,317         --           --           --
Impairment charges (4) ..........        --           --           --         22,277       77,982
Cumulative translation loss (5) .        --           --           --           --         22,786
                                    ---------    ---------    ---------    ---------    ---------
   Income (loss) from operations    $   2,089        1,930        4,470      (33,395)    (121,182)
Interest expense ................      (9,850)      (7,808)      (5,444)      (5,603)      (2,857)
Interest income .................       1,295        3,256        4,748          425          377
Minority interest ...............       1,313         (412)      (4,581)       3,461       15,331
Other income(2) .................       1,350        1,853        2,648        4,784        7,136
Other expense(2) ................        (193)        (856)      (2,004)      (1,425)      (1,134)
                                    ---------    ---------    ---------    ---------    ---------
Loss before provision for
   income taxes and cumulative ..
   effect of accounting change ..      (3,996)      (2,037)        (163)     (31,753)    (102,329)
Provision for income taxes ......       1,478         (852)      (1,051)      (4,132)      (2,348)
                                    ---------    ---------    ---------    ---------    ---------
Loss before cumulative
   effect of accounting change ..   $  (2,518)   $  (2,889)   $  (1,214)   $ (35,885)   $(104,677)
Cumulative effect of
   accounting change(3) .........        --           --         (4,871)        --           --
                                    ---------    ---------    ---------    ---------    ---------
Reported net loss ...............   $  (2,518)   $  (2,889)   $  (6,085)   $ (35,885)   $(104,677)
Dividend to preferred
   stockholders .................        --           --           --         (7,494)        --
                                    ---------    ---------    ---------    ---------    ---------
Net loss available to common
   stockholders (as restated) ...   $  (2,518)   $  (2,889)   $  (6,085)   $ (43,379)   $(104,677)
                                    =========    =========    =========    =========    =========
Net loss per share -
Basic:
   Before cumulative effect of
     accounting change (as
     restated) ..................   $   (0.16)   $   (0.18)   $   (0.08)   $   (2.38)   $   (3.64)
   Cumulative effect of
     accounting change ..........        --           --          (0.30)        --           --
   After cumulative effect of
     accounting change (as
     restated) ..................   $   (0.16)   $   (0.18)   $   (0.38)   $   (2.38)   $   (3.64)

Net loss per share -
Diluted:
   Before cumulative effect of
     accounting change (as
     restated) ..................   $   (0.16)   $   (0.18)   $   (0.08)   $   (2.38)   $   (3.64)
   Cumulative effect of
     accounting change ..........        --           --          (0.30)        --           --
   After cumulative effect of
     accounting change (as
     restated) ..................   $   (0.16)   $   (0.18)   $   (0.38)   $   (2.38)   $   (3.64)

Weighted average shares
   outstanding (000)
   Basic ........................      15,815       15,825       15,834       18,215       28,733
   Diluted ......................      15,815       15,825       15,834       18,215       28,733
</TABLE>


                                       2
<PAGE>


<TABLE>
<CAPTION>
                                                    AS OF DECEMBER 31,
                               ----------------------------------------------------------
                                  2000        2001        2002       2003         2004
----------------------------   ---------   ---------   ---------   ---------    ---------
                                                     (in thousands)
<S>                            <C>         <C>         <C>         <C>          <C>
BALANCE SHEET DATA:
Working capital ............   $  27,957   $  25,109   $  11,731   $ (18,018)   $ (12,295)
Total assets ...............     308,092     288,467     316,444     253,105      131,811
Bank borrowings, convertible
   debenture and long-term
   obligations .............     114,439     111,336     106,937      68,587       48,455
Shareholders' equity .......     130,489     125,164     121,161     107,709       30,678
</TABLE>

----------
(1)      See "Item 1. Business--Acquisitions."
(2)      Major components of other income (expense) (as presented above) include
         rental and lease  income,  and foreign  currency  gains or losses.  See
         "Item 7.  Management's  Discussion and Analysis of Financial  Condition
         and Results of Operations."
(3)      Effective January 1, 2002, we adopted Statement of Financial Accounting
         Standards No. 142, "Goodwill and Other Intangible Assets." According to
         this statement,  goodwill and other  intangible  assets with indefinite
         lives are no  longer  subject  to  amortization,  but  rather an annual
         assessment of impairment applied on a fair-value-based test. We adopted
         SFAS No. 142 in fiscal 2002 and performed  our first annual  assessment
         of impairment,  which  resulted in an impairment  loss of $4.9 million.
(4)      The  expense in 2004 was the  impairment  of  long-lived  assets of our
         Mexico  operations  due to  our  decision  to  sell  the  manufacturing
         operations  in Mexico.  The expense in 2003 was the  impairment  of our
         goodwill and intangible assets and write-off of prepaid expenses due to
         our decision to cease directly operating a substantial  majority of our
         equipment and fixed assets in Mexico commencing in the third quarter of
         2003.  See Note 5 and Note 7 of the  "Notes to  Consolidated  Financial
         Statements."
(5)      Cumulative   translation   loss   attributable  to  liquidated   Mexico
         operations  in  2004  was  due to our  decision  to  cease  our  Mexico
         operations.


                                       3
<PAGE>


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

         The following  discussion and analysis should be read together with the
Consolidated  Financial  Statements  of Tarrant  Apparel Group and the "Notes to
Consolidated  Financial  Statements"  included elsewhere in this Form 10-K. This
discussion   summarizes  the  significant  factors  affecting  the  consolidated
operating results,  financial  condition and liquidity and cash flows of Tarrant
Apparel  Group for the fiscal  years ended  December  31,  2002,  2003 and 2004.
Except for historical  information,  the matters  discussed in this Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations  are
forward looking  statements that involve risks and  uncertainties  and are based
upon  judgments  concerning  various  factors that are beyond our  control.  See
"Cautionary Statement Regarding Forward-Looking Statements."

OVERVIEW

         Tarrant  Apparel  Group is a design and  sourcing  provider  of private
label and private brand casual apparel for women, men and children, serving mass
merchandisers,  department  stores,  branded  wholesalers  and specialty  chains
located primarily in the United States.

         We  generate  revenues  from the  sale of  apparel  merchandise  to our
customers  that we have  manufactured  by  third  party  contract  manufacturers
located outside of the United States.  Revenues and net loss for the years ended
December 31, 2002, 2003 and 2004 were as follows (dollars in thousands):

REVENUES AND NET LOSS:                        2002          2003         2004
-----------------------------------------   ---------    ---------    ---------

Net sales ...............................   $ 347,391    $ 320,423    $ 155,453
Net loss before cumulative effect of
   accounting change ....................   $  (1,214)   $ (35,885)   $(104,677)
Net loss after cumulative effect of
   accounting change ....................   $  (6,085)   $ (35,885)   $(104,677)



         Cash flows for the years ended December 31, 2002, 2003 and 2004 were as
follows (dollars in thousands):

CASH FLOWS:                                      2002        2003        2004
--------------------------------------------   --------    --------    --------
Net cash provided by operating activities ..   $ 16,047    $  9,935    $ 12,168
Net cash provided by (used in) investing
   activities ..............................   $ (6,179)   $ (1,504)   $  1,250
Net cash used in financing activities ......   $ (8,479)   $ (6,295)   $(15,552)


RESTATEMENT OF FINANCIAL RESULTS

         As a result of a review by Securities and Exchange  Commission  ("SEC")
in connection with our filing of a registration  statement, we have reviewed the
accounting  treatment  of our October  2003  private  placement  of  convertible
preferred stock. As a result, we have revised our accounting  treatment for this
transaction  to  record a  beneficial  conversion  feature  in  accordance  with
Emerging  Issues  Task Force  ("EITF")  No.  98-5 and to restate  our  financial
statements  for the fiscal years ended December 31, 2003 and 2004 to reflect the
beneficial conversion feature of the convertible


                                       4
<PAGE>


preferred stock. The restatement results in changes in classification of certain
items included within  shareholders'  equity on our balance sheet as of December
31, 2003 and 2004,  and a reduction to our earnings per share  calculations  for
the year ended December 31, 2003. The restatement has no impact on total assets,
liabilities,  total  shareholders'  equity, net income (loss) or cash flows. The
restatement will not have any effect on reported earnings for future periods.

         We have restated our 2003 and 2004 financial  statements to reflect the
recording of a beneficial  conversion  feature of $7.5 million.  The  beneficial
conversion feature relates to issuance of 881,732 shares of Series A convertible
preferred  stock in  fiscal  2003.  The  beneficial  conversion  feature  of the
preferred shares in the amount of $7.5 million is recorded in the fourth quarter
of 2003,  resulting in an increase in loss per share to common  shareholders for
the year  ended  December  31,  2003 to $(2.38)  per share  from the  previously
reported  $(1.97) per share. The beneficial  conversion  feature does not change
our reported earnings (loss) per share for the year ended December 31, 2004, nor
any subsequent period. The effect of recording the beneficial conversion feature
on the December 31, 2004 financial statements was an increase in the accumulated
deficit of $7.5 million and an offsetting increase in contributed  capital.  The
restatement  did not change total  stockholders'  equity at December 31, 2003 or
2004.


SIGNIFICANT DEVELOPMENTS IN 2004

RESTRUCTURING AND SALE OF MEXICO OPERATIONS

         In August 2003,  we  determined to abandon our strategy of being both a
trading  and  vertically  integrated   manufacturing   company,  and  commencing
September 1, 2003, we ceased directly  operating nearly all of our equipment and
fixed  assets  in  Mexico  by  leasing  and  outsourcing  the  management  of  a
substantial majority of our Mexican operations to affiliates of Mr. Kamel Nacif,
a shareholder at the time of the transaction. We made our determination based on
many factors, including the following:

         o        Our   vertical   integration   strategy  in  Mexico   required
                  significant   working   capital,    which   required   us   to
                  significantly  increase debt to finance our Mexico operations.
                  Such  financing  was  not  available  to  us  on  commercially
                  reasonable terms.

         o        We faced the challenges of rising  overhead costs and the need
                  to take  low and  sometimes  negative  margin  orders  in slow
                  seasons to fill capacity at our facilities,  which reduced our
                  overall average gross margin.

         o        The  elimination of quotas on WTO,  member  countries by 2005,
                  and the other effects of trade agreements among WTO countries,
                  would soon result in  increased  competition  from  developing
                  countries,   which   historically   have  lower  labor  costs,
                  including  China and  Taiwan,  both of which  recently  became
                  members of the WTO.

         Our Mexican  operations  did not  represent  an  independent  cash flow
generating  entity.  It was a component  of our  vertical  integration  business
strategy and its sales were primarily to the United States reportable segment.

         In  connection  with our  restructuring  of our Mexico  operations,  we
incurred  $2.5  million and $1.1  million of  severance  costs in 2003 and 2004,
respectively,  in the  Mexico  reportable  segment.  We  did  not  relocate  any
employees in connection with this  restructuring and therefore did not incur any
relocation costs. In addition,  we did not incur any contract termination costs.
There was no ending  liability  balance for the severance costs incurred in 2003
and 2004  since such  amounts  were all paid in 2003 and 2004.


                                       5
<PAGE>


Severance  costs  incurred in 2003 were included in costs of goods sold and such
costs incurred in 2004 were included in general and  administrative  expenses in
the accompanying consolidated statements of operations.

         Due to our change of strategy in Mexico, at June 30, 2003, we wrote off
approximately  $19.5  million in  goodwill  associated  with  certain  assets we
acquired  in  Mexico,  and wrote  down $11  million  of  inventory  in Mexico in
anticipation of its  liquidation at reduced prices.  See Note 7 of the "Notes to
Consolidated Financial Statements."

         In  August  2004,  through  Tarrant  Mexico,  S. de R.L.  de C.V.,  our
majority owned and controlled subsidiary in Mexico, we entered into an Agreement
for Purchase of Assets with Mr. Nacif's affiliates,  which agreement was amended
in October 2004. Pursuant to the agreement, as amended, on November 30, 2004, we
sold to the  purchasers  substantially  all of our assets and real  property  in
Mexico which include  equipment and facilities  previously leased to Mr. Nacif's
affiliates in 2003, for an aggregate purchase price consisting of the following:

         o        $105,400  in cash and  $3,910,000  by  delivery  of  unsecured
                  promissory notes bearing interest at 5.5% per annum; and

         o        $40,204,000,  by delivery of secured  promissory notes bearing
                  interest  at 4.5% per annum,  maturing  on  December  31, 2014
                  payable in equal  installments  of principal and interest over
                  the term of the notes.

         Upon  consummation  of the sale, we entered into a purchase  commitment
agreement  with the  purchasers,  pursuant  to which we have  agreed to purchase
annually  over  the  ten-year  term  of the  agreement,  $5  million  of  fabric
manufactured at our former  facilities  acquired by the purchasers at negotiated
market prices. This agreement replaced an existing purchase commitment agreement
whereby we were obligated to purchase  annually from Mr. Nacif's  affiliates,  6
million  yards of fabric (or  approximately  $19.2  million of fabric at today's
market prices) manufactured at these same facilities through October 2009.

         In  accordance  with SFAS 144, we evaluated  the  long-lived  assets in
Mexico for  recoverability  and concluded that the book value of the asset group
was significantly higher than the expected future cash flows and that impairment
had  occurred.   Accordingly,  we  recognized  a  non-cash  impairment  loss  of
approximately  $78 million in the second quarter of 2004. The impairment  charge
was the  difference  between the  carrying  value and fair value of the impaired
assets.  Fair  value  was  determined  based on  independent  appraisals  of the
property and equipment  obtained in June 2004. There was no tax benefit recorded
with the impairment loss due to a full valuation  allowance recorded against the
future tax benefit as of June 30, 2004.

         Our  disposition  of our  facilities  in Mexico has reduced our working
capital  requirements,  eliminated  the need to accept  low or  negative  margin
orders to fill production capacity, and permitted us to source production in the
best locations worldwide.  We believe that our strong design,  merchandising and
sourcing capabilities are competitive advantages that will enable us to overcome
the  desire  by  some  retailers  to  purchase  merchandise  directly  from  the
manufacturer.

PRIVATE BRANDS INITIATIVE

         During  2003,  we launched  our  private  brands  initiative,  where we
acquire ownership of or license rights to a brand name and sell apparel products
under this brand to a single retail company within a geographic  region.  During
2004, we made significant progress in our private brands initiative, as follows:


                                       6
<PAGE>


         o        Amended  our  agreement   with  Macy's   Merchandising   Group
                  (formerly  Federated   Merchandising   Group)  to  exclusively
                  distribute American Rag Cie;

         o        Established   an   exclusive   distribution   with   Dillard's
                  Department Stores for Alain Weiz;

         o        Added Gear 7 for distribution at K-Mart;

         o        Began discussions with, and subsequently  entered into apparel
                  license agreement for House of Dereon by Beyonce; and

         o        Entered into apparel license agreement for Jessica Simpson.

INTERNAL REVENUE SERVICE AUDIT

         In January 2004, the Internal Revenue Service completed its examination
of our Federal  income tax returns for the years ended December 31, 1996 through
2001.  The IRS has proposed  adjustments  to increase our income tax payable for
the six years under examination. This adjustment would also result in additional
state taxes and  interest.  In  addition,  in July 2004,  the IRS  initiated  an
examination  of our Federal  income tax return for the year ended  December  31,
2002. In March 2005,  the IRS proposed an  adjustment  to our taxable  income of
approximately $6 million related to similar issues  identified in their audit of
the 1996 through 2001 federal  income tax returns.  The proposed  adjustments to
our 2002 federal  income tax return would not result in  additional  tax due for
that year due to the tax loss reported in the 2002 federal return.  However,  it
could reduce the amount of net  operating  losses  available to offset taxes due
from the preceding tax years.  We believe that we have  meritorious  defenses to
and intend to vigorously  contest the proposed  adjustments  made to our federal
income tax  returns  for the years  ended 1996  through  2002.  If the  proposed
adjustments are upheld through the administrative and legal process,  they could
have a  material  impact on our  earnings  and cash  flow.  We  believe  we have
provided  adequate  reserves for any reasonably  foreseeable  outcome related to
these matters on the  consolidated  balance sheets included in the  Consolidated
Financial  Statements  under the caption "Income  Taxes".  The maximum amount of
loss in  excess of the  amount  accrued  in the  financial  statements  is $12.6
million.  We do not believe that the  adjustments,  if any, arising from the IRS
examination,  will result in an additional  income tax liability  beyond what is
recorded in the accompanying consolidated balance sheets.

LABOR DIFFICULTIES IN MEXICO

         In connection with the restructuring of our Mexican operations, and the
resulting  reduction  in our  Mexican  work  force,  a group of laid off workers
attempted to form a new labor union and organized walkouts and demonstrations at
one of our sewing plants in Ajalpan,  Mexico. These demonstrations took place in
August  2003 and were  short-lived,  but very well  publicized.  Workers  rights
groups  picked up the story and began an  Internet  campaign  to  publicize  the
workers'  grievances.  In October  2003,  a local labor board denied the group's
application to organize a new union.  Nevertheless,  we have remained the target
of workers rights activists who have picketed our customers,  stuffed electronic
mailboxes  with  inaccurate,  protest  e-mails,  and  threatened  customers with
retaliation for continuing business with us. While we have defended our position
to our customers,  some of our larger  customers for Mexico  produced jeans wear
have been  reluctant  to place  orders with us in response to actions  taken and
contemplated  by these activist  groups.  As a consequence of these actions,  we
experienced a significant  decline in revenue of approximately  $75 million from
sales of Mexico-produced merchandise in 2004 as compared to 2003.


                                       7
<PAGE>


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Management's  discussion  and analysis of our  financial  condition and
results of  operations  are based upon our  consolidated  financial  statements,
which have been  prepared in accordance  with  accounting  principles  generally
accepted in the United States of America.  The  preparation  of these  financial
statements  requires us to make estimates and judgments that affect the reported
amounts of assets,  liabilities,  revenues and expenses, and related disclosures
of contingent assets and liabilities.  We are required to make assumptions about
matters,  which are  highly  uncertain  at the time of the  estimate.  Different
estimates we could  reasonably  have used or changes in the  estimates  that are
reasonably  likely  to occur  could  have a  material  effect  on our  financial
condition or result of operations. Estimates and assumptions about future events
and their effects cannot be determined with  certainty.  On an ongoing basis, we
evaluate estimates,  including those related to returns,  discounts,  bad debts,
inventories,  intangible assets, income taxes, and contingencies and litigation.
We base our  estimates  on  historical  experience  and on  various  assumptions
believed  to  be  applicable  and  reasonable  under  the  circumstances.  These
estimates may change as new events occur, as additional  information is obtained
and  as  our  operating   environment   changes.  In  addition,   management  is
periodically faced with uncertainties,  the outcomes of which are not within its
control and will not be known for prolonged period of time.

         Management  believes  our  financial  statements  are fairly  stated in
accordance with accounting principles generally accepted in the United States of
America and provide a meaningful  presentation  of our  financial  condition and
results of operations.

         We believe the following critical  accounting  policies affect our more
significant  judgments and estimates used in the preparation of our consolidated
financial  statements.  For a further discussion on the application of these and
other accounting  policies,  see Note 1 of the "Notes to Consolidated  Financial
Statements."

ACCOUNTS RECEIVABLE--ALLOWANCE FOR RETURNS, DISCOUNTS AND BAD DEBTS

         We evaluate the  collectibility of accounts  receivable and chargebacks
(disputes  from  the  customer)   based  upon  a  combination  of  factors.   In
circumstances where we are aware of a specific customer's  inability to meet its
financial  obligations (such as in the case of bankruptcy filings or substantial
downgrading  of  credit  sources),  a  specific  reserve  for bad debts is taken
against  amounts  due to reduce  the net  recognized  receivable  to the  amount
reasonably  expected to be  collected.  For all other  customers,  we  recognize
reserves  for bad  debts  and  chargebacks  based on our  historical  collection
experience.  If  collection  experience  deteriorates  (for  example,  due to an
unexpected  material  adverse change in a major  customer's  ability to meet its
financial obligations to us), the estimates of the recoverability of amounts due
us could be reduced by a material amount.

         As of December  31,  2004,  the balance in the  allowance  for returns,
discounts and bad debts  reserves was $2.4 million,  compared to $4.2 million at
December 31, 2003.

INVENTORY

         Our  inventories  are  valued  at the  lower of cost or  market.  Under
certain  market  conditions,  we  use  estimates  and  judgments  regarding  the
valuation of inventory to properly value  inventory.  Inventory  adjustments are
made for the  difference  between the cost of the  inventory  and the  estimated
market  value and  charged to  operations  in the period in which the facts that
give rise to the adjustments become known.


                                       8
<PAGE>


VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL

         We assess the impairment of identifiable intangibles, long-lived assets
and  goodwill  whenever  events or changes in  circumstances  indicate  that the
carrying value may not be recoverable.  Factors considered  important that could
trigger an impairment review include, but are not limited to, the following:

         o        a significant underperformance relative to expected historical
                  or projected future operating results;

         o        a significant  change in the manner of the use of the acquired
                  asset or the strategy for the overall business; or

         o        a significant negative industry or economic trend.

         Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142,  "Goodwill and Other  Intangible  Assets."  According to this
statement,  goodwill and other  intangible  assets with indefinite  lives are no
longer subject to  amortization,  but rather an annual  assessment of impairment
applied on a  fair-value-based  test. We adopted SFAS No. 142 in fiscal 2002 and
performed  our first  annual  assessment  of  impairment,  which  resulted in an
impairment loss of $4.9 million.

         We utilized  the  discounted  cash flow  methodology  to estimate  fair
value. At December 31, 2004, we have a goodwill  balance of $8.6 million,  and a
net property and equipment  balance of $1.9  million,  as compared to a goodwill
balance of $8.6  million  and a net  property  and  equipment  balance of $135.6
million at December 31, 2003.  Our  goodwill  balance  reflects the write off of
$19.5 million of goodwill in 2003 as discussed in "--  Significant  Developments
in 2004 - Restructuring and Sale of Mexico  Operations" and Note 5 and Note 7 of
the "Notes to Consolidated Financial Statements." Our net property and equipment
balance at December 31, 2004 reflects the disposal of our Mexico fixed assets of
$123.3 million in the fourth quarter of 2004.

         We assess the carrying  value of long-lived  assets In accordance  with
SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived Assets."
In 2004, we evaluated the  long-lived  assets in Mexico for  recoverability  and
concluded that the book value of the asset group was  significantly  higher than
the expected future cash flows and that impairment had occurred. Accordingly, we
recognized a non-cash impairment loss of approximately $78 million in the second
quarter of 2004. The impairment  charge was the difference  between the carrying
value and fair value of the impaired assets. Our determination of fair value was
determined  based  on  independent  appraisals  of the  property  and  equipment
obtained in June 2004.

FOREIGN CURRENCY TRANSLATION

         Assets and  liabilities  of our Mexico and Hong Kong  subsidiaries  are
translated at the rate of exchange in effect on the balance  sheet date;  income
and expenses are translated at the average rates of exchange  prevailing  during
the respective periods. The functional currency in which we transact business in
Hong Kong is the Hong Kong dollar and in Mexico is the peso.

         Foreign  currency gains and losses resulting from translation of assets
and liabilities are included in other comprehensive  income (loss).  Transaction
gains or  losses,  other than  inter-company  debt  deemed to be of a  long-term
nature,  are  included  in net income  (loss) in the period in which they occur.
Upon the sale in  November  2004 of our fixed  assets  in  Mexico,  the  foreign
currency   translation   adjustment  related  to  our  Mexico   subsidiaries  of
approximately  $22.8 million of loss was  reclassified  and charged to income in
the fourth quarter of 2004.


                                       9
<PAGE>


INCOME TAXES

         As  part  of  the  process  of  preparing  our  consolidated  financial
statements,  management  is  required to  estimate  income  taxes in each of the
jurisdictions  in which we  operate.  The  process  involves  estimating  actual
current tax expense along with assessing  temporary  differences  resulting from
differing treatment of items for book and tax purposes. These timing differences
result in  deferred  tax  assets  and  liabilities,  which are  included  in our
consolidated balance sheets.  Management records a valuation allowance to reduce
its  deferred  tax  assets  to the  amount  that is more  likely  than not to be
realized.  Management  has  considered  future  taxable  income and  ongoing tax
planning strategies in assessing the need for the valuation allowance. Increases
in the valuation  allowance result in additional  expense to be reflected within
the tax provision in the consolidated statement of operations.

         In addition,  accruals are also estimated for ongoing audits  regarding
U.S. Federal tax issues that are currently unresolved,  based on our estimate of
whether,  and the extent to which,  additional  taxes will be due. We  routinely
monitor the potential  impact of these  situations  and believe that amounts are
properly  accrued for. If we ultimately  determine that payment of these amounts
is unnecessary, we will reverse the liability and recognize a tax benefit during
the period in which we determine that the liability is no longer  necessary.  We
will record an  additional  charge in our  provision  for taxes in any period we
determine  that the original  estimate of a tax liability is less than we expect
the  ultimate  assessment  to be.  See  Note 10 of the  "Notes  to  Consolidated
Financial Statements" for a discussion of current tax matters.

DEBT COVENANTS

         Our debt agreements require certain covenants including a minimum level
of net worth as  discussed  in Note 8 of the  "Notes to  Consolidated  Financial
Statements."  If our results of  operations  erode and we are not able to obtain
waivers  from the  lenders,  the debt would be in default  and  callable  by our
lenders.  In addition,  due to cross-default  provisions in our debt agreements,
substantially  all of our long-term  debt would become due in full if any of the
debt is in default.  In  anticipation  of us not being able to meet the required
covenants  due to  various  reasons,  we either  negotiate  for  changes  in the
relative  covenants or an advance  waiver or  reclassify  the  relevant  debt as
current.  We also believe that our lenders would  provide  waivers if necessary.
However,  our expectations of future operating results and continued  compliance
with other debt  covenants  cannot be assured and our  lenders'  actions are not
controllable by us. If projections of future operating  results are not achieved
and the debt is placed in default,  we would be required to reduce our expenses,
including by curtailing  operations,  and to raise  capital  through the sale of
assets,  issuance  of equity or  otherwise,  any of which  could have a material
adverse effect on our financial condition and results of operations.

NEW ACCOUNTING PRONOUNCEMENTS

         For a description  of recent  accounting  pronouncements  including the
respective  expected  dates of adoption and effects on results of operations and
financial  condition,  see  Note  1 of  the  "Notes  to  Consolidated  Financial
Statements."


                                       10
<PAGE>


RESULTS OF OPERATIONS

         The  following  table sets forth,  for the periods  indicated,  certain
items in our consolidated statements of income as a percentage of net sales:

                                                     YEARS ENDED DECEMBER 31,
                                                 -----------------------------
                                                   2002       2003       2004
                                                 -------    -------    -------
Net sales ...................................     100.0 %    100.0 %    100.0 %
Cost of sales ...............................      87.0       90.0       86.5
                                                 -------    -------    -------
Gross profit ................................      13.0       10.0       13.5
Selling and distribution expenses ...........       3.1        3.5        6.0
General and administration expenses .........       8.6        9.9       20.6
Impairment charges ..........................       --         7.0       50.2
Cumulative translation loss .................       --         --        14.7
                                                 -------    -------    -------

Income (loss) from operations ...............       1.3      (10.4)     (78.0)
Interest expense ............................      (1.6)      (1.7)      (1.8)
Interest income .............................       1.4        0.1        0.2
Minority interest ...........................      (1.3)       1.0        9.9
Other income ................................       0.8        1.5        4.6
Other expense ...............................      (0.6)      (0.4)      (0.7)
                                                 -------    -------    -------

Loss before provision for income taxes
   and cumulative effect of accounting
   change ...................................       0.0       (9.9)     (65.8)
Income taxes ................................      (0.3)      (1.3)      (1.5)
                                                 -------    -------    -------

Loss before cumulative effect of
   accounting change ........................      (0.3)     (11.2)     (67.3)
Cumulative effect of accounting change(1) ...      (1.4)       --         --
                                                 -------    -------    -------

Net loss ....................................      (1.7)%    (11.2)%    (67.3)%
                                                 =======    =======    =======
----------
(1) Reflects the adoption of SFAS No. 142


COMPARISON OF 2004 TO 2003

         Net sales decreased by $165.0 million, or 51.5%, from $320.4 million in
2003  to  $155.5  million  in  2004.  The  decrease  in net  sales  was  largely
attributable  to a decrease in Mexican sourced sales from $139.1 million in 2003
to $19.5 million. Several of our larger customers for Mexico produced jeans wear
refused  to place  orders  with us  following  the  restructuring  of our Mexico
operations and resulting labor unrest in Mexico,  which resulted in a decline in
revenue of approximately $75 million from sales of  Mexico-produced  merchandise
during 2004 as compared to 2003. Additionally,  in 2004 we experienced a decline
in sales to certain customers of  Mexico-sourced  merchandise that was unrelated
to the labor unrest. In 2004, we also experienced a reduction of sales of fabric
to Mexican  manufacturers  of approximately  $17 million.  We also experienced a
reduction of sales from our import  operations in the Far East of  approximately
$40  million,  due in part to  several of our larger  customers  reducing  their
back-to-school and holiday order placements.

         Gross profit  consists of net sales less product  costs,  direct labor,
manufacturing  overhead,  duty, quota,  freight in,  brokerage,  and warehousing
expense. Gross profit for 2004 was $21.0 million, or 13.5%


                                       11
<PAGE>


of net sales,  compared  to $32.0  million,  or 10.0 % of net  sales,  for 2003,
representing a decrease of $11.0 million or 34.5%.  The decrease in gross profit
for 2004 was primarily  due to the  substantial  decrease in sales  volume.  The
lower gross  profit,  especially  in the fourth  quarter,  was  primarily due to
unplanned  air freight costs and higher quota costs in some  categories  coupled
with  additional  inventory  markdowns.  The  increase  in  gross  profit  as  a
percentage of net sales for 2004 when compared to 2003 was primarily  because of
an inventory write-down of $11 million and severance payments to Mexican workers
of approximately $2.5 million included in cost of goods sold in 2003.  Excluding
the  inventory  write-down  and  severance  payments in 2003,  gross profit as a
percentage of net sales for 2003 was 14.2% compared to 13.5% for 2004.

         Selling and distribution  expenses  decreased by $2.0 million,  or 18%,
from $11.3  million  in 2003 to $9.3  million in 2004.  As a  percentage  of net
sales,  these variable expenses  increased from 3.5% in 2003 to 6.0% in 2004 due
to the significant decline in sales during 2004.

         General and  administrative  expenses  increased by $317,000,  or 1.0%,
from $31.8  million in 2003 to $32.1  million in 2004.  As a  percentage  of net
sales,  these  expenses  increased  from  9.9% in 2003 to  20.6%  in 2004 due to
significant decline in sales during 2004. This increase was partly caused by the
reclassification  of $3.2 million of depreciation of our Mexican facilities from
cost of goods sold in the fourth  quarter of 2003,  compared to $6.8  million of
depreciation and $1.1 million of severance payments to Mexican workers in 2004.

         Impairment  charges  were  $78.0  million  in 2004,  compared  to $22.3
million in 2003. The expense in 2004 was the impairment of long-lived  assets of
our Mexico operations due to our decision to sell the  manufacturing  operations
in Mexico.  The expense in 2003 included  $19.5 million of the impairment of our
goodwill and intangible assets and $2.8 million of write-off of prepaid expenses
due to our decision to cease  directly  operating a substantial  majority of our
equipment  and fixed assets in Mexico  commencing  in the third quarter of 2003.
See Note 5 and Note 7 of the "Notes to Consolidated Financial Statements."

         Cumulative   translation   loss   attributable  to  liquidated   Mexico
operations  was $22.8 million in 2004,  or (14.7)% of net sales,  compared to no
such expense in 2003. As discussed  above, we incurred this charge upon the sale
of our fixed assets in Mexico in the fourth quarter of 2004.

         Loss from  operations  was $121.2  million  in 2004,  or (78.0)% of net
sales,  compared to $33.4 million in 2003,  or (10.4)% of net sales,  due to the
factors described above.

         Interest expense decreased by $2.7 million, or 49.0%, from $5.6 million
in 2003 to $2.9 million in 2004. This decrease in interest  expense was a result
of a decrease of the amount we financed under our main credit  facility in 2004.
Interest income was $378,000 in 2004 compared to $425,000 in 2003.  Other income
increased by $2.4 million,  or 49.2%,  from $4.8 million in 2003 to $7.1 million
in 2004,  due to $3.7 million of lease income  received for our  facilities  and
equipment in Mexico in 2003,  compared to $5.5 million in 2004.  Other  expenses
decreased from $1.4 million in 2003 to $1.1 million in 2004.

         Losses  allocated  to  minority  interests  in 2004 was $15.3  million,
representing  $471,000 attributed to the minority  shareholder in United Apparel
Ventures,  LLC, for its 49.9% share in the loss and $14.8 million  attributed to
the minority shareholder in Tarrant Mexico for its 25% share in the loss. Losses
allocated  to minority  interests  in 2003 was $3.5  million,  representing  the
minority  partner's  share of  profit  in UAV of $3.5  million,  offset  by $7.0
million  attributed to the minority  shareholder  in Tarrant  Mexico for its 25%
share in the loss including $4.4 million for its share in the special write-down
on goodwill and inventory of Tarrant Mexico.


                                       12
<PAGE>


         Loss before  provision for income taxes was $102.3  million in 2004 and
$31.8  million  in  2003,   representing   (65.8)%  and  (9.9)%  of  net  sales,
respectively.  The increase in loss before  provision  for income was due to the
factors discussed above.

         Provision for income taxes was $2.3 million in 2004 versus $4.1 million
in 2003, representing (1.5)% and (1.3)% of net sales, respectively.

         Loss after taxes and cumulative  effect of accounting change was $104.7
million in 2004 and $35.9 million in 2003,  representing  (67.3)% and (11.2)% of
net  sales,  respectively.  Included  in the  $104.7  million  loss in 2004 were
charges of $78.0  million  for the  impairment  of  long-lived  assets and $22.8
million  of  cumulative  translation  loss  attributable  to  liquidated  Mexico
operations.  Included in the $35.9 million loss in 2003 were non-cash charges of
$22.3 million for the  impairment  of assets and an inventory  write-down of $11
million.

COMPARISON OF 2003 TO 2002

         Net sales  decreased by $27.0  million,  or 7.8% from $347.4 million in
2002  to  $320.4  million  in  2003.  The  decrease  in net  sales  was  largely
attributable  to a decrease in Mexican sourced sales from $186.9 million in 2002
to $139.1 million in 2003.  This decrease in net sales was primarily a result of
the cessation of our  manufacturing  operations in Mexico in September  2003 and
the labor  difficulties and workers' rights activities we experienced  following
the reduction of our Mexico work force.  The decrease in net sales was partially
offset by  additional  revenue of $20.5  million  from sales of private  brands,
which we started to develop during 2003. However,  the private brand revenue was
not sufficient to cover the loss of sales volume from Mexican-sourced products.

         Gross  profit  for  2003 was  $32.0  million,  or  10.0% of net  sales,
compared  to $45.3  million,  or 13.0% of net sales,  for 2002,  representing  a
decrease of $13.3 million or 29.4%. The decrease in gross profit as a percentage
of net sales  occurred  primarily  because  of an  inventory  write-down  of $11
million in the second quarter of 2003 and severance  payments to Mexican workers
of  approximately  $2.5  million  included  in cost of goods sold in 2003.  This
increase in cost of goods sold was  partially  offset by a  reclassification  of
depreciation  and  amortization  in fourth  quarter  of 2003 of $3.2  million to
general  and  administration   expense.   Excluding  the  inventory  write-down,
severance  payments and  reclassification  of depreciation  and  amortization in
2003, gross profit would have decreased by $3.0 million or 6.6% to $42.3 million
or 13.2%.

         Selling and distribution  expenses increased by $572,000, or 5.3%, from
$10.8  million in 2002 to $11.3  million in 2003.  As a percentage of net sales,
these  variable  expenses  increased  from  3.1% in 2002  to 3.5% in  2003.  The
increase  was  primarily  caused  by an  overall  increase  in  warehousing  and
distribution  cost due to the sale of private  brands  apparel  in smaller  size
shipments.

         General and administrative expenses increased by $1.7 million, or 5.6%,
from $30.1  million in 2002 to $31.8  million in 2003.  As a  percentage  of net
sales, these expenses increased from 8.6% in 2002 to 9.9% in 2003. This increase
was primarily  caused by the  reclassification  of $3.2 million of  depreciation
from cost of goods sold in the fourth quarter of 2003. The charge for the change
in the  allowances  for returns and discounts for 2003 was $183,000,  or 0.1% of
sales, compared to such charge of $867,000, or 0.2% of sales, during 2002.

         Impairment  charge was $22.3 million in 2003,  compared to $4.9 million
in 2002  being  classified  as a  cumulative  effect  of  accounting  change  in
accordance  with SFAS 142. This expense in 2003 is primarily due to our decision
to cease  directly  operating a substantial  majority of our equipment and fixed


                                       13
<PAGE>


assets in Mexico  commencing  in the third  quarter  of 2003.  See Note 7 of the
"Notes to Consolidated Financial Statements."

         Loss from  operations  was $33.4  million  in 2003,  or  (10.4)% of net
sales,  compared to income from  operations  of $4.5 million in 2002, or 1.3% of
net sales, due to the factors described above.

         Interest expense  increased by $159,000,  or 2.9%, from $5.4 million in
2002 to $5.6 million in 2003. This increase in interest  expense was a result of
an increase in interest rate  applicable to our main credit  facility.  Interest
income was  $425,000  in 2003  compared  to $4.7  million in 2002.  Included  in
interest  income for 2002 was  approximately  $4.5 million from a related  party
note receivable related to the sale of certain equipment pertaining to the twill
mill,  which we  re-acquired in December  2002.  Other income  increased by $2.1
million,  or 80.7%,  from $2.6 million in 2002 to $4.8  million in 2003,  due to
$3.7 million of lease income received for our facilities and equipment in Mexico
starting  September 1, 2003,  offset by a reduction of realized  gain on foreign
currency of $819,000. Other expenses decreased from $2.0 million in 2002 to $1.4
million in 2003 due to a reduction  of  unrealized  loss on foreign  currency of
$454,000.

         Losses  allocated  to  minority  interests  in 2003 was  $3.5  million,
representing the minority  partner's share of profit in United Apparel Ventures,
LLC of  $3.5  million,  offset  by  $7.0  million  attributed  to  the  minority
shareholder  in  Tarrant  Mexico  for its 25% share in the loss  including  $4.4
million for its share in the special  write-down  on goodwill  and  inventory of
Tarrant  Mexico.  In 2002,  we  allocated  $4.6  million  of profit to  minority
interest,  which  consisted of profit shared by the minority  partner in the UAV
joint venture.

         Loss  before  taxes and  cumulative  effect of  accounting  change  was
$163,000 in 2002 and $31.8 million in 2003,  representing 0.0% and (9.9)% of net
sales, respectively.  The increase in loss before taxes and cumulative effect of
accounting change was due to the factors discussed above.

         Provision for income taxes was $1.1 million in 2002 versus $4.1 million
in 2003. The increase in income tax expense is due to adjustments to the accrual
for potential IRS audits and increases in the valuation allowance.

         Loss after taxes and  cumulative  effect of accounting  change was $6.1
million in 2002 and $35.9  million in 2003,  representing  (1.7)% and (11.2)% of
net  sales,  respectively.  Included  in the  $6.1  million  loss in 2002  was a
non-cash  charge of $4.9 million to reduce the carrying value of goodwill to the
estimated  fair value,  resulting  from adoption of SFAS No. 142,  "Goodwill and
Other  Intangible  Assets."  Included  in the  $35.9  million  loss in 2003 were
non-cash  charges of $22.3 million for the impairment of assets and an inventory
write-down of $11 million.

         As noted above,  we have  restated  our 2003  financial  statements  to
record a  beneficial  conversion  feature of the  preferred  shares we issued in
October  2003 in the  amount of $7.5  million  in the  fourth  quarter  of 2003,
resulting in an increase in loss per share to common  shareholders  for the year
ended  December  31,  2003 to  $(2.38)  per share from the  previously  reported
$(1.97) per share.


                                       14
<PAGE>


         QUARTERLY RESULTS OF OPERATIONS

         The  following  table sets forth,  for the periods  indicated,  certain
items in our  consolidated  statements of income in millions of dollars and as a
percentage of net sales:

<TABLE>
<CAPTION>
                                                 QUARTER ENDED
                    ----------------------------------------------------------------------
                     MAR.31   JUN.30   SEP.30   DEC.31   MAR.31   JUN.30   SEP.30   DEC.31
                      2003     2003     2003     2003     2004     2004     2004     2004
                    -------  -------  -------  -------  -------  -------  -------  -------
<S>                 <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Net Sales .......   $  78.7  $  78.2  $  96.5  $  67.0  $  42.2  $  38.5  $  38.1  $  36.7
Gross profit ....       8.8     (0.4)    11.5     12.1      7.5      5.3      4.1      4.1
Operating income
 (loss) .........      (1.3)   (34.4)     1.4      0.8     (5.9)   (84.4)    (3.4)   (27.5)
Net income (loss)      (3.9)   (32.6)     0.1      0.4     (3.0)   (68.6)    (4.0)   (29.1)
</TABLE>


<TABLE>
<CAPTION>
                                                  QUARTER ENDED
                    --------------------------------------------------------------------------
                    MAR.31    JUN.30    SEP.30   DEC.31   MAR.31    JUN.30    SEP.30    DEC.31
                     2003      2003      2003     2003     2004      2004      2004      2004
-----------------   ------    ------    ------   ------   ------    ------    ------    ------
<S>                 <C>       <C>       <C>      <C>      <C>       <C>       <C>       <C>
Net sales .......   100.0%    100.0%    100.0%   100.0%   100.0%    100.0%    100.0%    100.0%
Gross profit ....    11.2      (0.6)     11.9     18.0     17.8      13.7      10.9      11.1
Operating income
 (loss) .........    (1.7)    (44.0)      1.5      1.2    (14.0)   (219.2)     (9.0)    (74.7)
Net income (loss)    (4.9)    (41.7)      0.1      0.6     (7.1)   (178.1)    (10.5)    (79.3)
</TABLE>


         As is typical  for us,  quarterly  net sales  fluctuated  significantly
because our customers  typically  place bulk orders with us, and a change in the
number of orders shipped in any one period may have a material effect on the net
sales for that period.


                                       15
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

         Our  liquidity  requirements  arise  from the  funding  of our  working
capital  needs,  principally  inventory,  finished  goods  shipments-in-transit,
work-in-process and accounts receivable, including receivables from our contract
manufacturers  that  relate  primarily  to fabric we  purchase  for use by those
manufacturers.  Our primary sources for working capital and capital expenditures
are cash  flow from  operations,  borrowings  under  our bank and  other  credit
facilities, issuance of long-term debt, sales of equity and debt securities, and
vendor financing. In the near term, we expect that our operations and borrowings
under bank and other credit facilities will provide  sufficient cash to fund our
operating expenses,  capital  expenditures and interest payments on our debt. In
the long-term,  we expect to use internally generated funds and external sources
to satisfy our debt and other long-term liabilities.

         Our liquidity is dependent,  in part, on customers  paying on time. Any
abnormal chargebacks or returns may affect our source of short-term funding. Any
changes in credit terms given to major  customers may have an impact on our cash
flow.  Suppliers' credit is another major source of short-term financing and any
adverse changes in their terms will have negative impact on our cash flow.

         Other  principal  factors  that could  affect the  availability  of our
internally generated funds include:

         o        deterioration of sales due to weakness in the markets in which
                  we sell our products;

         o        decreases in market prices for our products;

         o        increases in costs of raw materials; and

         o        changes in our working capital requirements.

         Principal  factors  that could  affect our  ability to obtain cash from
external sources include:

         o        financial  covenants  contained  in our current or future bank
                  and debt facilities; and

         o        volatility  in the market  price of our common stock or in the
                  stock markets in general.

         The  disposition  of our Mexico  operations has enabled us to return to
the business model that was profitable prior to implementation of our vertically
integrated manufacturing operations that required major capital expenditures and
substantial  working  capital.  The lease  and  subsequent  sale of our  Mexican
facilities  significantly  reduced our working capital requirements due to fewer
employees and the  elimination of fixed  overhead.  Investment in inventory also
was substantially  reduced as we no longer need to purchase raw materials,  such
as cotton, at commencement of the  manufacturing  process and carry the costs of
such  materials  until  finished  goods are  shipped to our  customers.  Reduced
working   capital  and  capital   expenditures  in  Mexico  has  resulted  in  a
corresponding  reduction of  outstanding  indebtedness  and  interest  payments.
Furthermore,  we no longer need to accept orders with low or negative margins to
fill production capacity in slow seasons, which should improve margins and allow
us to source production in the best locations worldwide.


                                       16
<PAGE>


         Cash flows for the years ended December 31, 2002, 2003 and 2004 were as
follows (dollars in thousands):

CASH FLOWS:                                      2002        2003        2004
--------------------------------------------   --------    --------    --------
Net cash provided by operating activities ..   $ 16,047    $  9,935    $ 12,168
Net cash provided by (used in) investing
   activities ..............................   $ (6,179)   $ (1,504)   $  1,250
Net cash used in financing activities ......   $ (8,479)   $ (6,295)   $(15,552)


         Net cash provided by operating activities was $12.2 million in 2004, as
compared to net cash  provided by  operations  in 2003 of $9.9 million and $16.0
million in 2002. Net cash provided by operations in 2004 resulted primarily from
a net loss of $104.7 million offset by  depreciation  and  amortization  of $8.3
million,  asset impairment of $78.0 million and cumulative  translation of $22.8
million. In addition to these items, the components of working capital impacting
cash from operations included a decrease of $21.2 million in accounts receivable
and a decrease of $4.2 million in inventory.

         During  2004,  cash flow  provided  by  investing  activities  was $1.3
million, as compared to net cash used in investing activities of $1.5 million in
2003 and $6.2 million in 2002.  Cash  provided by investing  activities  in 2004
included approximately $1.2 million of proceeds from the sale of fixed assets.

         During 2004, net cash used in financing activities was $15.6 million as
compared  to $6.3  million in 2003 and $8.5  million  in 2002.  Net cash used in
financing  activities  in 2004  included  $11.3  million  net  repayment  of our
short-term bank borrowings and $17.2 million net repayment of indebtedness under
our credit facilities, partially offset by $9.4 million of net proceeds from the
issuance of  convertible  debentures  and $3.6 million of net proceeds  from the
issuance of preferred stock and warrant.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

         Following is a summary of our  contractual  obligations  and commercial
commitments available to us as of December 31, 2004 (in millions):

<TABLE>
<CAPTION>
                                                     PAYMENTS DUE BY PERIOD
                                       ------------------------------------------------
                                                            Between   Between
                                                 Less than    2-3       4-5      After
CONTRACTUAL OBLIGATION                  Total      1 year    years     years    5 years
                                       --------   -------   -------   -------   -------
<S>           <C>                      <C>        <C>       <C>       <C>       <C>
Long-term debt(1) ................     $   22.2   $  19.6   $   2.6   $   --    $   --
Convertible debentures, net ......     $   10.0   $   --    $  10.0   $   --    $   --
Operating leases .................     $    0.6   $   0.3   $   0.3   $   --    $   --
Minimum royalties ................     $   17.9   $   2.8   $   7.5   $   1.9   $   5.7
Purchase commitment ..............     $   50.0   $   5.0   $  10.0   $  10.0   $  25.0
                                       --------   -------   -------   -------   -------
Total Contractual Cash Obligations     $  100.7   $  27.7   $  30.4   $  11.9   $  30.7
----------
<FN>
(1)   Excludes  interest on long-term  debt  obligations.  Based on  outstanding
      borrowings  as of December  31, 2004,  and assuming all such  indebtedness
      remained   outstanding   during  2005  and  the  interest  rates  remained
      unchanged,  we estimate that our interest cost on long-term  debt would be
      approximately $3.2 million.
</FN>
</TABLE>


                                       17
<PAGE>


<TABLE>
<CAPTION>
                                                                              AMOUNT OF COMMITMENT
                                                                             EXPIRATION PER PERIOD
                                              TOTAL AMOUNTS     ----------------------------------------------
OTHER COMMERCIAL                                COMMITTED        Less than     Between     Between      After
COMMITMENTS AVAILABLE TO US                       TO US            1 year     2-3 years   4-5 years    5 years
------------------------------------------    -------------     ----------    ---------   ---------    -------
<S>                                               <C>              <C>            <C>         <C>         <C>
Lines of credit...........................        $63.9            $63.9          --          --          --
Letters of credit (within lines of credit)        $18.9            $18.9          --          --          --
Total Commercial Commitments..............        $63.9            $63.9          --          --          --
</TABLE>


         On June 13, 2002,  we entered  into a letter of credit  facility of $25
million with UPS Capital Global Trade Finance  Corporation  ("UPS").  Under this
facility,  we may arrange for the issuance of letters of credit and acceptances.
The  facility  is  collateralized  by the  shares and  debentures  of all of our
subsidiaries  in Hong Kong.  In addition to the  guarantees  provided by Tarrant
Apparel  Group and our  subsidiaries,  Fashion  Resource  (TCL) Inc. and Tarrant
Luxembourg  Sarl,  Gerard  Guez,  our  Chairman,  also signed a guarantee  of $5
million in favor of UPS to secure this facility. This facility bears interest at
6.25% per annum at December 31,  2004.  Under this  facility,  we are subject to
certain restrictive  covenants,  including that we maintain a specified tangible
net worth,  fixed charge  ratio,  and leverage  ratio.  On December 31, 2004, we
amended the letter of credit  facility with UPS to reduce the maximum  amount of
borrowings  under the facility to $15 million and extend the expiration  date of
the facility to June 30, 2005. Under the amended letter of credit  facility,  we
are subject to restrictive financial covenants of maintaining tangible net worth
of $22 million at each of  December  31, 2004 and March 31, 2005 and $25 million
as of the last day of each fiscal quarter thereafter.  There is also a provision
capping maximum capital expenditures per quarter of $800,000. As of December 31,
2004,  $12.6  million  was  outstanding  under this  facility  with UPS,  and an
additional $1.3 million was available for future borrowings.  In addition,  $1.1
million of open letters of credit was outstanding as of December 31, 2004.

         On December 31, 2004,  our Hong Kong  subsidiaries  also entered into a
new loan  agreement  with UPS pursuant to which UPS made a $5 million term loan,
the proceeds of which were used to repay $5 million of indebtedness  owed to UPS
under the letter of credit of facility. The principal amount of this loan is due
and payable in 24 equal monthly  installments  of  approximately  $208,333 each,
plus  interest  equivalent to the "prime rate" plus 2% commencing on February 1,
2005.  Under  the  loan  agreement,  we are  subject  to  restrictive  financial
covenants of  maintaining  tangible net worth of $22 million at each of December
31,  2004 and March 31,  2005 and $25  million as of the last day of each fiscal
quarter   thereafter.   There  is  also  a  provision  capping  maximum  capital
expenditure  per  quarter at  $800,000.  As of  December  31,  2004,  we were in
compliance  with the  covenants.  The  obligations  under the loan agreement are
collateralized  by the same security  interests and  guarantees as the letter of
credit facility.  Additionally, the term loan is secured by two promissory notes
payable to Tarrant  Luxembourg  Sarl in the amounts of $2,550,000 and $1,360,000
and a pledge by Gerard Guez of 4.6 million  shares of our common stock to secure
the obligations.

         Since March 2003, DBS Bank (Hong Kong) Limited  (formerly  known as Dao
Heng  Bank)  has made  available  a letter of  credit  facility  of up to HKD 20
million  (equivalent to US $2.6 million) to our  subsidiaries in Hong Kong. This
is a demand facility and is secured by the pledge of our office property,  which
is owned by Gerard Guez,  our Chairman and Todd Kay, our Vice  Chairman,  and by
our  guarantee.  The letter of credit  facility was  increased to HKD 30 million
(equivalent  to US$3.9  million) in June 2004.  As of December  31,  2004,  $3.4
million was outstanding under this facility.  In addition,  $1.4 million of open
letters of credit was  outstanding  as of December 31, 2004.  In October 2004, a
tax loan  for HKD  7.725  million  (equivalent  to US  $977,000)  was also  made
available to our Hong Kong subsidiaries.  As of December 31, 2004,  $916,000 was
outstanding under this tax loan.


                                       18
<PAGE>


         We were previously party to a revolving credit,  factoring and security
agreement (the "Debt Facility") with GMAC Commercial Credit, LLC ("GMAC").  This
Debt Facility provided a revolving  facility of $90 million,  including a letter
of credit  facility  not to exceed $20 million,  and was  scheduled to mature on
January 31, 2005.  The Debt  Facility  also provided a term loan of $25 million,
which was being repaid in monthly  installments  of $687,500.  The Debt Facility
provided  for  interest  at LIBOR plus the LIBOR rate margin  determined  by the
Total  Leverage  Ratio (as  defined in the Debt  Facility  agreements),  and was
collateralized  by our  receivables,  intangibles,  inventory  and various other
specified  non-equipment  assets.  In May 2004, the maximum  facility amount was
reduced to $45 million in total and we established new financial  covenants with
GMAC for the fiscal year of 2004.

         On October 1, 2004,  we amended and  restated the Debt  Facility  dated
January  21,  2000 by and among  us,  our  subsidiaries,  TagMex,  Inc.  Fashion
Resource  (TCL) Inc and United Apparel  Ventures,  LLC and GMAC. The amended and
restated  agreement (the Factoring  agreement) adds as parties our  subsidiaries
Private  Brands,  Inc and No! Jeans,  Inc. In addition,  in connection  with the
factoring agreement, our indirect majority-owned subsidiary,  PBG7, LLC. entered
into a separate  factoring  agreement  with GMAC.  Pursuant  to the terms of the
factoring  agreement,  we and our subsidiaries agree to assign and sell to GMAC,
as  factor,  all  accounts  which  arise  from  the  Tarrant  Parties'  sale  of
merchandise  or  rendition  of service  created  on a going  forward  basis.  At
Tarrant's request, GMAC, in its discretion, may make advances to Tarrant Parties
up to the lesser of (a) up to 90% of our  accounts on which GMAC has the risk of
loss and (b) forty million dollars,  minus in each case, any amount owed to GMAC
by any Tarrant  Party.  Pursuant to the terms of the PBG7  factoring  agreement,
PBG7 agreed to assign and sell to GMAC,  as factor,  all  accounts,  which arise
from  PBG7's  sale  of  merchandise  or  rendition  of  services  created  on  a
going-forward  basis.  At PBG7's  request,  GMAC,  in its  discretion,  may make
advances  to PBG7 up to the lesser of (a) up to 90% of PBG7's  accounts on which
GMAC has the risk of loss,  and (b) five million minus in each case, any amounts
owed to GMAC by PBG7. Under both factoring  agreement,  any amounts,  which GMAC
advances  in  excess  of the  purchase  price  of  the  relevant  accounts,  are
considered to be loans and are chargeable to the Tarrant Parties' or PBG7's when
paid. Each of the parties only become  obligated to GMAC for a direct  financial
obligation  in the event that GMAC makes and  advance in excess of the  purchase
price of the relevant accounts,  and any such obligations are payable on demand.
This facility bears  interest at 6% per annum at December 31, 2004.  Restrictive
covenants  under  the  revised  facility  include a limit on  quarterly  capital
expenses of $800,000  and  tangible  net worth of $20 million at  September  30,
2004, $22 million at December 31, 2004 and March 31, 2005 and $25 million at the
end of each fiscal quarter thereafter beginning on June 30, 2005. As of December
31,  2004 we were in  compliance  with the new  tangible  net worth and  capital
expense  covenants.  A total of $17.0  million  was  outstanding  under the GMAC
facility at December 31, 2004.

         The credit  facility  with GMAC and the credit  facility with UPS carry
cross-default  clauses.  A breach  of a  financial  covenant  set by GMAC or UPS
constitutes an event of default under the other credit facility,  entitling both
financial  institutions  to demand  payment in full of all  outstanding  amounts
under their respective debt and credit facilities.

         The amount we can borrow under the new factoring  facility with GMAC is
determined  based on a  defined  borrowing  base  formula  related  to  eligible
accounts receivable.  A significant decrease in eligible accounts receivable due
to the  aging  of  receivables,  can have an  adverse  effect  on our  borrowing
capabilities under our credit facility,  which may adversely affect the adequacy
of our working  capital.  In addition,  we have typically  experienced  seasonal
fluctuations in sales volume. These seasonal fluctuations result in sales volume
decreases  in the first and  fourth  quarters  of each year due to the  seasonal
fluctuations  experienced  by  the  majority  of  our  customers.  During  these
quarters,  borrowing  availability  under our credit  facility may decrease as a
result of decrease in eligible accounts receivables generated from our sales.


                                       19
<PAGE>


         On December 14, 2004, we completed a $10 million  financing through the
issuance of 6% Secured  Convertible  Debentures  ("Debentures")  and warrants to
purchase up to 1,250,000  shares of our common  stock.  Prior to  maturity,  the
investors may convert the Debentures  into shares of our common stock at a price
of $2.00 per share. The warrants have a term of five years and an exercise price
of $2.50 per share.  The Debentures  bear interest at a rate of 6% per annum and
have a term of three years.  We may elect to pay interest on the  Debentures  in
shares of our common stock if certain  conditions  are met,  including a minimum
market price and trading  volume for our common stock.  The  Debentures  contain
customary  events of default and permit the holders  thereof to  accelerate  the
maturity if the full principal  amount  together with interest and other amounts
owing upon the occurrence of such events of default.  The Debentures are secured
by a subordinated lien on certain of our accounts receivable and related assets.
The  placement  agent in the  financing,  for its services were paid $620,000 in
cash and issued  five year  warrants  to  purchase  up to 200,000  shares of our
common stock at an exercise price of $2.50 per share.

         On February  14,  2005,  we borrowed $5 million  from Max Azria,  which
amount  bears  interest  at the rate of 4% per  annum and is  payable  in weekly
installments  of $250,000  beginning  on February 28, 2005 and  continuing  each
Monday until July 11, 2005. This is an unsecured loan.

         Tarrant  Mexico S. de R.L.  de C.V.,  Famian  division  was  previously
indebted  to Banco  Nacional  de  Comercio  Exterior  SNC  pursuant  to a credit
facility  assumed by Tarrant Mexico  following its merger with Grupo Famian.  We
paid off this loan in the third quarter of 2004.

         We had an equipment  loan with an initial  borrowing of $16.25  million
from GE Capital  Leasing,  which was scheduled to mature in November  2005.  The
loan was  secured  by  equipment  located in Puebla and  Tlaxcala,  Mexico,  and
interest  accrued  at a rate of 2.5%  over  LIBOR.  We paid off this loan in the
third quarter of 2004.

         During  2000,  we  financed  equipment  purchases  for a  manufacturing
facility  with  certain  vendors.  A total of $16.9  million was  financed  with
five-year  promissory notes,  which bear interest ranging from 7.0% to 7.5%, and
are payable in semiannual  payments  commencing in February 2000. As of December
31, 2004, $135,000 remained outstanding under these notes, which amount was paid
off in February 2005. A portion of the debt was denominated in Euros. Unrealized
transaction  (loss) gain associated  with the debt  denominated in Euros totaled
$(1.0)  million,  $(561,000) and $367,000 for the years ended December 31, 2002,
2003 and  2004,  respectively.  These  amounts  were  recorded  in other  income
(expense) in the accompanying consolidated statements of operations.

         From time to time, we open letters of credit under an uncommitted  line
of credit from Aurora Capital  Associates who issues these letters of credit out
of Israeli  Discount Bank. As of December 31, 2004, $1.0 million was outstanding
under this  facility  and $7.5 million of letters of credit were open under this
arrangement.

         The  effective  interest  rates  on  short-term  bank  borrowing  as of
December 31, 2003 and 2004 were 5.3% and 5.7%, respectively.

         We have  financed our  operations  from our cash flow from  operations,
borrowings  under our bank and other  credit  facilities,  issuance of long-term
debt  (including  debt to or arranged by vendors of equipment  purchased for our
Mexican twill and production facility),  the proceeds from the exercise of stock
options  and from time to time  shareholder  advances.  Our  short-term  funding
relies  very  heavily  on  our  major  customers,  banks,  suppliers  and  major
shareholders.  From time to time, we have had temporary  over-advances  from our
banks.   Any  withdrawal  of  support  from  these  parties  will  have  serious
consequences on our liquidity.


                                       20
<PAGE>


         From time to time in the past,  we borrowed  funds from,  and  advanced
funds to, certain officers and principal shareholders, including Gerard Guez and
Todd Kay. See disclosure under "-Related Party Transactions" below.

         As  discussed   above,   the  Internal  Revenue  Service  has  proposed
adjustments to our Federal income tax returns to increase our income tax payable
for the years ended December 31, 1996 through 2001. This  adjustment  would also
result in additional  state taxes and interest.  In addition,  in July 2004, the
IRS initiated an examination of our Federal income tax return for the year ended
December 31, 2002. In March 2005,  the IRS proposed an adjustment to our taxable
income of approximately $6 million related to similar issues identified in their
audit of the 1996 through 2001  federal  income tax returns.  We believe that we
have  meritorious  defenses to and intend to  vigorously  contest  the  proposed
adjustments  made to our  federal  income tax  returns  for the years ended 1996
through  2002.  We believe  that we have  meritorious  defenses to and intend to
vigorously  contest the proposed  adjustments.  If the proposed  adjustments are
upheld through the administrative and legal process,  they could have a material
impact  on our  earnings  and,  in  particular,  cash  flow.  We may not have an
adequate  cash  reserve  to pay the  final  adjustments  resulting  from the IRS
examination.  As a result,  we may be required to arrange for payments over time
or raise additional  capital in order to meet these  obligations.  We believe we
have provided adequate reserves for any reasonably  foreseeable  outcome related
to these matters on the consolidated balance sheets included in the Consolidated
Financial  Statements  under the caption  "Income  Taxes." The maximum amount of
loss in  excess of the  amount  accrued  in the  financial  statements  is $12.6
million.  We do not believe that the  adjustments,  if any, arising from the IRS
examination,  will result in an additional  income tax liability  beyond what is
recorded in the accompanying consolidated balance sheets.

         We may seek to  finance  future  capital  investment  programs  through
various methods, including, but not limited to, borrowings under our bank credit
facilities,  issuance of long-term debt, sales of equity securities,  leases and
long-term  financing  provided by the sellers of  facilities or the suppliers of
certain  equipment used in such  facilities.  To date,  there is no plan for any
major capital expenditure.

         We do not believe that the  moderate  levels of inflation in the United
States in the last  three  years have had a  significant  effect on net sales or
profitability.

RELATED PARTY TRANSACTIONS

         We lease our principal  offices and  warehouse  located in Los Angeles,
California  from GET and  office  space in Hong  Kong  from  Lynx  International
Limited.  GET and Lynx International  Limited are each owned by Gerard Guez, our
Chairman of the Board of Directors, and Todd Kay, our Vice Chairman of the Board
of Directors. We believe, at the time the leases were entered into, the rents on
these  properties  were  comparable  to then  prevailing  market  rents.  We are
currently  leasing both of these facilities on a  month-to-month  basis. We paid
$1,330,000  in 2004  for rent  for  office  and  warehouse  facilities  at these
locations.

         In February 2004, our Hong Kong  subsidiary  entered into a 50/50 joint
venture  with Auto  Enterprises  Limited,  an unrelated  third party,  to source
products for Seven Licensing  Company,  LLC and our Private Brands subsidiary in
mainland  China. On May 31, 2004,  after realizing an accumulated  loss from the
venture of  approximately  $200,000 (our share being half), we sold our interest
for $1 to Asia Trading  Limited,  a company  owned by Jacqueline  Rose,  wife of
Gerard Guez. The venture owed us $221,000 as of December 31, 2004.

         On October 16, 2003,  we leased to  affiliates  of Mr.  Kamel Nacif,  a
shareholder  at the time of the  transaction,  for a substantial  portion of our
manufacturing  facilities  and  operations in Mexico  including  real estate and
equipment. We leased our twill mill in Tlaxcala, Mexico, and our sewing plant in
Ajalpan,


                                       21
<PAGE>


Mexico, for a period of 6 years and for an annual rental fee of $11 million.  In
connection  with this  lease  transaction,  we also  entered  into a  management
services agreement pursuant to which Mr. Nacif's affiliates agreed to manage the
operation of our remaining  facilities in Mexico in exchange for the use of such
facilities.  The term of the management services agreement was also for a period
of 6 years.  In 2004, $5.5 million of lease income was recorded in other income.
We agreed to purchase annually,  six million yards of fabric manufactured at the
facilities leased and/or operated by Mr. Nacif's  affiliates at market prices to
be negotiated. We purchased $5.3 million of fabric under this agreement in 2004.
Net  amount due from Mr.  Kamel  Nacif and his  affiliates  was  $183,000  as of
December 31, 2004.

         In August 2004,  we entered into a purchase and sale  agreement to sell
to Mr. Nacif's affiliates,  substantially all of our assets and real property in
Mexico,  including  the equipment  and  facilities  we previously  leased to Mr.
Nacif's affiliates. Upon completion of this transaction in the fourth quarter of
2004,  we entered  into a new purchase  commitment  agreement  with Mr.  Nacif's
affiliates to replace our previously purchase commitment agreement. Pursuant the
new  purchase  commitment  agreement  we agreed to purchase $5 million of fabric
manufactured at the facilities we sold to Mr. Nacif's  affiliates  annually over
the ten-year term of the agreement,  at negotiated market prices.  See Note 5 of
the "Notes to Consolidated Financial Statements".

         From time to time in the past,  we borrowed  funds from,  and  advanced
funds to, certain officers and principal shareholders, including Gerard Guez and
Todd Kay. The greatest  outstanding  balance of such advances to Mr. Guez during
2004 was approximately  $4,796,000.  Mr. Guez paid our expenses of approximately
$456,000  and  $400,000  for  the  years  ended  December  31,  2003  and  2004,
respectively,  which  amounts  were  applied  to  reduce  accrued  interest  and
principle on Mr. Guez's loan. Subsequently, Mr. Guez repaid $2.3 million of this
indebtedness during January and February of 2005. This $2.3 million was included
in due from related parties in the accompanying consolidated balance sheet as of
December 31, 2004. The remaining  balance of $2,466,000 is payable on demand and
had been shown as  reductions to  shareholders'  equity as of December 31, 2004.
There were no outstanding advances from or borrowing to Mr. Kay during 2004. All
advances to, and  borrowings  from,  Mr. Guez bore interest at the rate of 7.75%
during the period. Total interest paid by Mr. Guez was $374,000 and $370,000 for
the years ended December 31, 2003 and 2004, respectively. Since the enactment of
the  Sarbanes-Oxley  Act in 2002, no further  personal  loans (or  amendments to
existing loans) have been or will be made to officers or directors of Tarrant.

         Since  June  2003,  United  Apparel  Venture  LLC,  a  majority  owned,
controlled  and  consolidated  subsidiary of Tarrant,  has been selling to Seven
Licensing  Company,  LLC  ("Seven  Licensing"),  jeans  wear  bearing  the brand
"Seven7",   which  is  ultimately  purchased  by  Express.  Seven  Licensing  is
beneficially  owned by Gerard Guez.  In the third  quarter of 2004,  in order to
strengthen our own private brand  business,  we decided to discontinue  sourcing
for Seven7.  Total sales to Seven  Licensing  during the year ended December 31,
2004 were $2.6 million.

         On July 1, 2001, we formed an entity to jointly  market,  share certain
risks and achieve economies of scale with Azteca Production International,  Inc.
("Azteca"),  called United  Apparel  Ventures,  LLC ("UAV").  Azteca is owned by
Hubert Guez, the brother of Gerard Guez,  our Chairman.  This entity was created
to coordinate  the  production  of apparel for a single  customer of our branded
business. UAV is owned 50.1% by Tag Mex, Inc., our wholly owned subsidiary,  and
49.9% by Azteca. Results of the operation of UAV have been consolidated into our
results since July 2001 with the minority partner's share of all gains and loses
eliminated through the minority interest line in our financial  statements.  Due
to the restructuring of our Mexico operations, we discontinued manufacturing for
UAV customers in the second  quarter of 2004.  Two and one half percent of gross
sales as  management  fees were paid in 2003 and 2004 to each of the  members of
UAV, per the operating agreement.  We purchased $37.0 million, $37.1 million and
$11.5 million of finished  goods and service from Azteca and its  affiliates for
the years


                                       22
<PAGE>


ended December 31, 2002, 2003 and 2004, respectively.  Our total sales of fabric
and service to Azteca in 2002, 2003 and 2004 were $2.9 million, $9.9 million and
$1.0 million, respectively.

         At December 31, 2004,  Messrs.  Guez and Kay beneficially owned 961,000
and 1,003,500  shares,  respectively,  of common stock of Tag-It  Pacific,  Inc.
("Tag-It"),  collectively representing 10.8% of Tag-It Pacific's common stock at
December  31,  2004.  Tag-It  is  a  provider  of  brand  identity  programs  to
manufacturers  and  retailers  of apparel and  accessories.  Tag-It  assumed the
responsibility  for  managing  and  sourcing  all  trim  and  packaging  used in
connection with products  manufactured by or on our behalf in Mexico. We believe
that the terms of this  arrangement,  which is subject to the  acceptance of our
customers,  are no less favorable to us than could be obtained from unaffiliated
third parties.  Due to the  restructuring  of our Mexico  operations,  Tag-It no
longer manages our trim and packaging requirements.  We purchased $23.9 million,
$16.8  million  and $1.0  million of trim from  Tag-It  during  the years  ended
December 31, 2002, 2003 and 2004. We sold to Tag-It $1.5 million and $0 from our
trim and fabric  inventory  during the year ended  December  31,  2003 and 2004,
respectively.  From time to time we have  guaranteed the  indebtedness of Tag-It
for the purchase of trim on our behalf. See Note 8 of the "Notes to Consolidated
Financial Statements."

         We  believe  that each of the  transactions  described  above  has been
entered into on terms no less favorable to us than could have been obtained from
unaffiliated  third  parties.  We have  adopted a policy  that any  transactions
between us and any of our affiliates or related parties, including our executive
officers,  directors,  the family members of those  individuals and any of their
affiliates,  must (i) be  approved  by a majority of the members of the Board of
Directors  and by a  majority  of the  disinterested  members  of the  Board  of
Directors  and (ii) be on terms no less  favorable  to us than could be obtained
from unaffiliated third parties.

FACTORS THAT MAY AFFECT FUTURE RESULTS

         This Annual  Report on Form 10-K contains  forward-looking  statements,
which are subject to a variety of risks and  uncertainties.  Our actual  results
could  differ  materially  from  those  anticipated  in  these   forward-looking
statements as a result of various factors, including those set forth below.

RISKS RELATED TO OUR BUSINESS

WE DEPEND ON A GROUP OF KEY CUSTOMERS FOR A SIGNIFICANT  PORTION OF OUR SALES. A
SIGNIFICANT  ADVERSE  CHANGE  IN A  CUSTOMER  RELATIONSHIP  OR  IN A  CUSTOMER'S
FINANCIAL POSITION COULD HARM OUR BUSINESS AND FINANCIAL CONDITION.

         Kohl's  accounted  for 6.6% and 16.4% of our net sales in fiscal  years
2003 and 2004,  respectively.  Mervyn's  accounted for 5.9% and 15.4% of our net
sales in fiscal years 2003 and 2004, respectively. Lerner New York accounted for
8.3% and  15.0% of our net sales in fiscal  years  2003 and 2004,  respectively.
Affiliated  department stores owned by Federated Department Stores accounted for
approximately  5.2% and 10.3% of our net sales in  fiscal  years  2003 and 2004,
respectively.  Wet Seal  accounted  for  approximately  3.3% and 7.9% of our net
sales in fiscal years 2003 and 2004, respectively. We believe that consolidation
in the retail industry has centralized  purchasing decisions and given customers
greater leverage over suppliers,  like us, and we expect this trend to continue.
If this consolidation  continues, our net sales and results of operations may be
increasingly  sensitive to deterioration in the financial condition of, or other
adverse developments with, one or more of our customers.

         While we have long-standing customer relationships, we generally do not
have  long-term   contracts  with  them.   Purchases   generally   occur  on  an
order-by-order basis, and relationships exist as long


                                       23
<PAGE>


as there is a perceived benefit to both parties. A decision by a major customer,
whether motivated by competitive  considerations,  financial  difficulties,  and
economic conditions or otherwise, to decrease its purchases from us or to change
its manner of doing  business with us, could  adversely  affect our business and
financial  condition.  In addition,  during  recent  years,  various  retailers,
including  some of our  customers,  have  experienced  significant  changes  and
difficulties,  including consolidation of ownership, increased centralization of
purchasing decisions, restructurings, bankruptcies and liquidations.

         These and other financial problems of some of our retailers, as well as
general  weakness  in the retail  environment,  increase  the risk of  extending
credit  to  these  retailers.   A  significant  adverse  change  in  a  customer
relationship  or in a customer's  financial  position could cause us to limit or
discontinue  business with that customer,  require us to assume more credit risk
relating to that  customer's  receivables,  limit our ability to collect amounts
related to previous purchases by that customer, or result in required prepayment
of our  receivables  securitization  arrangements,  all of which  could harm our
business and financial condition.

FAILURE OF THE  TRANSPORTATION  INFRASTRUCTURE TO MOVE SEA FREIGHT IN ACCEPTABLE
TIME FRAMES COULD ADVERSELY AFFECT OUR BUSINESS.

         Because the bulk of our  freight is  designed to move  through the West
Coast ports in  predictable  time frames,  we are at risk of  cancellations  and
penalties when those ports operate inefficiently creating delays in delivery. We
experienced  such delays from June 2004 until November 2004, and we may continue
to experience similar delays in the future especially during peak seasons. There
can be no  assurances  of,  and we have  no  control  over a  return  to  timely
deliveries.  Unpredictable  timing  for  shipping  may cause us to  utilize  air
freight or may result in  customer  penalties  for late  delivery,  any of which
could  reduce  our  operating  margins  and  adversely  effect  our  results  of
operations.

FAILURE TO MANAGE OUR GROWTH AND EXPANSION COULD IMPAIR OUR BUSINESS.

         Since our inception,  we have experienced  periods of rapid growth.  No
assurance can be given that we will be successful in  maintaining  or increasing
our sales in the  future.  Any future  growth in sales will  require  additional
working capital and may place a significant strain on our management, management
information systems,  inventory  management,  sourcing capability,  distribution
facilities and receivables  management.  Any disruption in our order processing,
sourcing or  distribution  systems  could cause orders to be shipped  late,  and
under  industry  practices,  retailers  generally can cancel orders or refuse to
accept goods due to late shipment.  Such  cancellations and returns would result
in a reduction in revenue,  increased  administrative  and shipping  costs and a
further burden on our distribution facilities.

FAILURE TO MANAGE OUR RESTRUCTURING IN MEXICO COULD IMPAIR OUR BUSINESS.

         We determined to cease directly operating a substantial majority of our
equipment  and  fixed  assets in  Mexico,  and to lease a large  portion  of our
facilities  and  operations  in  Mexico  to a  related  third  party,  which  we
consummated  effective  September  1, 2003.  Subsequently,  in August  2004,  we
entered into a purchase  and sale  agreement  to sell  substantially  all of our
assets and real  property in Mexico,  including  the  equipment  and  facilities
previously leased to Mr. Nacif's  affiliates,  which transaction was consummated
in the fourth  quarter of 2004.  As a  consequence,  we have become  primarily a
trading company, relying on third party manufacturers to produce the merchandise
we sell to our  customers  and as a result  assume  the  risks  associated  with
contracting these services.

OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.

         We have experienced, and expect to continue to experience,  substantial
variations  in our net sales and operating  results from quarter to quarter.  We
believe that the factors which influence this variability


                                       24
<PAGE>


of  quarterly  results  include  the timing of our  introduction  of new product
lines,  the level of  consumer  acceptance  of each new  product  line,  general
economic  and industry  conditions  that affect  consumer  spending and retailer
purchasing,  the availability of manufacturing  capacity, the seasonality of the
markets in which we participate,  the timing of trade shows,  the product mix of
customer orders, the timing of the placement or cancellation of customer orders,
the weather,  transportation  delays,  quotas, the occurrence of charge backs in
excess of reserves and the timing of  expenditures  in anticipation of increased
sales and  actions  of  competitors.  Due to  fluctuations  in our  revenue  and
operating expenses, we believe that period-to-period  comparisons of our results
of  operations  are  not a good  indication  of our  future  performance.  It is
possible that in some future quarter or quarters,  our operating results will be
below the  expectations of securities  analysts or investors.  In that case, our
stock price could fluctuate significantly or decline.

THE FINANCIAL CONDITION OF OUR CUSTOMERS COULD AFFECT OUR RESULTS OF OPERATIONS.

         Certain retailers, including some of our customers, have experienced in
the past,  and may  experience  in the  future,  financial  difficulties,  which
increase  the risk of  extending  credit  to such  retailers  and the risk  that
financial  failure will  eliminate a customer  entirely.  These  retailers  have
attempted to improve their own operating  efficiencies  by  concentrating  their
purchasing  power among a narrowing group of vendors.  There can be no assurance
that we will remain a preferred vendor for our existing customers. A decrease in
business from or loss of a major customer  could have a material  adverse effect
on our results of  operations.  There can be no  assurance  that our factor will
approve the extension of credit to certain retail customers in the future.  If a
customer's  credit is not approved by the factor, we could assume the collection
risk on sales to the customer itself, require that the customer provide a letter
of credit, or choose not to make sales to the customer.

WE DEPEND ON OUR COMPUTER AND COMMUNICATIONS SYSTEMS.

         As  a  multi-national   corporation,   we  rely  on  our  computer  and
communication  network to operate efficiently.  Any interruption of this service
from power loss,  telecommunications  failure, weather, natural disasters or any
similar  event  could  have  a  material  adverse  affect  on our  business  and
operations. Additionally, hackers and computer viruses have disrupted operations
at many major companies. We may be vulnerable to similar acts of sabotage, which
could have a material adverse effect on our business and operations.

WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE.

         We may not be able to fund our  future  growth or react to  competitive
pressures if we lack sufficient funds.  Currently, we believe we have sufficient
cash on hand and cash available through our bank credit facilities,  issuance of
long-term  debt,  proceeds  from loans from  affiliates,  and proceeds  from the
exercise  of stock  options  to fund  existing  operations  for the  foreseeable
future.  However,  in the future we may need to raise  additional  funds through
equity  or debt  financings  or  collaborative  relationships.  This  additional
funding  may not be  available  or, if  available,  it may not be  available  on
economically reasonable terms. In addition, any additional funding may result in
significant  dilution  to  existing  shareholders.  If  adequate  funds  are not
available,  we may be required to curtail our operations or obtain funds through
collaborative  partners  that may require us to release  material  rights to our
products.

OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH IMPORTING PRODUCTS.

         Substantially  all of our  import  operations  are  subject  to tariffs
imposed  on  imported  products  and  quotas  imposed  by trade  agreements.  In
addition,  the countries in which our products are  manufactured or imported may
from time to time impose additional new duties, tariffs or other restrictions on
our imports


                                       25
<PAGE>


or adversely modify existing restrictions. Adverse changes in these import costs
and  restrictions,  or our suppliers'  failure to comply with customs or similar
laws,  could harm our business.  We cannot  assure that future trade  agreements
will not provide our  competitors  with an  advantage  over us, or increase  our
costs,  either  of which  could  have an  adverse  effect  on our  business  and
financial condition.

         Our operations are also subject to the effects of  international  trade
agreements and regulations such as the North American Free Trade Agreement,  and
the activities and regulations of the World Trade Organization. Generally, these
trade  agreements  benefit our  business by reducing or  eliminating  the duties
assessed  on products  manufactured  in a  particular  country.  However,  trade
agreements can also impose requirements that adversely affect our business, such
as limiting the  countries  from which we can purchase raw materials and setting
duties or  restrictions  on products that may be imported into the United States
from a  particular  country.  In  addition,  the World  Trade  Organization  may
commence a new round of trade  negotiations  that  liberalize  textile  trade by
further  eliminating  quotas or reducing  tariffs.  The elimination of quotas on
World Trade  Organization  member  countries by 2005 and other  effects of these
trade  agreements   could  result  in  increased   competition  from  developing
countries,  which  historically  have lower  labor  costs,  including  China and
Taiwan,  both of which recently became members of the World Trade  Organization.
This potential  increase in competition from developing  countries is one of the
several  reasons why we  determined  to cease our  manufacturing  operations  in
Mexico.

         Our ability to import  products in a timely and  cost-effective  manner
may also be  affected  by  problems  at ports or issues  that  otherwise  affect
transportation and warehousing providers, such as labor disputes. These problems
could require us to locate  alternative ports or warehousing  providers to avoid
disruption to our customers.  These  alternatives  may not be available on short
notice or could  result in higher  transit  costs,  which  could have an adverse
impact on our business and financial condition.

OUR DEPENDENCE ON INDEPENDENT  MANUFACTURERS  REDUCES OUR ABILITY TO CONTROL THE
MANUFACTURING  PROCESS,  WHICH  COULD HARM OUR  SALES,  REPUTATION  AND  OVERALL
PROFITABILITY.

         We depend on independent contract  manufacturers to secure a sufficient
supply of raw  materials  and  maintain  sufficient  manufacturing  and shipping
capacity in an environment  characterized by declining  prices,  labor shortage,
continuing  cost  pressure  and  increased  demands for product  innovation  and
speed-to-market.  This  dependence  could  subject us to difficulty in obtaining
timely delivery of products of acceptable quality.  In addition,  a contractor's
failure  to ship  products  to us in a timely  manner  or to meet  the  required
quality  standards could cause us to miss the delivery date  requirements of our
customers.  The failure to make timely  deliveries  may cause our  customers  to
cancel  orders,  refuse  to accept  deliveries,  impose  non-compliance  charges
through  invoice  deductions or other  charge-backs,  demand  reduced  prices or
reduce future orders, any of which could harm our sales,  reputation and overall
profitability.  We do not  have  material  long-term  contracts  with any of our
independent  contractors and any of these contractors may unilaterally terminate
their  relationship with us at any time. To the extent we are not able to secure
or maintain relationships with independent  contractors that are able to fulfill
our requirements, our business would be harmed.

         We have  initiated a factory  compliance  agreement with our suppliers,
and monitor our independent  contractors' compliance with applicable labor laws,
but we do not control our contractors or their labor practices. The violation of
federal,  state or foreign labor laws by one of the our contractors could result
in our being subject to fines and our goods that are  manufactured  in violation
of such laws being seized or their sale in interstate commerce being prohibited.
From  time to  time,  we  have  been  notified  by  federal,  state  or  foreign
authorities that certain of our contractors are the subject of investigations or
have been found to have  violated  applicable  labor laws.  To date, we have not
been subject to any sanctions that, individually or in the aggregate, have had a
material  adverse  effect on our business,  and we are not aware of any facts on
which any such sanctions could be based. There can be no


                                       26
<PAGE>


assurance,  however, that in the future we will not be subject to sanctions as a
result of violations of applicable labor laws by our  contractors,  or that such
sanctions will not have a material adverse effect on our business and results of
operations. In addition, certain of our customers,  require strict compliance by
their apparel manufacturers,  including us, with applicable labor laws and visit
our facilities often. There can be no assurance that the violation of applicable
labor laws by one of our contractors  will not have a material adverse effect on
our relationship with our customers.

OUR  BUSINESS IS SUBJECT TO RISKS OF  OPERATING  IN A FOREIGN  COUNTRY AND TRADE
RESTRICTIONS.

         Approximately  91% of our products  were imported from outside the U.S.
in fiscal 2004. We are subject to the risks  associated  with doing  business in
foreign  countries,  including,  but not limited to,  transportation  delays and
interruptions,  political instability,  expropriation, currency fluctuations and
the imposition of tariffs, import and export controls, other non-tariff barriers
and cultural  issues.  Any changes in those countries' labor laws and government
regulations may have a negative effect on our profitability.

RISK ASSOCIATED WITH OUR INDUSTRY

OUR SALES ARE HEAVILY INFLUENCED BY GENERAL ECONOMIC CYCLES.

         Apparel  is a cyclical  industry  that is  heavily  dependent  upon the
overall level of consumer spending.  Purchases of apparel and related goods tend
to be highly  correlated with cycles in the disposable  income of our consumers.
Our customers  anticipate and respond to adverse changes in economic  conditions
and uncertainty by reducing  inventories and canceling orders. As a result,  any
substantial deterioration in general economic conditions,  increases in interest
rates,  acts of war,  terrorist  or  political  events  that  diminish  consumer
spending and confidence in any of the regions in which we compete,  could reduce
our sales and adversely affect our business and financial condition.

OUR BUSINESS IS HIGHLY COMPETITIVE AND DEPENDS ON CONSUMER SPENDING PATTERNS.

         The  apparel  industry  is highly  competitive.  We face a  variety  of
competitive challenges including:

         o        anticipating  and  quickly  responding  to  changing  consumer
                  demands;

         o        developing innovative,  high-quality products in sizes, colors
                  and styles that appeal to  consumers of varying age groups and
                  tastes;

         o        competitively  pricing our  products  and  achieving  customer
                  perception of value; and

         o        the need to provide strong and effective marketing support.

WE MUST SUCCESSFULLY  GAUGE FASHION TRENDS AND CHANGING CONSUMER  PREFERENCES TO
SUCCEED.

         Our success is largely  dependent upon our ability to gauge the fashion
tastes of our customers and to provide  merchandise  that  satisfies  retail and
customer demand in a timely manner. The apparel business fluctuates according to
changes in consumer  preferences  dictated in part by fashion and season. To the
extent we misjudge  the market for our  merchandise,  our sales may be adversely
affected.  Our ability to anticipate and effectively respond to changing fashion
trends depends in part on our ability to attract and retain key personnel in our
design,  merchandising  and marketing staff.  Competition for these personnel is
intense,  and we  cannot be sure that we will be able to  attract  and  retain a
sufficient number of qualified personnel in future periods.


                                       27
<PAGE>


OUR BUSINESS IS SUBJECT TO SEASONAL TRENDS.

         Historically,  our  operating  results  have been  subject to  seasonal
trends when measured on a quarterly  basis.  This trend is dependent on numerous
factors,  including the markets in which we operate,  holiday seasons,  consumer
demand,  climate,  economic  conditions  and numerous  other factors  beyond our
control.  There can be no assurance  that our historic  operating  patterns will
continue in future  periods as we cannot  influence  or  forecast  many of these
factors.

OTHER RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK

THE ULTIMATE RESOLUTION OF THE INTERNAL REVENUE SERVICE'S EXAMINATION OF OUR TAX
RETURNS MAY REQUIRE US TO INCUR AN EXPENSE  BEYOND WHAT HAS BEEN RESERVED FOR ON
OUR BALANCE SHEET OR MAKE CASH PAYMENTS BEYOND WHAT WE ARE THEN ABLE TO PAY.

         In January 2004, the Internal Revenue Service  proposed  adjustments to
increase  our federal  income tax payable for the years ended  December 31, 1996
through  2001.  This  adjustment  would also result in  additional  state taxes,
penalties  and  interest.  In  addition,  in July  2004,  the IRS  initiated  an
examination  of our Federal  income tax return for the year ended  December  31,
2002. In March 2005,  the IRS proposed an  adjustment  to our taxable  income of
approximately $6 million related to similar issues  identified in their audit of
the 1996  through  2001  federal  income tax  returns.  We believe  that we have
meritorious   defenses  to  and  intend  to  vigorously   contest  the  proposed
adjustments  made to our  federal  income tax  returns  for the years ended 1996
through 2002. If the proposed  adjustments are upheld through the administrative
and legal  process,  they could have a material  impact on our earnings and cash
flow.  We  believe  we  have  provided  adequate  reserves  for  any  reasonably
foreseeable outcome related to these matters on the consolidated  balance sheets
included in the Consolidated Financial Statements. The maximum amount of loss in
excess of the amount accrued in the financial  statements is $12.6  million.  If
the amount of any actual  liability,  however,  exceeds our  reserves,  we would
experience an immediate adverse earnings impact in the amount of such additional
liability,  which  could  be  material.  Additionally,  we  anticipate  that the
ultimate  resolution of these matters will require that we make significant cash
payments to the taxing authorities.  Presently we do not have sufficient cash or
borrowing ability to make any future payments that may be required. No assurance
can be given that we will have  sufficient  surplus cash from operations to make
the required payments.  Additionally,  any cash used for these purposes will not
be available for other corporate  purposes,  which could have a material adverse
effect on our financial condition and results of operations.

INSIDERS OWN A SIGNIFICANT  PORTION OF OUR COMMON  STOCK,  WHICH COULD LIMIT OUR
SHAREHOLDERS' ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS.

         As of March 31, 2005,  our  executive  officers and directors and their
affiliates  owned  approximately  45% of the  outstanding  shares of our  common
stock.  Gerard Guez, our Chairman,  and Todd Kay, our Vice  Chairman,  alone own
approximately  35.1% and 8.9%,  respectively,  of the outstanding  shares of our
common  stock at  March  31,  2005.  Accordingly,  our  executive  officers  and
directors  have the  ability to affect  the  outcome  of, or exert  considerable
influence  over,  all matters  requiring  shareholder  approval,  including  the
election and removal of directors and any change in control.  This concentration
of ownership of our common stock could have the effect of delaying or preventing
a change of control of us or otherwise  discouraging  or  preventing a potential
acquirer from  attempting to obtain  control of us. This, in turn,  could have a
negative  effect on the market price of our common stock.  It could also prevent
our  shareholders  from  realizing  a premium  over the market  prices for their
shares of common stock.


                                       28
<PAGE>


WE HAVE ADOPTED A NUMBER OF ANTI-TAKEOVER MEASURES THAT MAY DEPRESS THE PRICE OF
OUR COMMON STOCK.

         Our shareholders rights plan, our ability to issue additional shares of
preferred stock and some provisions of our articles of incorporation  and bylaws
could make it more difficult for a third party to make an  unsolicited  takeover
attempt of us. These anti-takeover  measures may depress the price of our common
stock by making it more difficult for third parties to acquire us by offering to
purchase  shares of our stock at a premium to its market price without  approval
of our board of directors.

OUR STOCK PRICE HAS BEEN VOLATILE.

         Our common stock is quoted on the NASDAQ  National  Market System,  and
there can be substantial volatility in the market price of our common stock. The
market  price of our common  stock has been,  and is likely to  continue  to be,
subject  to  significant  fluctuations  due to a variety of  factors,  including
quarterly variations in operating results, operating results which vary from the
expectations  of  securities  analysts  and  investors,   changes  in  financial
estimates,  changes in market valuations of competitors,  announcements by us or
our competitors of a material nature,  loss of one or more customers,  additions
or  departures of key  personnel,  future sales of common stock and stock market
price and volume  fluctuations.  In  addition,  general  political  and economic
conditions such as a recession,  or interest rate or currency rate  fluctuations
may adversely affect the market price of our common stock.

         In addition,  the stock market in general has experienced extreme price
and volume fluctuations that have affected the market price of our common stock.
Often, price fluctuations are unrelated to operating performance of the specific
companies whose stock is affected.  In the past, following periods of volatility
in the market price of a company's stock, securities class action litigation has
occurred  against  the  issuing  company.  If we were  subject  to this  type of
litigation in the future,  we could incur  substantial  costs and a diversion of
our  management's  attention and resources,  each of which could have a material
adverse effect on our revenue and earnings.  Any adverse  determination  in this
type of litigation could also subject us to significant liabilities.

ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO YOU.

         Some investors  favor  companies that pay  dividends,  particularly  in
general  downturns  in the stock  market.  We have not declared or paid any cash
dividends on our common stock. We currently intend to retain any future earnings
for funding growth, and we do not currently  anticipate paying cash dividends on
our  common  stock  in the  foreseeable  future.  Additionally,  we  cannot  pay
dividends on our common stock unless the terms of our bank credit facilities and
outstanding  preferred  stock,  if any,  permit the payment of  dividends on our
common stock.  Because we may not pay dividends,  your return on this investment
likely depends on your selling our stock at a profit.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See "Item 15. Exhibits,  Financial  Statement  Schedules and Reports on
Form 8K" for our financial statements,  and the notes thereto, and the financial
statement schedules filed as part of this report.

ITEM 9A. CONTROLS AND PROCEDURES

         EVALUATION OF CONTROLS AND PROCEDURES

         Members of the  company's  management,  including  our Chief  Executive
Officer and Chief Financial  Officer,  have evaluated the  effectiveness  of our
disclosure controls and procedures,  as defined by paragraph (e) of Exchange Act
Rules 13a-15 or 15d-15,  as of December 31, 2004,  the end of the


                                       29
<PAGE>


period covered by this report.  Members of the company's  management,  including
our Chief  Executive  Officer and Chief  Financial  Officer,  also  conducted an
evaluation of our internal control over financial reporting to determine whether
any  changes  occurred  during the fourth  quarter of 2004 that have  materially
affected,  or are reasonably likely to materially  affect,  our internal control
over financial reporting.

         As was initially reported, management was satisfied that its disclosure
controls and procedures  were  effective and that no significant  changes in its
internal  control over  financial  reporting  had  occurred.  Subsequent to such
evaluations,  as a result of a review by the Securities and Exchange  Commission
in  connection  with our filing of a  registration  statement,  we reviewed  the
accounting  treatment  of our October  2003  private  placement  of  convertible
preferred  stock. We initially  concluded that the  convertible  preferred stock
issued did not contain a beneficial conversion feature that should be recognized
and measured separately. After our review, management and the Audit Committee of
the Board of Directors  determined to revise our accounting treatment to reflect
the beneficial  conversion  feature of the  convertible  preferred  stock and to
restate our financial  statements  for the fiscal years ended  December 31, 2003
and 2004.

         In light of the  restatement,  management  and Grant  Thornton LLP, our
independent  accountants,  concluded  that a  material  weakness  existed in our
internal  control over  financial  reporting.  As a result,  management  has now
concluded that our disclosure  controls and procedures  were not effective as of
the end of the period  covered by this Report.  Subsequent to December 31, 2004,
we remedied this material  weakness by changing our policies and  procedures for
accounting for instruments with convertible  features.  Specifically,  our Chief
Financial  Officer,  who was hired in the third quarter of 2004, will review and
approve the  appropriate  accounting for  convertible  instruments and determine
whether any embedded beneficial  conversion feature is required to be recognized
and measured separately.

         Additionally,   in  connection  with  its  audit  of  our  Consolidated
Financial  Statements for the year ended December 31, 2003,  Grant Thornton LLP,
our independent  accountants,  advised the Audit Committee and management of our
need for additional  staff with expertise in preparing  required  disclosures in
the Notes to the Financial Statements,  and our need to develop greater internal
resources  for  researching  and  evaluating  the   appropriateness  of  complex
accounting principles and evaluating the effect of new accounting pronouncements
on  us.  Grant  Thornton  LLP   considered   these  matters  to  be  significant
deficiencies as that term is defined under  standards  established by the Public
Company  Accounting   Oversight  Board  (United  States).  In  response  to  the
observations  made  by  Grant  Thornton  LLP,  in 2004  we  implemented  certain
enhancements  to our  financial  reporting  processes,  including  reassigning a
member of our financial staff to a newly created "Financial  Reporting" position
in the second and third quarters of 2004, and increased training of staff on SEC
financial  reporting  requirements.  Our newly hired Chief Financial  Officer is
also  evaluating  various  accounting  research  tools to provide more technical
resources to our financial  reporting  group.  The member of our financial staff
assigned to the Financial Reporting position has since left the company, and our
corporate  controller  has been  performing  the  functions of this new position
since the third quarter of 2004.  We will  continue to evaluate the  performance
and needs of our financial staff,  including  whether to fill the vacancy in the
Financial  Reporting  position,  and  implement  changes that we  determine  are
necessary  or  advisable.  We believe we are  taking  the  appropriate  steps to
address the matters  raised by Grant  Thornton LLP. We do not believe any of the
foregoing actions taken in the fourth quarter of 2004, to the extent they affect
internal controls over financial reporting,  are so significant as to materially
affect our internal controls over financial reporting.

         CHANGES IN CONTROLS AND PROCEDURES

         During the fourth quarter of 2004, there were no significant changes in
our internal  controls or in other factors known to the Chief Executive  Officer
or the Chief  Financial  Officer that  materially  affected,  or are  reasonably
likely to materially  effect,  our internal  control over  financial  reporting.
Subsequent to December 31, 2004, in response to the material weakness  discussed
above,  we changed our policies and procedures  for  accounting for  instruments
with convertible features.


                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

         (a)      Financial  Statements  and Schedule.  Reference is made to the
Index to Financial  Statements  and Schedule on page F-1 for a list of financial
statements  and the financial  statement  schedule filed as part of this report.
All other  schedules are omitted because they are not applicable or the required
information is shown in the Company's financial  statements or the related notes
thereto.

         (b)      Exhibits.  See the  Exhibit  Index  attached to this Form 10-K
annual report.


                                       30
<PAGE>


                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULE



                                                                            PAGE
                                                                            ----

Financial Statements

    Report of Independent Registered Public Accounting Firm,
         Grant Thornton LLP..................................................F-2

    Report of Independent Registered Public Accounting Firm,
         Ernst & Young LLP...................................................F-3

    Consolidated Balance Sheets--December 31, 2003 and 2004..................F-4

    Consolidated Statements of Operations and Comprehensive Loss--
         Three year period ended December 31, 2004...........................F-5

    Consolidated Statements of Shareholders' Equity--Three year
         period ended December 31, 2004......................................F-6

    Consolidated Statements of Cash Flows--Three year period
         ended December 31, 2004.............................................F-7

    Notes to Consolidated Financial Statements...............................F-8

Financial Statement Schedule

    Schedule II--Valuation and Qualifying Accounts..........................F-39


                                      F-1
<PAGE>



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Tarrant Apparel Group

We have audited the accompanying  consolidated balance sheets of Tarrant Apparel
Group (a California  corporation)  and  subsidiaries as of December 31, 2004 and
2003, and the related  consolidated  statements of operations and  comprehensive
loss,  shareholders'  equity,  and cash  flows for the years then  ended.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we  engaged to perform  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tarrant
Apparel  Group  and   subsidiaries  at  December  31,  2004  and  2003  and  the
consolidated  results of their operations and their  consolidated cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.

We have also audited  Schedule II of Tarrant  Apparel  Group for the years ended
December 31, 2004 and 2003. In our opinion,  this schedule  presents fairly,  in
all material respects, the information required to be set forth therein.

As  described  in  Note  22  to  the  consolidated  financial  statements,   the
accompanying  consolidated financial statements for the years ended December 31,
2004 and 2003 have been restated.




                                                 /S/ GRANT THORNTON LLP


Los Angeles, California
March 24, 2005, except for Note 19,
as to which the date is March 30, 2005, and
Note 22, as to which the date is May 31, 2005


                                      F-2
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Tarrant Apparel Group

We have audited the accompanying statements of operations, shareholders' equity,
and cash flows of Tarrant  Apparel  Group for the year ended  December 31, 2002.
Our audit also included the financial  statement schedule listed in the Index at
Item 15(a) for the year ended December 31, 2002. These financial  statements and
schedule are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  We were not engaged to perform an
audit of the Company's  internal  control over  financial  reporting.  Our audit
included  consideration of internal control over financial  reporting as a basis
for designing audit  procedures that are appropriate in the  circumstances,  but
not for the  purpose  of  expressing  an  opinion  on the  effectiveness  of the
Company's internal control over financial reporting.  Accordingly, we express no
such opinion. An audit includes examining,  on a test basis, evidence supporting
the amounts and  disclosures  in the financial  statements,  also  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We believe that our
audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated results of operations and cash flows of
Tarrant Apparel Group and  subsidiaries  for the year ended December 31, 2002 in
conformity with accounting  principles  generally accepted in the United States.
Also,  in our opinion,  the related  financial  statement  schedule for the year
ended  December  31, 2002 when  considered  in  relation to the basic  financial
statements,  taken as a whole,  presents  fairly in all  material  respects  the
information set forth therein.

As  discussed  in Note 6 to the  consolidated  financial  statements,  effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142.





                                                 /S/ ERNST & YOUNG LLP


Los Angeles, California
March 14, 2003


                                      F-3
<PAGE>


<TABLE>
                                               TARRANT APPAREL GROUP

                                            CONSOLIDATED BALANCE SHEETS
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                       2003             2004
                                                                                  -------------    -------------
                                ASSETS                                               (as restated - see Note 22)
                                ------                                            ------------------------------
<S>                                                                               <C>              <C>
Current assets:
  Cash and cash equivalents ...................................................   $   3,319,964    $   1,214,944
  Restricted cash .............................................................       2,759,742             --
  Accounts receivable, net ....................................................      57,165,926       37,759,343
  Due from related parties ....................................................      18,056,488       10,651,914
  Inventory ...................................................................      23,251,591       19,144,105
  Current portion of note receivable from related party .......................            --          5,323,733
  Prepaid expenses ............................................................       1,776,142        1,251,684
  Prepaid royalties ...........................................................            --          2,257,985
  Income taxes receivable .....................................................         277,695          144,796
                                                                                  -------------    -------------

    Total current assets ......................................................     106,607,548       77,748,504

  Property and equipment, net .................................................     135,645,751        1,874,893
  Notes receivable - related party, net of current portion ....................            --         40,107,337
  Equity method investment ....................................................       1,434,375        1,880,281
  Deferred financing cost, net ................................................         326,932        1,203,259
  Other assets ................................................................         507,704          414,161
  Goodwill, net ...............................................................       8,582,845        8,582,845
                                                                                  -------------    -------------

    Total assets ..............................................................   $ 253,105,155    $ 131,811,280
                                                                                  =============    =============

        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Short-term bank borrowings ..................................................   $  29,293,323    $  17,951,157
  Accounts payable ............................................................      23,514,894       24,394,553
  Accrued expenses ............................................................      11,194,421       11,243,179
  Income taxes ................................................................      16,497,939       16,826,383
  Due to related parties ......................................................       5,418,795             --
  Due to shareholders .........................................................             496             --
  Current portion of long-term obligations ....................................      38,705,240       19,628,701
                                                                                  -------------    -------------

    Total current liabilities .................................................     124,625,108       90,043,973

Long-term obligations .........................................................         588,272        2,544,546
Convertible debentures, net ...................................................            --          8,330,483
Deferred tax liabilities ......................................................         275,129          213,784

Minority interest in UAV ......................................................       5,141,620             --
Minority interest in Tarrant Mexico ...........................................      14,766,215             --

Commitments and contingencies
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized;
   no shares (2003) and no shares (2004) issued and outstanding ...............            --               --
Common stock, no par value, 100,000,000 shares authorized;
   27,614,763 shares (2003) and 28,814,763 shares (2004) issued and outstanding     107,891,426      111,515,091
Warrant to purchase common stock ..............................................       1,798,733        2,846,833
Contributed capital ...........................................................       9,000,553        9,965,591
Retained earnings (Accumulated deficit) .......................................      13,493,712      (91,182,959)
Notes receivable from officer/shareholder .....................................      (4,796,428)      (2,466,062)
Accumulated other comprehensive loss ..........................................     (19,679,185)            --
                                                                                  -------------    -------------

    Total shareholders' equity ................................................     107,708,811       30,678,494
                                                                                  -------------    -------------

    Total liabilities and shareholders' equity ................................   $ 253,105,155    $ 131,811,280
                                                                                  =============    =============
</TABLE>

                             See accompanying notes.


                                      F-4
<PAGE>


<TABLE>
                              TARRANT APPAREL GROUP

          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                              -----------------------------------------------
                                                   2002            2003             2004
                                              -------------    -------------    -------------
<S>                                           <C>              <C>              <C>
Net sales .................................   $ 347,390,930    $ 320,422,850    $ 155,452,663
Cost of sales .............................     302,082,144      288,445,173      134,492,460
                                              -------------    -------------    -------------

Gross profit ..............................      45,308,786       31,977,677       20,960,203
Selling and distribution expenses .........      10,757,029       11,329,414        9,290,819
General and administrative expenses .......      30,082,061       31,767,122       32,083,637
Write-off of prepaid expenses .............            --          2,771,989             --
Impairment charges ........................            --         19,504,521       77,982,034
Cumulative translation loss attributable to
   liquidated Mexico operations ...........            --               --         22,786,125
                                              -------------    -------------    -------------

Income (loss) from operations .............       4,469,696      (33,395,369)    (121,182,412)
Interest expense ..........................      (5,443,995)      (5,602,556)      (2,857,096)
Interest income ...........................       4,748,144          424,518          377,587
Minority interest .........................      (4,580,766)       3,461,243       15,331,171
Other income ..............................       2,647,975        4,784,479        7,136,343
Other expense .............................      (2,004,073)      (1,425,346)      (1,134,145)
                                              -------------    -------------    -------------

Loss before provision for income taxes and
   cumulative effect of accounting change .        (163,019)     (31,753,031)    (102,328,552)
Provision for income taxes ................       1,051,018        4,131,629        2,348,119
                                              -------------    -------------    -------------

Loss before cumulative effect of
   accounting change ......................      (1,214,037)     (35,884,660)    (104,676,671)
Cumulative effect of accounting change ....      (4,871,244)            --               --
                                              -------------    -------------    -------------

Net loss ..................................   $  (6,085,281)   $ (35,884,660)   $(104,676,671)
                                              =============    =============    =============

Net loss per share - Basic and Diluted
(as restated, see Note 22):
   Before cumulative effect of
      accounting change ...................   $       (0.08)   $       (2.38)   $       (3.64)
   Cumulative effect of accounting change .           (0.30)            --               --
                                              -------------    -------------    -------------
   After cumulative effect of
      accounting change ...................   $       (0.38)   $       (2.38)   $       (3.64)
                                              =============    =============    =============


Net loss ..................................   $  (6,085,281)   $ (35,884,660)   $(104,676,671)
Foreign curreny translation adjustment ....     (13,282,977)      (9,945,727)            --
                                              -------------    -------------    -------------
Total Comprehensive loss ..................   $ (19,368,258)   $ (45,830,387)   $(104,676,671)
                                              =============    =============    =============
</TABLE>


                             See accompanying notes.


                                      F-5
<PAGE>


<TABLE>
                              TARRANT APPAREL GROUP

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

<CAPTION>


                                   Preferred         Number            Common           Number                        Contributed
                                     Stock          of Shares           Stock         of Shares        Warrants         Capital
                                 -------------    -------------    -------------    -------------    -------------   -------------
<S>                              <C>                   <C>         <C>                 <C>           <C>             <C>
Balance at January 1, 2002 ...   $        --               --      $  69,341,090       15,840,815             --     $   1,434,259
  Net loss ...................            --               --               --               --               --              --
  Currency translation .......            --               --               --               --               --              --

  Comprehensive loss .........            --               --               --               --               --              --
  Exercise of stock options ..            --               --             24,135            5,500             --              --
  Income tax benefit from
   exercise of stock options .            --               --              3,014             --               --              --
  Issuance of preferred stock        8,820,573          100,000             --               --               --              --
  Repayment from shareholders,
   net .......................            --               --               --               --               --              --
                                 -------------    -------------    -------------    -------------    -------------   -------------
Balance at December 31, 2002 .       8,820,573          100,000       69,368,239       15,846,315             --         1,434,259
  Net loss ...................            --               --               --               --               --              --
  Currency translation .......            --               --               --               --               --              --

  Comprehensive loss .........            --               --               --               --               --              --
  Conversion of preferred
   stock to common stock .....      (8,820,573)        (100,000)       8,820,573        3,000,000             --              --
  Issuance of preferred stock
   and warrant, net ..........      29,226,041          881,732             --               --          1,798,733            --
  Conversion of preferred
   stock to common stock .....     (29,226,041)        (881,732)      29,226,041        8,817,320             --              --
  Intrinsic value of beneficial
   conversion associated with
   convertible preferred stock            --               --               --               --               --         7,494,722
  Issuance of common stock ...            --               --            788,000          200,000             --              --
  Retirement of stock ........            --               --           (311,427)        (248,872)            --              --
  Compensation expense .......            --               --               --               --               --            71,572
  Repayment from shareholders             --               --               --               --               --              --
                                 -------------    -------------    -------------    -------------    -------------   -------------

Balance at December 31, 2003
(as restated, see Note 22) ...            --               --        107,891,426       27,614,763        1,798,733       9,000,553
  Currency translation .......            --               --               --               --               --              --
  Net loss ...................            --               --               --               --               --              --
  Cumulative translation loss
    attributable to liquidated
    Mexico operations ........            --               --               --               --               --              --
  Compensation expense .......            --               --               --               --               --           161,038
  Issuance of common stock ...            --               --          3,623,665        1,200,000           44,100            --
  Issuance of warrants with
    debentures ...............            --               --               --               --          1,004,000            --
  Intrinsic value of bene-
    ficial conversion
    associated with con-
    vertible debentures ......            --               --               --               --               --           804,000
  Repayment from shareholders             --               --               --               --               --              --
  Reclassification of share-
    holders' receivable to
    current asset ............            --               --               --               --               --              --
                                 -------------    -------------    -------------    -------------    -------------   -------------

Balance at December 31, 2004
(as restated, see Note 22) ...   $        --               --      $ 111,515,091       28,814,763    $   2,846,833   $   9,965,591
                                 =============    =============    =============    =============    =============   =============



<CAPTION>
                                   Retained        Accumulated
                                    Earnings          Other           Notes            Total
                                 (Accumulated     Comprehensive       from          Shareholders'
                                    Deficit)      Income (Loss)    Shareholders        Equity
                                 -------------    -------------    -------------    -------------

<S>                              <C>              <C>              <C>              <C>
Balance at January 1, 2002 ...   $  62,958,375    $   3,549,519    $ (12,118,773)   $ 125,164,470
  Net loss ...................      (6,085,281)            --               --         (6,085,281)
  Currency translation .......            --        (13,282,977)            --        (13,282,977)
                                                                                    -------------
  Comprehensive loss .........            --               --               --        (19,368,258)
  Exercise of stock options ..            --               --               --             24,135
  Income tax benefit from
   exercise of stock options .            --               --               --              3,014
  Issuance of preferred stock             --               --               --          8,820,573
  Repayment from shareholders,
   net .......................            --               --          6,516,969        6,516,969
                                 -------------    -------------    -------------    -------------
Balance at December 31, 2002 .      56,873,094       (9,733,458)      (5,601,804)     121,160,903
  Net loss ...................     (35,884,660)            --               --        (35,844,660)
  Currency translation .......            --         (9,945,727)            --         (9,945,727)
                                                                                    -------------
  Comprehensive loss .........            --               --               --        (45,830,387)
  Conversion of preferred
   stock to common stock .....            --               --               --               --
  Issuance of preferred stock
   and warrant, net ..........            --               --               --         31,024,774
  Conversion of preferred
   stock to common stock .....            --               --               --               --
  Intrinsic value of beneficial
   conversion associated with
   convertible preferred stock      (7,494,722)            --               --               --
  Issuance of common stock ...            --               --               --            788,000
  Retirement of stock ........            --               --               --           (311,427)
  Compensation expense .......            --               --               --             71,572
  Repayment from shareholders             --               --            805,376          805,376
                                 -------------    -------------    -------------    -------------

Balance at December 31, 2003
(as restated, see Note 22) ...      13,493,712      (19,679,185)      (4,796,428)     107,708,811
  Currency translation .......            --         (3,106,940)            --         (3,106,940)
  Net loss ...................    (104,676,671)            --               --       (104,676,671)
  Cumulative translation loss
    attributable to liquidated
    Mexico operations ........            --         22,786,125             --         22,786,125
  Compensation expense .......            --               --               --            161,038
  Issuance of common stock ...            --               --               --          3,667,765
  Issuance of warrants with
    debentures ...............            --               --               --          1,004,000
  Intrinsic value of bene-
    ficial conversion
    associated with con-
    vertible debentures ......            --               --               --            804,000
  Repayment from shareholders             --               --             30,366           30,366
  Reclassification of share-
    holders' receivable to
    current asset ............            --               --          2,300,000        2,300,000
                                 -------------    -------------    -------------    -------------

Balance at December 31, 2004
(as restated, see Note 22) ...   $ (91,182,959)   $        --      $  (2,466,062)   $  30,678,494
                                 =============    =============    =============    =============
</TABLE>


                             See accompanying notes


                                      F-6
<PAGE>


<TABLE>
                              TARRANT APPAREL GROUP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                            -----------------------------------------------
                                                                2002             2003              2004
                                                            -------------    -------------    -------------
<S>                                                         <C>              <C>              <C>
Operating activities:
Net loss ................................................   $  (6,085,281)   $ (35,884,660)   $(104,676,671)
Adjustments to reconcile net loss to net cash provided by
operating activities:
   Deferred taxes .......................................        (107,162)        (132,622)         (61,345)
   Depreciation and amortization ........................      10,441,086       16,097,595        8,337,946
   Accrued interest on note receivable ..................      (4,452,490)            --               --
   Cumulative effect of accounting change ...............       4,871,244             --               --
   Impairment charges ...................................            --         22,276,510       77,982,034
   Cumulative transaction loss attributable to the
      liquidated Mexico operations ......................            --               --         22,786,125
   Inventory write-down .................................            --         10,986,153             --
   Income from equity method investment .................            --               --           (769,706)
   Loss on sale of fixed assets .........................           5,291          593,626          (15,272)
   Unrealized (gain) loss on foreign currency ...........       1,014,696          560,602         (367,262)
   Minority interest ....................................       4,426,080       (3,218,069)     (15,331,171)
   Gain on legal settlement .............................        (473,041)        (235,785)            --
   Compensation expense related to stock options ........            --             71,572          161,038
   Change in the provision for returns and discounts ....         453,167         (324,387)      (1,747,060)
   Changes in operating assets and liabilities:
      Restricted cash ...................................            --         (2,759,742)       2,759,742
      Accounts receivable ...............................      (7,141,536)       7,856,700       21,224,454
      Due to/from related parties .......................         673,650      (14,801,324)        (122,389)
      Inventory .........................................       5,818,431        9,626,509        4,162,158
      Temporary quota ...................................         369,849             --               --
      Prepaid expenses ..................................       1,551,324          590,046       (1,860,955)
      Other assets ......................................            --            450,782             --
      Accounts payable ..................................      (3,772,979)      (4,207,552)         687,758
      Accrued expenses and income tax payable ...........       8,454,900        2,388,976         (981,196)
                                                            -------------    -------------    -------------

   NET CASH PROVIDED BY OPERATING ACTIVITIES ............      16,047,229        9,934,930       12,168,228

Investing activities:
Purchase of fixed assets ................................      (2,984,547)        (368,113)        (111,836)
Proceeds from sale of fixed assets ......................            --            209,788        1,219,904
Acquisitions, net of cash ...............................      (2,355,954)            --               --
Investment in equity investment method ..................            --         (1,434,375)        (137,000)
Distribution from equity investment method ..............            --               --            460,800
Investment in joint venture .............................            --               --           (211,963)
Advances to shareholders/officers .......................      (1,008,591)            --               --
Collection of advances from shareholders/officers .......         169,991           88,723           30,366
                                                            -------------    -------------    -------------

   NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ..      (6,179,101)      (1,503,977)       1,250,271

Financing activities:
Short-term bank borrowings, net .........................       7,241,576         (161,194)     (11,342,166)
Proceeds from long-term obligations .....................     198,551,201      239,280,109      129,667,084
Payment of financing costs ..............................         (44,560)            --         (1,124,668)
Payment of long-term obligations and bank borrowings ....    (211,894,730)    (275,640,677)    (146,375,987)
Repayments of borrowings from shareholders/officers .....      (2,359,847)        (486,379)            --
Proceeds from issuance of preferred stock and warrant ...            --         31,024,774        3,623,665
Proceeds from convertible debentures ....................            --               --         10,000,000
Repurchase of shares ....................................            --           (311,427)            --
Exercise of stock options including related tax benefit .          27,149             --               --
                                                            -------------    -------------    -------------

   NET CASH USED IN FINANCING ACTIVITIES ................      (8,479,211)      (6,294,794)     (15,552,072)

Effect of exchange rate on cash .........................      (1,524,882)        (204,677)          28,553
                                                            -------------    -------------    -------------

Increase (decrease) in cash and cash equivalents ........        (135,965)       1,931,482       (2,105,020)

Cash and cash equivalents at beginning of year ..........       1,524,447        1,388,482        3,319,964
                                                            -------------    -------------    -------------

Cash and cash equivalents at end of year ................   $   1,388,482    $   3,319,964    $   1,214,944
                                                            =============    =============    =============
</TABLE>


                             See accompanying notes


                                      F-7
<PAGE>


                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BASIS OF CONSOLIDATION

The accompanying  financial  statements  consist of the consolidation of Tarrant
Apparel Group, a California corporation (formerly "Fashion Resource, Inc."), and
its majority owned Subsidiaries located primarily in the U.S., Mexico, and Asia.
At December 31, 2004, we own 50.1% of United Apparel Ventures ("UAV") and 75% of
PBG7,  LLC  ("PBG7").  We  consolidate  these  entities and reflect the minority
interests  in earnings  (losses) of the ventures in the  accompanying  financial
statements. All inter-company amounts are eliminated in consolidation. The 49.9%
minority  interest  in  UAV is  owned  by  Azteca  Production  International,  a
corporation owned by the brothers of our Chairman, Gerard Guez. The 25% minority
interest in PBG7 is owned by BH7, LLC.

We serve specialty  retail,  mass  merchandise  and department  store chains and
major  international  brands by designing,  merchandising,  contracting  for the
manufacture  of, and selling  casual  apparel for women,  men and children under
private  label.  Commencing  in 1999, we expanded our  operations  from sourcing
apparel to sourcing and operating our own  vertically  integrated  manufacturing
facilities.  In August 2003, we determined to abandon our strategy of being both
a  trading  and  vertically  integrated  manufacturing  company,  and  effective
September  1, 2003,  we leased and  outsourced  operation  of our  manufacturing
facilities in Mexico to affiliates of Mr. Kamel Nacif, a shareholder at the time
of  the  transaction.  See  Note  15 of the  "Notes  to  Consolidated  Financial
Statements."  In August 2004,  we entered into a purchase and sale  agreement to
sell these facilities to affiliates of Mr. Nacif, which transaction  consummated
in the  fourth  quarter  of  2004.  See  Note 5 and  Note  7 of  the  "Notes  to
Consolidated Financial Statements."

Historically,  our operating  results have been subject to seasonal  trends when
measured on a quarterly  basis.  This trend is  dependent  on numerous  factors,
including the markets in which we operate,  holiday  seasons,  consumer  demand,
climate,  economic  conditions  and numerous  other factors  beyond our control.
Generally,  the second and third quarters are stronger than the first and fourth
quarters.  There can be no assurance that the historic  operating  patterns will
continue in future periods.

RISK AND UNCERTAINTIES - IRS EXAMINATION AND DEBT COVENANTS

As discussed in Note 10 of the "Notes to Consolidated Financial Statements," our
federal  income tax returns for the years ended  December  31, 1996 through 2002
are under  examination  by the Internal  Revenue  Service  ("IRS").  The IRS has
proposed adjustments to increase our federal income tax payable for these years.
This  adjustment  would also result in  additional  state taxes,  penalties  and
interest.  We  believe  that we  have  meritorious  defenses  to and  intend  to
vigorously  contest the  proposed  adjustments  made to our  federal  income tax
returns for the years ended 1996 through 2002. If the proposed  adjustments  are
upheld through the administrative and legal process,  they could have a material
impact on our  earnings and cash flow.  The maximum  amount of loss in excess of
the amount accrued in the financial  statements is $12.6 million.  If the amount
of any actual liability,  however,  exceeds our reserves, we would experience an
immediate  adverse  earnings impact in the amount of such additional  liability,
which  could  be  material.   Additionally,  we  anticipate  that  the  ultimate
resolution of these matters will require that we make  significant cash payments
to the taxing authorities. Presently we do not have sufficient cash or borrowing
ability to make any future  payments  that may be required.  No assurance can be
given that we will have  sufficient  surplus  cash from  operations  to make the
required  payments.  Additionally,  any cash used for these purposes will not be
available  for other  corporate  purposes,  which could have a material  adverse
effect on our financial condition and results of operations.  See Note 10 of the
"Notes to Consolidated Financial Statements" for a further discussion on the IRS
examination.


                                      F-8
<PAGE>


DEBT COVENANTS

As discussed in Note 8 of the "Notes to Consolidated  Financial Statements," our
debt  agreements  require  certain  covenants  including a minimum  level of net
worth. If our results of operations  erode and we are not able to obtain waivers
from the lenders,  the debt would be in default and callable by our lenders.  In
addition, due to cross-default provisions in our debt agreements,  substantially
all of our  long-term  debt  would  become  due in full if any of the debt is in
default. In anticipation of us not being able to meet the required covenants due
to various reasons, we either negotiate for changes in the relative covenants or
an advance  waiver or reclassify  the relevant debt as current.  We also believe
that our lenders would provide waivers if necessary.  However,  our expectations
of future operating  results and continued  compliance with other debt covenants
cannot be  assured  and our  lenders'  actions  are not  controllable  by us. If
projections of future operating  results are not achieved and the debt is placed
in default, we would be required to reduce our expenses, including by curtailing
operations,  and to raise capital through the sale of assets, issuance of equity
or otherwise, any of which could have a material adverse effect on our financial
condition and results of  operations.  See Note 8 of the "Notes to  Consolidated
Financial  Statements"  for a further  discussion of the credit  facilities  and
related debt covenants.

REVENUE RECOGNITION

Revenue is recognized at the point of shipment for all merchandise sold based on
FOB shipping point.  For merchandise  shipped on landed duty paid ("LDP") terms,
revenue  is  recognized  at the  point of  either  leaving  Customs  for  direct
shipments or at the point of leaving our warehouse  where title is  transferred.
Customers are allowed the rights of return or  non-acceptance  only upon receipt
of damaged products or goods with quality different from shipment samples. We do
not undertake any after-sale warranty or any form of price protection.

We often arrange, on behalf of manufacturers,  for the purchase of fabric from a
single supplier.  We have the fabric shipped directly to the cutting factory and
invoice  the factory for the fabric.  Generally,  the  factories  pay us for the
fabric with offsets against the price of the finished goods.

SHIPPING AND HANDLING COSTS

Freight  charges  are  included  in selling  and  distribution  expenses  in the
statement of operations and amounted to $2,136,000,  $1,817,000 and $783,000 for
the years ended December 31, 2002, 2003 and 2004, respectively.  We did not bill
customers for shipping and handling costs for the years 2002, 2003 and 2004.

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

Cash equivalents  consist of cash and highly liquid investments with an original
maturity of three months or less when purchased.  Restricted cash refers to cash
deposit(s) held as collateral by lending  institution(s) to either guarantee our
liabilities and/or loans. Cash and cash equivalents,  including restricted cash,
held in foreign financial  institutions  totaled $3,930,000 and $1,206,000 as of
December 31, 2003 and 2004,  respectively.  Restricted  cash is not considered a
cash equivalent for purposes of the statement of cash flows.

ACCOUNTS RECEIVABLE--ALLOWANCE FOR RETURNS, DISCOUNTS AND BAD DEBTS

We evaluate the collectibility of accounts receivable and chargebacks  (disputes
from the customer) based upon a combination of factors.  In circumstances  where
we  are  aware  of  a  specific  customer's  inability  to  meet  its  financial
obligations  (such  as  in  the  case  of  bankruptcy   filings  or  substantial
downgrading  of  credit  sources),  a  specific  reserve  for bad debts is taken
against  amounts  due to reduce  the net  recognized  receivable  to the  amount
reasonably  expected to be  collected.  For all other  customers,  we  recognize
reserves for bad debts and  uncollectible  chargebacks  based on our  historical
collection experience.  If collection experience  deteriorates (for example, due
to an unexpected  material adverse change in a major customer's  ability to meet
its financial obligations to us), the estimates of the recoverability of amounts
due us could be reduced by a material amount.  As of December 31, 2003 and 2004,
the  balance of the  allowance  for  returns,  discounts  and bad debts was $4.2
million and $2.4 million, respectively.


                                      F-9
<PAGE>


INVENTORIES

Inventories are stated  (valued) at the lower of cost  (first-in,  first-out) or
market.  Under  certain  market  conditions,  we  use  estimates  and  judgments
regarding  the  valuation of inventory to properly  value  inventory.  Inventory
adjustments  are made for the  difference  between the cost of the inventory and
the estimated  market value and charged to operations in the period in which the
facts that give rise to the adjustments become known.

COST OF SALES

Cost  of  sales  includes   costs  related  to  product  costs,   direct  labor,
manufacturing  overhead,  duty,  quota,  freight in,  brokerage and  warehousing
expense.

SELLING AND DISTRIBUTION EXPENSES

Selling and distribution  expenses  include expenses related to samples,  travel
and entertainment,  salaries, rent and other office expenses, professional fees,
freight out and selling commissions incurred in the sales process.

GENERAL AND ADMINISTRATIVE EXPENSES

General and  administrative  expenses  include  expenses related to research and
product development,  travel and entertainment,  salaries, rent and other office
expenses, depreciation and amortization, professional fees and bank charges.

PRODUCT DESIGN, ADVERTISING AND SALES PROMOTION COSTS

Product design,  advertising and sales promotion costs are expensed as incurred.
Product  design,  advertising  and sales  promotion  costs  included in selling,
general and administrative expenses in the accompanying statements of operations
(excluding  the  costs  of  manufacturing   production   samples)   amounted  to
approximately  $1,225,000,  $1,306,000  and  $2,106,000 in 2002,  2003 and 2004,
respectively.

QUOTA

We purchase  quota rights to be used in the  importation  of our  products  from
certain foreign countries.  The effect of quota transactions is accounted for as
a product cost.

Permanent quota entitlements were principally  obtained through free allocations
by the Hong Kong Government  pursuant to an import  restraint  between Hong Kong
and the United States and are renewable on an annual basis, based upon the prior
year utilization. Permanent quota entitlements acquired from outside parties are
amortized over three years on a straight-line basis, and were fully amortized at
December 31, 2003 and 2004.

Temporary  quota  represents  quota rights  acquired from other  permanent quota
entitlement holders on a temporary basis.  Temporary quota has a maximum life of
twelve months. The cost of temporary quota purchased for use in the current year
is assigned to inventory  purchases  while the cost of temporary  quota acquired
for usage in the year  following the balance sheet date is recorded as a current
asset.  At December  31, 2003 and 2004,  there were no  temporary  quota  rights
included in current assets.

PROPERTY AND EQUIPMENT

Property  and  equipment  is recorded at cost.  Additions  and  betterments  are
capitalized  while repair and  maintenance  costs are charged to  operations  as
incurred.  Depreciation  of  property  and  equipment  is  provided  for  by the
straight-line method over their estimated useful lives.  Leasehold  improvements
are amortized using the straight-line  method over the lesser of their estimated
useful lives or the term of the lease.  Upon  retirement or disposal of property
and equipment, the cost and related accumulated depreciation are eliminated from
the accounts and any gain or loss is reflected in the  statement of  operations.
Repair and maintenance  costs are charged to expense as incurred.  The estimated
useful lives of the assets are as follows:


                                      F-10
<PAGE>


         Buildings                                  35 to 40 years
         Equipment                                   7 to 15 years
         Furniture and Fixtures                       5 to 7 years
         Vehicles                                          5 years
         Leasehold Improvements                      Term of lease

INTANGIBLES

The excess of cost over fair value of net assets  acquired  was  amortized  over
five to thirty years through  December 31, 2001.  Effective  January 1, 2002, we
adopted Statement of Financial  Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible  Assets."  According to this statement,  goodwill and other
intangible  assets with indefinite  lives are no longer subject to amortization,
but rather an annual  assessment  of  impairment  applied on a  fair-value-based
test.  We adopted  SFAS No. 142 in fiscal 2002 and  performed  our first  annual
assessment of impairment,  which resulted in an impairment loss of $4.9 million.
This  amount is  presented  as  cumulative  effect of  accounting  change in our
Consolidated Statements of Operations and Cash Flows.

IMPAIRMENT OF LONG-LIVED ASSETS

The carrying  value of long-lived  assets are reviewed when events or changes in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  If it is determined  that an impairment loss has occurred based on
the lowest  level of  identifiable  expected  future  cash flow,  then a loss is
recognized in the statement of operations using a fair value based model.

VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL

Effective  January  1,  2002,  we  adopted  Statement  of  Financial  Accounting
Standards No. 142,  "Goodwill and Other  Intangible  Assets."  According to this
statement,  goodwill and other  intangible  assets with indefinite  lives are no
longer subject to amortization,  but rather an assessment of impairment  applied
on a  fair-value-based  test on an annual basis or more  frequently  if an event
occurs or  circumstances  change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount.

We utilized the  discounted  cash flow  methodology  to estimate fair value.  At
December  31,  2004,  we have a  goodwill  balance  of $8.6  million,  and a net
property  and  equipment  balance of $1.9  million,  as  compared  to a goodwill
balance of $8.6  million  and a net  property  and  equipment  balance of $135.6
million at December 31, 2003.  Our  goodwill  balance  reflects the write off of
$19.5  million of goodwill in the second  quarter of 2003.  Our net property and
equipment balance at December 31, 2004 reflects the disposal of our Mexico fixed
assets of $123.3 million in the fourth quarter of 2004. See Note 5 and Note 7 of
the "Notes to Consolidated Financial Statements."

Factors  considered  important that could trigger an impairment  review include,
but are not limited to, the following:

         o        a significant underperformance relative to expected historical
                  or projected future operating results;

         o        a significant  change in the manner of the use of the acquired
                  asset or the strategy for the overall business; or

         o        a significant negative industry or economic trend.

DEFERRED FINANCING COST

Deferred  financing  costs were $327,000 and $1,203,000 at December 31, 2003 and
2004,  respectively.   These  costs  of  obtaining  financing  and  issuance  of
convertible debt  instruments are being amortized on a straight-line  basis over
the term of the related debt.  Amortization  expenses for deferred  charges were
$311,000,  $408,000 and $387,000 for the years ended December 31, 2002, 2003 and
2004, respectively.


                                      F-11
<PAGE>


INCOME TAXES

We utilize SFAS No. 109, "Accounting for Income Taxes," which prescribes the use
of the  liability  method to compute  the  differences  between the tax basis of
assets  and  liabilities  and the  related  financial  reporting  amounts  using
currently  enacted  tax laws and rates.  A  valuation  allowance  is recorded to
reduce deferred taxes to the amount that is more likely than not to be realized.

Our Hong Kong  corporate  affiliates are taxed at an effective Hong Kong rate of
17.5%.  As of December 31, 2004, no domestic tax provision has been provided for
$64.9 million of un-remitted  retained earnings of these Hong Kong corporations,
as we intend to maintain these amounts outside of the U.S. on a permanent basis.

NET LOSS PER SHARE

Basic and diluted loss per share has been computed in  accordance  with SFAS No.
128,  "Earnings Per Share". A reconciliation of the numerator and denominator of
basic loss per share and diluted loss per share is as follows:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                               -----------------------------------------------
                                                    2002             2003             2004
                                               -------------    -------------    -------------
                                                                (as restated,
                                                                 see Note 22)
<S>                                            <C>              <C>              <C>
Basic and Diluted EPS Computation:
Numerator:
Reported net loss ..........................   $  (6,085,281)   $ (35,884,660)   $(104,676,671)
Dividend to the preferred stockholders .....            --         (7,494,722)            --
                                               -------------    -------------    -------------
Net loss available to common stockholders ..   $  (6,085,281)   $ (43,379,382)   $(104,676,671)

Denominator:
Weighted average common shares outstanding -
Basic and Diluted ..........................      15,834,122       18,215,071       28,732,796

Basic and Diluted EPS ......................   $       (0.38)   $       (2.38)   $       (3.64)
                                               =============    =============    =============
</TABLE>


The  following   potentially  dilutive  securities  were  not  included  in  the
computation of loss per share, because to do so would have been anti-dilutive:

                                   2002               2003               2004
                                ----------         ----------         ----------

Options ...............          6,376,487          8,926,087          8,331,962
Warrants ..............               --              881,732          2,361,732
   Total ..............          6,376,487          9,807,819         10,693,694


DIVIDENDS

We did not declare or pay any cash dividends in 2002, 2003 or 2004. We intend to
retain  any future  earnings  for use in our  business  and,  therefore,  do not
anticipate declaring or paying any cash dividends in the foreseeable future. The
declaration and payment of any cash dividends in the future will depend upon our
earnings,  financial condition,  capital needs and other factors deemed relevant
by the Board of  Directors.  In  addition,  our credit  agreements  prohibit the
payment of dividends during the term of the agreements.


                                      F-12
<PAGE>


FOREIGN CURRENCY TRANSLATION

Assets and liabilities of the Mexico and Hong Kong  subsidiaries  are translated
at the rate of exchange in effect on the balance sheet date; income and expenses
are translated at the average rates of exchange  prevailing during the year. The
functional currencies in which we transact business are the Hong Kong dollar and
the peso in Mexico.

Foreign  currency  gains and losses  resulting  from  translation  of assets and
liabilities are included in other comprehensive income (loss). Transaction gains
or losses, other than inter-company debt deemed to be of a long-term nature, are
included  in net income  (loss) in the period in which they occur.  In 2004,  we
substantially liquidated our Mexico subsidiaries following the sale of the fixed
assets in  Mexico.  The  accumulated  foreign  currency  translation  adjustment
related to the Mexico subsidiaries of $22.8 million of loss was reclassified and
charged to income.  The  adjustment  occurred in the fourth quarter of 2004. See
Note 5 of the "Notes to Consolidated Financial Statements."

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial  instruments  is  determined by reference to various
market data and other valuation techniques as appropriate. Considerable judgment
is required in  estimating  fair values.  Accordingly,  the estimates may not be
indicative  of the amounts that we could realize in a current  market  exchange.
The  carrying  amounts of cash and cash  equivalents,  receivables  and accounts
payable  approximate  fair  values.  The carrying  amounts of our variable  rate
borrowings   under  the  various   short-term   borrowings  and  long-term  debt
arrangements approximate fair value.

CONCENTRATION OF CREDIT RISK

Financial  instruments,  which potentially  expose us to concentration of credit
risk, consist primarily of cash equivalents,  trade accounts receivable, related
party receivables and amounts due from factor.

Our products are  primarily  sold to mass  merchandisers  and  specialty  retail
stores.  These customers can be  significantly  affected by changes in economic,
competitive or other factors.  We make  substantial  sales to a relatively  few,
large customers. In order to minimize the risk of loss, we assign certain of our
domestic accounts receivable to a factor without recourse or requires letters of
credit  from our  customers  prior to the  shipment of goods.  For  non-factored
receivables,  account-monitoring procedures are utilized to minimize the risk of
loss.  Collateral  is  generally  not  required.  At December 31, 2003 and 2004,
approximately  22.0%  and  19.6%  of  accounts  receivable  were  due  from  two
customers,  respectively.  The following  table  presents the  percentage of net
sales concentrated with certain customers.

                                                    PERCENTAGE OF NET SALES
                                              ----------------------------------
      CUSTOMER                                 2002          2003          2004
      ---------------------                   ------        ------        ------
      Kohl's.............................        5.1           6.6          16.4
      Mervyn's...........................        7.3           5.9          15.4
      Lerner New York (2)................        9.9           8.3          15.0
      Federated..........................        0.5           5.2          10.3
      Wet Seal...........................        0.8           3.3           7.9
      Wal-Mart...........................        9.7           8.7           5.9
      The Limited (1)....................       12.7          15.3           4.6
      Lane Bryant........................       17.6          12.1           2.0
      Tommy Hilfiger.....................       17.4           6.7           0.0
      ----------
      (1)   Includes  Express and Limited stores.
      (2)   Sold by Limited Brands Inc. in November 2002.

We maintain demand  deposits with several major banks.  At times,  cash balances
may be in excess of Federal Deposit Insurance  Corporation or equivalent foreign
insurance limits.


                                      F-13
<PAGE>


USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States  requires  management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying  notes.  Significant  estimates  used by us in  preparation  of the
financial  statements  include  allowance for returns,  discounts and bad debts,
valuation of long-lived and intangible  assets and goodwill,  and tax provision.
Actual results could differ from those estimates.

EMPLOYEE STOCK OPTIONS

We account for employee  stock options  using the intrinsic  value method rather
than the alternative  fair-value  accounting method.  Under the  intrinsic-value
method,  if the exercise price of the employee's stock options equals the market
price of the underlying stock on the date of the grant, no compensation  expense
is recognized. For the years ended December 31, 2002, 2003 and 2004, $0, $72,000
and  $161,000  were  recorded  as an  expense  related  to  our  stock  options,
respectively.

Pro forma information regarding net income and earnings per share is required by
SFAS 148, and has been  determined as if we had accounted for our employee stock
options under the fair value method of that Statement.  The fair value for these
options was estimated at the date of grant using a Black-Scholes  option pricing
model  with  the  following   weighted-average   assumptions:   weighted-average
risk-free  interest  rate of 4% for 2002 and 2003,  3% to 4% for 2004;  dividend
yields of 0% for 2002, 2003 and 2004; weighted-average volatility factors of the
expected  market price of our common stock of 0.65 for 2002 and 2003 and 0.51 to
0.55 for 2004; and a weighted-average  expected life of the option of four years
for 2002, 2003 and 2004.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is  amortized  to  expense  over the  options'  vesting  period.  Our pro  forma
information follows:

<TABLE>
<CAPTION>
                                                       2002              2003               2004
                                                  --------------    --------------     --------------
<S>                                               <C>               <C>                <C>
Net loss as reported ........................     $   (6,085,281)   $  (35,884,660)    $ (104,676,671)
Add stock-based employee compensation charges
   reported in net loss .....................     $            0    $       71,572     $      161,038
Pro forma compensation expense, net of tax ..     $   (3,433,779)   $   (4,115,263)    $   (3,852,990)
Pro forma net loss ..........................     $   (9,519,060)   $  (39,928,351)    $ (108,368,623)
Net loss per share
  Basic and diluted (as restated, see
    Note 22) ................................     $        (0.38)   $        (2.38)    $        (3.64)
Add stock-based employee compensation charges
   reported in net loss
   Basic and diluted ........................     $         0.00    $         0.00     $         0.01
Pro forma compensation expense per share
   Basic and diluted ........................     $        (0.22)   $        (0.22)    $        (0.14)
Pro forma loss per share
  Basic and diluted (as restated, see
     Note 22) ...............................     $        (0.60)   $        (2.60)    $        (3.77)
</TABLE>


OTHER COMPREHENSIVE INCOME (LOSS)

Other  comprehensive  income (loss)  includes all changes in equity (net assets)
from non-owner  sources such as foreign  currency  translation  adjustments.  We
account  for other  comprehensive  income  (loss) in  accordance  with SFAS 130,
"Reporting Comprehensive Income."

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In  January   2003,   the  FASB  issued   Interpretation   No.  46  ("FIN  46"),
"Consolidation of Variable  Interest  Entities." FIN 46 addresses when a company
should  consolidate  in its financial  statements  the assets,  liabilities  and
activities of a variable  interest entity  ("VIE").  It defines VIEs as entities
that  either  do not have any  equity  investors  with a  controlling  financial
interest,  or have equity  investors  that do not provide  sufficient  financial
resources for the entity


                                      F-14
<PAGE>


to support its activities without additional subordinated financial support. FIN
46 also  requires  disclosures  about  VIE's that a company is not  required  to
consolidate,   but  in  which  it  has  a  significant  variable  interest.  The
consolidation  requirements of FIN 46 applied  immediately to variable  interest
entities  created  after January 31, 2003. We have not obtained an interest in a
VIE subsequent to that date. A  modification  to FIN 46 (FIN 46(R)) was released
in December  2003.  FIN 46(R) delayed the effective date for VIEs created before
February 1, 2003,  with the  exception of  special-purpose  entities  ("SPE's"),
until the first fiscal year or interim  period ending after March 15, 2004.  FIN
46(R) delayed the effective  date for  special-purpose  entities until the first
fiscal year or interim  period after  December 15, 2003. We were not the primary
beneficiaries  of any SPE's at December 31, 2003 and 2004.  We adopted FIN 46(R)
for non-SPE  entities as of March 31, 2004. The adoption of FIN 46 and FIN 46(R)
did not result in the consolidation of any VIEs.

In December  2004,  the FASB issued SFAS No. 123  (revised  2004),  "Share-Based
Payment,"  which  addresses the accounting for employee stock options.  SFAS No.
123R   eliminates   the  ability  to  account  for   shared-based   compensation
transactions  using APB Opinion No. 25 and generally  would require instead that
such  transactions be accounted for using a fair  value-based  method.  SFAS No.
123R also requires that tax benefits associated with these share-based  payments
be classified as financing  activities in the statement of cash flow rather than
operating activities as currently permitted. SFAS No. 123R becomes effective for
interim or annual periods  beginning  after June 15, 2005.  Accordingly,  we are
required to apply SFAS No. 123R  beginning in the quarter  ending  September 30,
2005. SFAS No. 123R offers  alternative  methods of adopting this final rule. We
have not yet determined which alternative method it will use.

In November 2004, the FASB issued SFAS No. 151,  "Inventory  Costs, an amendment
of ARB No. 43, Chapter 4," SFAS No. 151 clarifies that abnormal  inventory costs
such as costs of idle facilities,  excess freight and handling costs, and wasted
materials  (spoilage) are required to be recognized as current period costs. The
provisions  of SFAS No. 151 are  effective for our fiscal 2006. We are currently
evaluating  the  provisions of SFAS No. 151 and do not expect that adoption will
have a material effect on our financial position,  results of operations or cash
flows.

CURRENCY RATE HEDGING

We  manufacture in a number of countries  throughout  the world,  including Hong
Kong, and, as a result,  are exposed to movements in foreign  currency  exchange
rates. Periodically we will enter into various currency rate hedges. The primary
purpose of our foreign currency  hedging  activities is to manage the volatility
associated  with foreign  currency  purchases of materials  and equipment in the
normal course of business. We utilize forward exchange contracts with maturities
of one to three months.  We do not enter into derivative  financial  instruments
for  speculative or trading  purposes.  We enter into certain  foreign  currency
derivative  instruments that do not meet hedge accounting criteria. As a result,
we mark to market all derivative  instruments  with the gain or loss included in
other income and expense.  See Note 18 of the "Notes to  Consolidated  Financial
Statements."  These instruments are intended to protect against exposure related
to financing transactions (equipment) and income from international  operations.
The fair value of the exchange  contracts  was not  significant  at December 31,
2003 and there were no exchange contracts at December 31, 2004.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current year
presentation.

2.       ACCOUNTS RECEIVABLE

Accounts receivable consists of the following:
                                                            DECEMBER 31,
                                                   ----------------------------
                                                       2003            2004
                                                   ------------    ------------
U.S. trade accounts receivable .................   $ 31,685,308    $  3,248,887
Foreign trade accounts receivable ..............     24,528,500      17,148,600
Factored accounts receivable ...................           --        19,452,756
Other receivables ..............................      5,178,501         346,965
Allowance for returns, discounts and bad debts .     (4,226,383)     (2,437,865)
                                                   ------------    ------------
                                                   $ 57,165,926    $ 37,759,343
                                                   ============    ============


                                      F-15
<PAGE>


Under the asset-based  lending arrangement we had with GMAC before September 29,
2004, we factored trade  receivables from clients with credit ratings below BBB.
GMAC did not  advance any funds to us and only  afforded  us a credit  insurance
coverage.  We received funds from GMAC only after such funds were collected from
customers at their respective due dates. Effective as of September 29, 2004, the
asset  based  lending  arrangement  was  amended  and  converted  to a factoring
arrangement.   At  December  31,  2004,  substantially  all  trade  receivables,
irrespective of their debt ratings, were factored and GMAC advances up to 90% of
the invoice value to us immediately upon the submission of invoices.  See Note 8
of "Notes to Consolidated Financial Statements."

3.       INVENTORY

Inventory consists of the following:

                                                             DECEMBER 31,
                                                    ----------------------------
                                                        2003             2004
                                                    -----------      -----------

Raw materials, fabric and trim accessories ...      $ 5,859,558      $ 1,164,977
Work-in-process ..............................        1,094,786             --
Finished goods shipments-in-transit ..........        7,522,464        9,283,022
Finished goods ...............................        8,774,783        8,696,106
                                                    -----------      -----------
                                                    $23,251,591      $19,144,105
                                                    ===========      ===========

We recorded a write down of our inventory totaling $10,986,000 in 2003 following
our  decision  to  withdraw  from our owned and  operated  facilities  in Mexico
effective  September  1, 2003.  The write down  reflected an  adjustment  to net
realizable value of inventory identified for liquidation at reduced prices.

4.       PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

                                                         DECEMBER 31,
                                             ----------------------------------
                                                  2003                 2004
                                             -------------        -------------

Land .................................       $   4,301,138        $      85,000
Buildings ............................          54,871,724              819,372
Equipment ............................         111,742,558            5,966,453
Furniture and fixtures ...............           2,441,058            2,228,375
Leasehold improvements ...............          11,357,892            2,605,763
Vehicles .............................             496,942              330,564
                                             -------------        -------------
                                               185,211,312           12,035,527

Less accumulated depreciation and
   amortization ......................         (49,565,561)         (10,160,634)
                                             -------------        -------------
                                             $ 135,645,751        $   1,874,893
                                             =============        =============


Depreciation  expense,  including  amortization of assets recorded under capital
leases,  totaled  $10,056,000,  $15,663,000  and  $7,853,000 for the years ended
December 31, 2002, 2003 and 2004, respectively.

5.       RESTRUCTURING AND SALE OF MEXICO OPERATIONS

Following our restructuring of our Mexican operations in 2003, and the resulting
reduction  in our Mexican  work force,  we became the target of workers'  rights
activists who have picketed our  customers,  stuffed  electronic  mailboxes with
inaccurate,  protest  e-mails,  and threatened  customers with  retaliation  for
continuing  business  with  us.  While  we have  defended  our  position  to our
customers, some of our larger customers for Mexico-produced jeans wear have been
reluctant to place orders with us in response to actions taken and  contemplated
by these activist groups. As a consequence, we experienced a significant decline
in revenue from sales of Mexico-produced merchandise during 2004. As a result of
this reduction in revenue from the sale of Mexico-produced merchandise,


                                      F-16
<PAGE>


the Board of Directors approved a resolution in July 2004 authorizing management
to sell the manufacturing operations in Mexico.

In accordance  with SFAS No. 144,  "Accounting for the Impairment or Disposal of
Long-Lived   Assets,"  we  evaluated  the   long-lived   assets  in  Mexico  for
recoverability  and  concluded  that  the  book  value of the  asset  group  was
significantly higher than the expected future cash flows and that impairment had
occurred. Accordingly, we recognized a non-cash impairment loss of approximately
$78  million  in the  second  quarter  of 2004.  The  impairment  charge was the
difference  between the carrying  value and fair value of the  impaired  assets.
Fair value was determined  based on  independent  appraisals of the property and
equipment  obtained  in June 2004.  There was no tax benefit  recorded  with the
impairment loss due to a full valuation  allowance  recorded  against the future
tax benefit as of June 30, 2004.  The entire  impairment  charge was recorded in
the Mexico geographic reporting segment.

In connection with our restructuring of our Mexico operations,  we incurred $2.5
million and $1.1 million of severance costs in 2003 and 2004,  respectively,  in
the Mexico reportable  segment.  We did not relocate any employees in connection
with this  restructuring  and therefore did not incur any relocation  costs.  In
addition,  we did not incur any contract  termination costs. There was no ending
liability  balance for the severance  costs incurred in 2003 and 2004 since such
amounts were all paid in 2003 and 2004.  Severance  costs  incurred in 2003 were
included in costs of goods sold and such costs incurred in 2004 were included in
general and administrative expenses in the accompanying  consolidated statements
of operations.

In August 2004,  through Tarrant Mexico,  S. de R.L. de C.V., our majority owned
and controlled  subsidiary in Mexico,  we entered into an Agreement for Purchase
of Assets with  affiliates of Mr. Kamel Nacif,  a shareholder at the time of the
transaction,  which  agreement  was  amended in October  2004.  Pursuant  to the
agreement,  as  amended,  on  November  30,  2004,  we  sold  to the  purchasers
substantially  all of our  assets  and real  property  in Mexico  which  include
equipment and facilities  previously leased to Mr. Nacif's affiliates in October
2003, for an aggregate purchase price consisting of the following:

         o        $105,400  in cash and  $3,910,000  by  delivery  of  unsecured
                  promissory notes bearing interest at 5.5% per annum; and

         o        $40,204,000,  by delivery of secured  promissory notes bearing
                  interest at 4.5% per annum, maturing on December 31, 2014, and
                  payable  in  equal  monthly   installments  of  principal  and
                  interest over the term of the notes.

Included  in  the  $45.4  million  notes  receivable  -  related  party  on  the
accompanying  balance  sheet as of December  31, 2004 was  $1,317,000  of Mexico
valued  added taxes on the real  property  component  of this  transaction.  The
future  maturities of the note  receivable  from the  purchasers,  including the
Mexican value added tax to be paid by the purchasers, is as follows:

                 Year ending December 31,            Amount
                 ------------------------            ------

                        2005                       $ 5,323,733
                        2006                       $ 5,323,733
                        2007                       $ 5,323,733
                        2008                       $ 4,020,400
                        2009                       $ 4,020,400
                        2010 and thereafter        $21,419,000
                        Total                      $45,431,000

Upon consummation of the sale, we entered into a purchase  commitment  agreement
with the purchasers,  pursuant to which we have agreed to purchase annually over
the ten-year term of the  agreement,  $5 million of fabric  manufactured  at our
former facilities  acquired by the purchasers at negotiated market prices.  This
agreement  replaced an existing  purchase  commitment  agreement whereby we were
obligated to purchase annually from Mr. Nacif's  affiliates,  6 million yards of
fabric (or  approximately  $19.2  million of fabric at  today's  market  prices)
manufactured  at these same  facilities  through October 2009. The annual future
purchase  commitments  approximate the annual maturities of the notes receivable
from the  related  party.  As a  result,  we expect  to fully  realize  the note
receivable  from related  party  through the receipt of fabric  manufactured  at
these facilities over the maturity period of the notes receivable.


                                      F-17
<PAGE>


6.       EQUITY METHOD INVESTMENT - AMERICAN RAG

In the second quarter of 2003, we acquired a 45% equity interest in the owner of
the trademark  "American Rag CIE" and the operator of American Rag retail stores
for $1.4 million,  and our subsidiary,  Private Brands, Inc., acquired a license
to certain exclusive rights to this trademark. We have guaranteed the payment to
the licensor of minimum royalties of $10.4 million over the initial 10-year term
of the  agreement.  Private  Brands also  entered  into a  multi-year  exclusive
distribution agreement with Federated  Merchandising Group ("FMG"), the sourcing
arm of Federated  Department  Stores, to supply FMG with American Rag CIE, a new
casual  sportswear  collection  for juniors and young men.  Private  Brands will
design and manufacture a full collection of American Rag apparel,  which will be
distributed by FMG exclusively to Federated stores across the country. Beginning
in August 2003, the American Rag collection was available in  approximately  100
select Macy's, the Bon Marche, Burdines, Goldsmith's,  Lazarus and Rich's-Macy's
locations.  The  investment  in American Rag CIE, LLC totaling  $1.4 million and
$1.9 million at December 31, 2003 and 2004, respectively, is accounted for under
the equity method and included in equity method  investment on the  accompanying
consolidated  balance  sheets.  Income  from the  equity  method  investment  is
recorded in the United States geographical  segment. The change in investment in
American Rag for 2004 was as follows:

         Balance as of December 31, 2003 .....     $  1,434,375
         Additional capital contribution .....          137,000
         Share of income......................          769,706
         Distribution ........................         (460,800)
                                                   ------------
         Balance as of December 31, 2004......     $  1,880,281
                                                   ============

We hold a 45% member  interest in American  Rag. The remaining 55% owners are an
unrelated  third party who  contributed  the  American Rag  trademark  and other
assets and liabilities relating to two retail stores operating under the name of
"American  Rag".  American Rag has sufficient  equity  investment to finance its
activities without  additional  subordinated  financial  support.  The entity is
generating  positive cash flow and net operating  profit from its retail stores.
The royalty income paid by us to American Rag is considered  other income and is
ancillary to the primary  operations.  Reported revenue from the retail business
in fiscal 2004 was  approximately $9 million.  The amount of royalty income paid
by us to American Rag in 2003 and 2004 was $250,000 and $500,000,  respectively.
Since  inception,  American  Rag  has  demonstrated  that  it  can  finance  its
activities without  additional  subordinated  financial support.  We do not have
sole  decision-making  ability.  Day  to  day  management  of  American  Rag  is
effectively controlled by one of the 55% owners.

We have not entered into any  obligations  to guarantee the entity's debt nor do
we expect to receive a guaranteed  return on its investment.  We determined that
we are not the primary  beneficiary of American Rag. Our variable  interest will
not absorb a majority of the VIE's expected losses.  We record its proportionate
share of income  and  losses  but are not  obligated  nor do we intend to absorb
losses beyond its 45%  investment  interest.  Additionally,  we do not expect to
receive a majority of the entity's expected  residual returns,  other than their
45% ownership interest.

7.       IMPAIRMENT OF ASSETS

IMPAIRMENT OF GOODWILL

Goodwill  is  classified  as  "excess  of costs  over fair  value of net  assets
acquired"  on the  accompanying  consolidated  balance  sheets.  SFAS  No.  142,
"Goodwill  and  Other  Intangible  Assets,"  requires  that  goodwill  and other
intangibles be tested for impairment using a two-step process. The first step is
to determine the fair value of the reporting unit, which may be calculated using
a  discounted  cash flow  methodology,  and compare  this value to its  carrying
value. If the fair value exceeds the carrying value, no further work is required
and no impairment loss would be recognized.  The second step is an allocation of
the fair value of the reporting  unit to all of the reporting  unit's assets and
liabilities  under  a  hypothetical  purchase  price  allocation.  Based  on the
evaluation  performed to adopt SFAS No. 142 along with  continuing  difficulties
being experienced in the industry, we recorded a non-cash charge of $4.9 million
in the first  quarter of 2002 to reduce the  carrying  value of  goodwill to the
estimated fair value.


                                      F-18
<PAGE>


The following table presents our results on a comparable basis:

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                  --------------------------------------------------
                                                        2002             2003             2004
                                                  ---------------  ---------------   ---------------
<S>                                               <C>              <C>               <C>
Reported net loss before cumulative effect
   of accounting change .......................   $    (1,214,037) $   (35,884,660)  $  (104,676,671)
Cumulative effect of accounting change ........        (4,871,244)            --                --
                                                  ---------------  ---------------   ---------------

Reported net loss after cumulative effect
     of accounting change .....................   $    (6,085,281) $   (35,884,660)  $  (104,676,671)
                                                  ===============  ===============   ===============

Basic and diluted earnings per common share:
Reported net loss before cumulative effect of
   accounting change (as restated, see Note 22)   $         (0.08) $         (2.38)  $         (3.64)
Cumulative effect of accounting change ........             (0.30)            --                --
                                                  ---------------  ---------------   ---------------

Adjusted net loss after cumulative effect of
     accounting change (restated, see Note 22)    $         (0.38) $         (2.38)  $         (3.64)
                                                  ===============  ===============   ===============
</TABLE>


In 2003, we ceased  directly  operating a substantial  majority of our equipment
and  fixed  assets  in  Mexico,  and  started  leasing  a large  portion  of our
manufacturing  facilities  and  operations  in Mexico to affiliates of Mr. Kamel
Nacif,  a shareholder  at the time of the  transaction,  effective  September 1,
2003.  During 2003,  we made an interim  review of our  goodwill and  intangible
assets  and  wrote  off all  goodwill  and  intangible  assets  affected  by our
strategic changes in Mexico.  Write-offs  included $9.1 million and $2.7 million
directly   relating  to  Tarrant   Mexico  -  Famian  and   Ajalpan   divisions,
respectively,  and  another  $7.5  million  relating  to of  Rocky  Apparel  LLC
("Rocky"). It is unlikely that Tommy Hilfiger, whose business we acquired in the
Rocky  acquisition,  would continue to purchase  merchandise  from UAV following
implementation  of the restructuring in Mexico. In 2003, we had also written off
the  remaining  goodwill of $150,000  relating  to the  acquisition  of Jane Doe
International, LLC due to the litigation with the minority shareholder.

The following table displays the change in the gross carrying amount of goodwill
by reporting units for the years ended December 31, 2003 and 2004. The reporting
units below are one level  below the  reportable  segments  included in Note 16,
"Operations by Geographic  Areas".  The reporting units Jane Doe, Tag Mex Inc. -
Rocky Division and Tag Mex Inc. - Chazz & MGI Division were included  within the
United  States  geographical  segment of Note 16. The  reporting  units  Tarrant
Mexico -  Ajalpan  and  Tarrant  Mexico - Famian  were  included  in the  Mexico
geographical  segment  of Note 16 of the  "Notes to the  Consolidated  Financial
Statements."


                                      F-19
<PAGE>


<TABLE>
<CAPTION>
                                                                     REPORTING UNITS
                                          ----------------------------------------------------------------------------
                                                                                            TAG MEX         FR TCL -
                                                            TARRANT         TARRANT         INC. -          CHAZZZ &
                                                            MEXICO -        MEXICO -         ROCKY            MGI
                              TOTAL         JANE DOE        AJALPAN          FAMIAN         DIVISION        DIVISION
                          ------------    ------------    ------------    ------------    ------------    ------------
<S>                       <C>             <C>             <C>             <C>             <C>             <C>
Balance as of
 January 1, 2003 ......   $ 28,064,019    $    150,338    $  2,739,378    $  9,069,922    $  7,521,536    $  8,582,845
Impairment losses .....    (19,504,521)       (150,338)     (2,739,378)     (9,093,269)     (7,521,536)           --
Foreign currency
 translations .........         23,347            --              --            23,347            --              --
                          ------------    ------------    ------------    ------------    ------------    ------------
Balance as of
 December 31, 2003 ....      8,582,845            --              --              --              --         8,582,845
Activities for the year           --              --              --              --              --              --
                          ------------    ------------    ------------    ------------    ------------    ------------
Balance as of
 December 31, 2004 ....   $  8,582,845    $       --      $       --      $       --      $       --      $  8,582,845
                          ============    ============    ============    ============    ============    ============
</TABLE>


IMPAIRMENT OF OTHER ASSETS

On June 28, 2000, we signed an exclusive  production agreement with Manufactures
Cheja ("Cheja") through February 2002. We had agreed on a new contract to extend
the agreement for an additional quantity of 6.4 million units beginning April 1,
2002,  which was  amended on  November  8, 2002,  for the  manufacturing  of 5.7
million units through September 30, 2004. In June 2003, we determined that we no
longer expected to recoup advances to Cheja related to the production agreement.
In June 2003, we wrote off $2.8 million of remaining advances to Cheja.

8.       DEBT

Debt consists of the following:

                                                           DECEMBER 31,
                                                 ------------------------------
                                                     2003              2004
                                                 ------------      ------------

Short-term bank borrowings:
  Import trade bills payable - UPS, DBS
     Bank and Aurora Capital ...............     $  3,113,030      $  3,902,714
  Bank direct acceptances - UPS and DBS
     Bank ..................................       12,660,945        10,447,855
  Other Hong Kong credit facilities -
     UPS and DBS Bank ......................       11,375,363         3,600,588
  Other Mexican credit facilities ..........        2,143,985              --
                                                 ------------      ------------
                                                 $ 29,293,323      $ 17,951,157
                                                 ============      ============

Long-term debt:
  Vendor financing .........................     $  3,971,490      $    135,145
  Equipment financing ......................        3,710,355            78,038
  Term loan - UPS ..........................             --           5,000,000
  Debt facility - GMAC .....................       31,611,667        16,960,064
                                                 ------------      ------------
                                                   39,293,512        22,173,247
  Less current portion .....................      (38,705,240)      (19,628,701)
                                                 ------------      ------------
                                                 $    588,272      $  2,544,546
                                                 ============      ============


IMPORT TRADE BILLS PAYABLE,  BANK DIRECT  ACCEPTANCES AND OTHER HONG KONG CREDIT
FACILITIES

On June 13,  2002,  we entered  into a letter of credit  facility of $25 million
with UPS Capital Global Trade Finance Corporation ("UPS").  Under this facility,
we may  arrange  for the  issuance  of letters of credit  and  acceptances.  The
facility  is  collateralized  by  the  shares  and  debentures  of  all  of  our
subsidiaries  in Hong Kong.  In addition to the  guarantees  provided by Tarrant
Apparel  Group and our  subsidiaries,  Fashion  Resource  (TCL) Inc. and Tarrant
Luxembourg  Sarl,  Gerard  Guez,  our  Chairman,  also signed a guarantee  of $5
million in favor of UPS to secure this


                                      F-20
<PAGE>


facility.  This facility bears interest at 6.25% per annum at December 31, 2004.
Under this facility, we are subject to certain restrictive covenants,  including
that we  maintain a  specified  tangible  net worth,  fixed  charge  ratio,  and
leverage  ratio.  On December 31, 2004, we amended the letter of credit facility
with UPS to reduce the maximum  amount of  borrowings  under the facility to $15
million and extend the expiration  date of the facility to June 30, 2005.  Under
the amended letter of credit facility,  we are subject to restrictive  financial
covenants of maintaining  tangible net worth of $22 million at December 31, 2004
and March 31,  2005 and $25  million as of the last day of each  fiscal  quarter
thereafter.  There is also a provision capping maximum capital  expenditures per
quarter of  $800,000.  As of December 31, 2004,  $12.6  million was  outstanding
under this  facility  with UPS  (classified  above as follows:  $1.1  million in
import trade bills  payable;  $9.8 million in bank direct  acceptances  and $1.7
million  in other Hong Kong  facilities)  and an  additional  $1.3  million  was
available for future  borrowings.  In addition,  $1.1 million of open letters of
credit was outstanding as of December 31, 2004.

Since March 2003, DBS Bank (Hong Kong) Limited (formerly known as Dao Heng Bank)
has  made  available  a  letter  of  credit  facility  of up to HKD  20  million
(equivalent  to US $2.6  million) to our  subsidiaries  in Hong Kong.  This is a
demand  facility and is secured by the pledge of our office  property,  which is
owned by Gerard Guez, our Chairman and Todd Kay, our Vice  Chairman,  and by our
guarantee.  The  letter of  credit  facility  was  increased  to HKD 30  million
(equivalent  to US$3.9  million) in June 2004.  As of December  31,  2004,  $3.4
million was outstanding under this facility.  In addition,  $1.4 million of open
letters of credit was  outstanding  as of December 31, 2004.  In October 2004, a
tax loan  for HKD  7.725  million  (equivalent  to US  $977,000)  was also  made
available to our Hong Kong subsidiaries.  As of December 31, 2004,  $916,000 was
outstanding under this loan.

As of December 31, 2004, the total balance outstanding under the DBS Bank credit
facilities  were $4.3  million  (classified  above as follows:  $1.8  million in
import trade payable; $.6 million in bank direct acceptances and $1.9 million in
other Hong Kong facilities).

From time to time, we open letters of credit under an uncommitted line of credit
from  Aurora  Capital  Associates  who issues  these  letters of credits  out of
Israeli  Discount  Bank. As of December 31, 2004,  $1.0 million was  outstanding
under this facility (classified above under import trade bills payable) and $7.5
million of letters of credit were open under this  arrangement.  This letters of
credits  arrangement  is  charged a  commission  fee of 2.25% on all  letters of
credits issued.

OTHER MEXICAN CREDIT FACILITIES

Tarrant  Mexico  S. de R.L.  de C.V.,  Famian  division  was  indebted  to Banco
Nacional de Comercio  Exterior  SNC  pursuant  to a credit  facility  assumed by
Tarrant Mexico following its merger with Grupo Famian.  We paid off this loan in
the third quarter of 2004.

VENDOR FINANCING

During 2000, we financed equipment  purchases for a manufacturing  facility with
certain vendors. A total of $16.9 million was financed with five-year promissory
notes,  which  bear  interest  ranging  from 7.0% to 7.5%,  and are  payable  in
semiannual  payments  commencing in February 2000. Of this amount,  $135,000 was
outstanding  as of December  31,  2004.  All of the $135,000 was payable in U.S.
dollars  and the debt was paid off in February  2005.  A portion of the debt was
denominated in Euros.  Unrealized  transaction  (loss) gain  associated with the
debt  denominated in Euros totaled $(1.0)  million,  $(561,000) and $367,000 for
the years ended December 31, 2002,  2003 and 2004,  respectively.  These amounts
were  recorded  in  other  income  (expense)  in the  accompanying  consolidated
statements of operations.

EQUIPMENT FINANCING

We had an equipment  loan with an initial  borrowing  of $16.25  million from GE
Capital Leasing ("GE Capital"),  which was scheduled to mature in November 2005.
The loan was  secured  by  equipment  located in Puebla  and  Tlaxcala,  Mexico.
Interest  accrued at a rate of 2.5% over  LIBOR.  Under this  facility,  we were
subject to covenants on tangible net worth of $30 million, leverage ratio of not
more than two times at the end of each  financial  year,  and no losses  for two
consecutive quarters. We paid off this loan in the third quarter of 2004.


                                      F-21
<PAGE>


We also had an  equipment  loan of $5.2  million  from Bank of  America  Leasing
("BOA"). In October 2003, we paid off the BOA facility in its entirety.

We also had two  equipment  loans  outstanding  at December  31,  2004  totaling
$78,000 bearing interest at 6% payable in installments through 2009.

TERM LOAN - UPS

On December 31, 2004,  our Hong Kong  subsidiaries  also entered into a new loan
agreement  with UPS  pursuant  to which UPS made a $5  million  term  loan,  the
proceeds  of which  were used to repay $5 million  of  indebtedness  owed to UPS
under the letter of credit of facility. The principal amount of this loan is due
and payable in 24 equal monthly  installments  of  approximately  $208,333 each,
plus  interest  equivalent to the "prime rate" plus 2% commencing on February 1,
2005.  Under  the  loan  agreement,  we are  subject  to  restrictive  financial
covenants of maintaining  tangible net worth of $22 million at December 31, 2004
and March 31,  2005 and $25  million as of the last day of each  fiscal  quarter
thereafter.  There is also a provision  capping maximum capital  expenditure per
quarter at $800,000.  As of December 31, 2004,  we were in  compliance  with the
covenants.  The obligations  under the loan agreement are  collateralized by the
same  security  interests  and  guarantees  as the  letter of  credit  facility.
Additionally,  the term loan is  secured  by two  promissory  notes  payable  to
Tarrant Luxembourg Sarl in the amounts of $2,550,000 and $1,360,000 and a pledge
by  Gerard  Guez of 4.6  million  shares  of our  common  stock  to  secure  the
obligations.

DEBT FACILITY- GMAC

We were previously party to a revolving credit, factoring and security agreement
(the "Debt  Facility")  with GMAC  Commercial  Credit,  LLC ("GMAC").  This Debt
Facility  provided a revolving  facility of $90  million,  including a letter of
credit  facility  not to exceed  $20  million,  and was  scheduled  to mature on
January 31, 2005.  The Debt  Facility  also provided a term loan of $25 million,
which was being repaid in monthly  installments  of $687,500.  The Debt Facility
provided  for  interest  at LIBOR plus the LIBOR rate margin  determined  by the
Total  Leverage  Ratio (as  defined in the Debt  Facility  agreements),  and was
collateralized  by our  receivables,  intangibles,  inventory  and various other
specified  non-equipment  assets.  In May 2004, the maximum  facility amount was
reduced to $45 million in total and we established new financial  covenants with
GMAC for the fiscal year of 2004.

On October 1, 2004, we amended and restated the Debt Facility  dated January 21,
2000 by and among us, our subsidiaries,  TagMex, Inc. Fashion Resource (TCL) Inc
and United Apparel  Ventures,  LLC and GMAC. The amended and restated  agreement
(the  Factoring  agreement)  extended  the  expiration  date of the  facility to
September 30, 2007 and added as parties our subsidiaries Private Brands, Inc and
No! Jeans,  Inc. In addition,  in connection with the factoring  agreement,  our
indirect majority-owned subsidiary, PBG7, LLC. entered into a separate factoring
agreement with GMAC.  Pursuant to the terms of the factoring  agreement,  we and
our subsidiaries agree to assign and sell to GMAC, as factor, all accounts which
arise from the Tarrant  Parties'  sale of  merchandise  or  rendition of service
created on a going forward basis. At Tarrant's request, GMAC, in its discretion,
may make  advances  to Tarrant  Parties up to the lesser of (a) up to 90% of our
accounts on which GMAC has the risk of loss and (b) forty million dollars, minus
in each case,  any amount  owed to GMAC by any  Tarrant  Party.  Pursuant to the
terms of the PBG7 factoring  agreement,  PBG7 agreed to assign and sell to GMAC,
as  factor,  all  accounts,  which  arise from  PBG7's  sale of  merchandise  or
rendition of services created on a going-forward basis. At PBG7's request, GMAC,
in its  discretion,  may make advances to PBG7 up to the lesser of (a) up to 90%
of PBG7's  accounts  on which  GMAC has the risk of loss,  and (b) five  million
minus in each case,  any  amounts  owed to GMAC by PBG7.  Under  both  factoring
agreement,  any amounts,  which GMAC advances in excess of the purchase price of
the relevant  accounts,  are  considered  to be loans and are  chargeable to the
Tarrant  Parties' or PBG7's when paid. Each of the parties only become obligated
to GMAC for a direct  financial  obligation  in the event  that  GMAC  makes and
advance in excess of the purchase price of the relevant  accounts,  and any such
obligations are payable on demand.  This facility bears interest at 6% per annum
at December 31, 2004. Restrictive covenants under the revised facility include a
limit on  quarterly  capital  expenses of $800,000 and tangible net worth of $20
million at September  30,  2004,  $22 million at December 31, 2004 and March 31,
2005 and $25 million at the end of each fiscal quarter  thereafter  beginning on
June 30,  2005.  As of  December  31,  2004 we were in  compliance  with the new
tangible net worth and capital expense  covenants.  A total of $17.0 million was
outstanding under the GMAC facility at December 31, 2004.


                                      F-22
<PAGE>


The  credit   facility  with  GMAC  and  the  credit  facility  with  UPS  carry
cross-default  clauses.  A breach  of a  financial  covenant  set by GMAC or UPS
constitutes an event of default under the other credit facility,  entitling both
financial  institutions  to demand  payment in full of all  outstanding  amounts
under their respective debt and credit facilities.

Annual  maturities for the long-term  debt,  convertible  debentures and capital
lease obligations are $19,628,701 (2005), $2,512,726 (2006), $10,013,512 (2007),
$14,345  (2008),  and $3,963 (2009).  The effective  interest rate on short-term
bank borrowing as of December 31, 2002,  2003 and 2004 were 4.1%, 5.3% and 5.7%,
respectively.

GUARANTEES

Guarantees have been issued since 2001 in favor of YKK, Universal Fasteners, and
RVL Inc. for $750,000, $500,000 and unspecified amount,  respectively,  to cover
trim  purchased  by Tag-It  Pacific  Inc. on our behalf.  We have not reported a
liability for these guarantees. We issued the guarantees to cover trim purchased
by Tag-It in order to ensure our production in a timely  manner.  If Tag-It ever
defaults, we would have to pay the outstanding liability due to these vendors by
Tag-It for purchases made on our behalf.  We have not had to perform under these
guarantees since inception.  It is not predictable to estimate the fair value of
the  guarantee;  however,  we do not  anticipate  that we will incur losses as a
result of these  guarantees.  As of December 31, 2004,  Tag-It  Pacific Inc. had
approximately $205,000 due to RVL Inc. and $18,000 due to Universal Fasteners.

9.       CONVERTIBLE DEBENTURES AND WARRANTS

On December 14, 2004, we completed a $10 million  financing through the issuance
of (i) 6% Secured  Convertible  Debentures  ("Debentures")  and (ii) warrants to
purchase up to 1,250,000  shares of our common  stock.  Prior to  maturity,  the
investors may convert the Debentures  into shares of our common stock at a price
of $2.00 per share. The warrants have a term of five years and an exercise price
of $2.50 per share. The warrants were valued at $866,000 using the Black-Scholes
option valuation model with the following  assumptions:  risk-free interest rate
of 4%; dividend yields of 0%; volatility factors of the expected market price of
our common stock of 0.55;  and an expected  life of four years.  The  Debentures
bear  interest at a rate of 6% per annum and have a term of three years.  We may
elect to pay interest on the Debentures in shares of our common stock if certain
conditions are met,  including a minimum market price and trading volume for our
common stock.  The closing  market price of our common stock on the closing date
of the  financing  was  $1.96.  The  convertible  debenture  was thus  valued at
$8,996,000,  resulting in an effective conversion price of $1.799 per share. The
intrinsic value of the conversion option of $804,000 is being amortized over the
life of the loan. The value of the warrants of $866,000 and the intrinsic  value
of the conversion  option of $804,000 were netted from the $10 million presented
as the convertible debentures, net on our accompanying balance sheets.

The  Debentures  contain  customary  events of default  and  permit the  holders
thereof to accelerate  the maturity if the full principal  amount  together with
interest and other amounts owing upon the  occurrence of such events of default.
Additionally,  upon a holder's election to accelerate  payment, we are obligated
to pay 120% of the principal amount of the Debenture plus all accrued and unpaid
interest thereon,  or, in the absence of certain conditions,  the greater of the
preceding  amount and the amount  such  holder  would  receive  had such  holder
converted  the  Debenture  and sold the  underlying  shares at the then  current
market price.  The Debentures  are secured by a subordinated  lien on certain of
our accounts receivable and related assets.

The placement agent in the financing, for its services was paid $620,000 in cash
and issued five year  warrants  to  purchase up to 200,000  shares of our common
stock at an exercise price of $2.50 per share.  The 200,000 warrants were valued
at $138,000 using the  Black-Scholes  option  valuation model with the following
assumptions:  risk-free  interest rate of 4%; dividend yields of 0%;  volatility
factors  of the  expected  market  price of our  common  stock  of 0.55;  and an
expected life of four years.  The $620,000  financing cost paid to the placement
agent and the value of the  200,000  warrants of  $138,000  are  included in the
deferred  financing  cost,  net on  our  accompanying  balance  sheets  and  are
amortized over the life of the loan.


                                      F-23
<PAGE>


10.      INCOME TAXES

The provision (credit) for domestic and foreign income taxes is as follows:

                                            YEAR ENDED DECEMBER 31,
                              -------------------------------------------------
                                  2002               2003               2004
                              -----------        -----------        -----------
Current:
  Federal .............       $  (307,684)       $ 2,400,000        $ 1,000,000
  State ...............           293,055           (241,948)             8,511
  Foreign .............         1,162,798          2,106,199          1,400,953
                              -----------        -----------        -----------

                                1,148,169          4,264,251          2,409,464
Deferred:
  Federal .............              --                 --                 --
  State ...............              --                 --                 --
  Foreign .............           (97,151)          (132,622)           (61,345)
                              -----------        -----------        -----------
                                  (97,151)          (132,622)           (61,345)
                              -----------        -----------        -----------

    Total .............       $ 1,051,018        $ 4,131,629        $ 2,348,119
                              ===========        ===========        ===========


The  source of loss  before the  provision  for taxes and  cumulative  effect of
accounting change is as follows:

                                           YEAR ENDED DECEMBER 31,
                            ---------------------------------------------------
                                 2002               2003               2004
                            -------------      -------------      -------------

Federal ...............     $ (11,061,937)     $ (18,609,818)     $ (14,271,441)
Foreign ...............        10,898,918        (13,143,213)       (88,057,111)
                            -------------      -------------      -------------

         Total ........     $    (163,019)     $ (31,753,031)     $(102,328,552)
                            =============      =============      =============


Our effective tax rate differs from the statutory  rate  principally  due to the
following reasons: (1) A full valuation allowance has been provided for deferred
tax assets as a result of the operating  losses in the United States and Mexico,
since  recoverability  of those assets has not been assessed as more likely than
not; (2) Although we have taxable  losses in Mexico,  it is subject to a minimum
tax;  and (3) The  earnings of our Hong Kong  subsidiary  are taxed at a rate of
17.5% versus the 35% U.S. federal rate. The impairment  charge in Mexico did not
result in a tax benefit due to an increase in the  valuation  allowance  against
the future tax  benefit.  We  believe  it is more  likely  than not that the tax
benefit will not be realized based on our future business plans in Mexico.

A reconciliation of the statutory federal income tax provision  (benefit) to the
reported tax provision (benefit) on income is as follows:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                --------------------------------------------
                                                    2002            2003            2004
                                                ------------    ------------    ------------
<S>                                             <C>             <C>             <C>
Income tax (benefit) based on federal
   statutory rate ...........................   $ (1,761,992)   $(11,113,561)   $(35,814,993)
State income taxes, net of federal benefit ..        190,486        (157,266)          5,532
Effect of foreign income taxes ..............      1,162,798       2,862,550       2,749,376
Nondeductible goodwill impairment ...........           --         4,141,426            --
Nondeductible impairment of long-lived assets           --              --        30,463,663
Increase in tax reserve .....................           --         2,400,000       1,000,000
Increase in valuation allowance
   and other ................................      1,459,726       5,998,480       3,944,541
                                                ------------    ------------    ------------

                                                $  1,051,018    $  4,131,629    $  2,348,119
                                                ============    ============    ============
</TABLE>


                                      F-24
<PAGE>


Deferred income taxes reflect the net effects of temporary  differences  between
the carrying amounts of assets and liabilities for financial  reporting purposes
and the amounts  used for income tax  purposes.  Significant  components  of the
deferred tax assets (liabilities) are as follows:

                                                            DECEMBER 31,
                                                   ----------------------------
                                                       2003            2004
                                                   ------------    ------------

Deferred tax assets:
   Provision for doubtful accounts and
      unissued credits .........................   $  1,149,051    $    433,261
   Provision for other reserves ................      2,711,566       1,533,620
   Domestic and foreign loss carry forwards
      and foreign tax credits ..................      2,050,179       9,789,485
   Deferred compensation and benefits ..........        197,486               0
   Goodwill impairment .........................      4,422,837       2,719,294
                                                   ------------    ------------
      Total deferred tax assets ................     10,531,119      14,475,660

Deferred tax liabilities:
   Other .......................................       (275,129)       (213,784)
                                                   ------------    ------------
                                                       (275,129)       (213,784)
Valuation allowance for deferred tax assets ....    (10,531,119)    (14,475,660)
                                                   ------------    ------------

Net deferred tax liabilities ...................   $   (275,129)   $   (213,784)
                                                   ============    ============


At  December  31,  2004,  we have $18.8  million of federal net  operating  loss
carryforwards  expiring in 2029. We also have foreign tax credits  carryforwards
totaling $824,000 that do not expire.

In January 2004, the Internal Revenue Service ("IRS")  completed its examination
of our Federal  income tax returns for the years ended December 31, 1996 through
2001.  The IRS has proposed  adjustments  to increase our income tax payable for
the six years under examination. In addition, in July 2004, the IRS initiated an
examination  of our Federal  income tax return for the year ended  December  31,
2002. In March 2005,  the IRS proposed an  adjustment  to our taxable  income of
approximately $6 million related to similar issues  identified in their audit of
the 1996 through 2001 federal  income tax returns.  The proposed  adjustments to
our 2002 federal  income tax return would not result in  additional  tax due for
that year due to the tax loss reported in the 2002 federal return.  However,  it
could reduce the amount of net  operating  losses  available to offset taxes due
from the preceding tax years.  This  adjustment  would also result in additional
state taxes and interest.  We believe that we have  meritorious  defenses to and
intend  to  vigorously  contest  the  proposed  adjustments.   If  the  proposed
adjustments are upheld through the administrative and legal process,  they could
have a  material  impact on our  earnings  and cash  flow.  We  believe  we have
provided  adequate  reserves for any reasonably  foreseeable  outcome related to
these matters on the  consolidated  balance sheets included in the  Consolidated
Financial  Statements  under the caption "Income  Taxes".  The maximum amount of
loss in  excess of the  amount  accrued  in the  financial  statements  is $12.6
million.  We do not believe that the  adjustments,  if any, arising from the IRS
examination,  will result in an additional  income tax liability  beyond what is
recorded in the accompanying consolidated balance sheets.


                                      F-25
<PAGE>


11.      COMMITMENTS AND CONTINGENCIES

We  have  entered  into  various  non-cancelable   operating  lease  agreements,
principally  for  executive  office,   warehousing   facilities  and  production
facilities with unexpired  terms in excess of one year.  Certain of these leases
provided for scheduled rent increases. We record rent expense on a straight-line
basis over the term of the lease.  The future minimum lease payments under these
non-cancelable operating leases are as follows:

2005.....................................................      $   267,106
2006.....................................................          181,642
2007.....................................................          118,516
2008.....................................................               --
2009.....................................................               --
Thereafter...............................................               --
                                                               -----------

      Total future minimum lease payments................      $   567,264
                                                               ===========

Several of the operating  leases contain  provisions  for additional  rent based
upon increases in the operating costs, as defined, per the agreement. Total rent
expense  under  the  operating  leases  amounted  to  approximately  $3,166,000,
$3,101,000 and $2,128,000 for 2002, 2003 and 2004, respectively.

We had open letters of credit of  $15,458,000,  $5,976,000  and $9,987,000 as of
December 31, 2002, 2003 and 2004, respectively.

We have two  employment  contracts  dated  January  1, 1998 with two  executives
providing  for base  compensation  and other  incentives.  On April 1, 2004,  we
amended each of these  contracts to extend the term through March 31, 2006,  and
to provide one  contract  for base  salary per annum of $500,000  for the period
from April 1, 2003 to March 31, 2006, and the other contract for base salary per
annum of $50,000 from April 1, 2003 to March 31, 2006.  Additionally,  we agreed
to pay each of these  executives an annual bonus (the "Annual Bonus") for fiscal
years ended December 31, 2003, 2004 and 2005 in an amount,  if any, equal to ten
percent (10%) of the amount by which our actual  pre-tax  income for such fiscal
year  exceeds  the amount of  projected  pre-tax  income set forth in our annual
budget  for the same  fiscal  year as  approved  by our Board of  Directors.  No
bonuses  were paid to these  executives  for the fiscal year ended  December 31,
2003 and 2004.

On October 17, 2004, Private Brands,  Inc, our wholly owned subsidiary,  entered
into a term sheet exclusive  licensing  agreement with J. S. Brand Management to
design,  manufacture  and distribute  Jessica  Simpson  branded jeans and casual
apparel in missy,  juniors  and large  sizes.  This  agreement  is a  three-year
contract,  and providing  compliance with all terms of the license, is renewable
for one additional  two-year term.  Minimum net sales are $20 million in year 1,
$25 million in year 2 and $30  million in year 3. The  agreement  also  provides
payment  of sales  royalty  and  advertising  royalty  at the rate of 8% and 3%,
respectively,  based on net sales;  the total  commitment on royalties  over the
term is $8.3 million.  As of December 31, 2004, we have advanced $2.2 million as
payment for the first year's minimum royalties.

In the second quarter of 2003, we acquired a 45% equity interest in the owner of
the trademark  "American Rag CIE" and the operator of American Rag retail stores
for $1.4 million,  and our subsidiary,  Private Brands, Inc., acquired a license
to certain exclusive rights to this trademark. We have guaranteed the payment to
the licensor of minimum royalties of $10.4 million over the initial 10-year term
of the  agreement.  At December  31,  2004,  the total  commitment  on royalties
remaining on the term was $9.6 million.

On October 16, 2003, we entered into a lease with affiliates of Mr. Kamel Nacif,
a substantial  portion of our manufacturing  facilities and operations in Mexico
including real estate and equipment.  The lease was effective as of September 1,
2003.  We leased our twill mill in  Tlaxcala,  Mexico,  and our sewing  plant in
Ajalpan,  Mexico,  for a period of 6 years and for an annual  rental  fee of $11
million.  Mr. Nacif was a stockholder at the time of transaction.  In connection
with this  transaction,  we also entered into a  management  services  agreement
pursuant to which Mr. Nacif's  affiliates managed the operation of our remaining
facilities in Mexico in exchange for use of the remaining  facilities.  The term
of  the  management  services  agreement  was  also  for a  period  of 6  years.
Additionally,  we agreed  to  purchase  annually,  six  million  yards of fabric
manufactured at the facilities leased and/or operated by Mr. Nacif's  affiliates
at market  prices to be  negotiated.  See Note 15 of the "Notes to  Consolidated
Financial  Statements."  Using current  market prices,  the purchase  commitment
would be approximately $18 million per year.


                                      F-26
<PAGE>


In  connection  with  the  restructuring  of our  Mexican  operations,  and  the
resulting  reduction in our Mexican work force, we became the target of workers'
rights activists who have picketed our customers,  stuffed electronic  mailboxes
with inaccurate,  protest e-mails, and threatened customers with retaliation for
continuing  business  with  us.  While  we have  defended  our  position  to our
customers, some of our larger customers for Mexico-produced jeans wear have been
reluctant to place orders with us in response to actions taken and  contemplated
by these activist  groups.  As a consequence of these actions,  we experienced a
significant  decline in  revenue  of  approximately  $75  million  from sales of
Mexico-produced merchandise in 2004 as compared to 2003.

In August  2004,  we entered  into an  Agreement  for  Purchase  of Assets  with
affiliates  of Mr. Kamel Nacif,  a shareholder  at the time of the  transaction,
with  agreement  was  amended in October  2004.  Pursuant to the  agreement,  as
amended,  on November 30, 2004, we sold to the purchasers  substantially  all of
our assets and real property in Mexico,  including the equipment and  facilities
we previously leased to Mr. Nacif's  affiliates.  Upon consummation of the sale,
we entered into a purchase commitment agreement with the purchasers, pursuant to
which  we have  agreed  to  purchase  annually  over  the  ten-year  term of the
agreement,  $5 million of fabric  manufactured at our former facilities acquired
by the  purchasers at  negotiated  market  prices.  This  agreement  replaced an
existing purchase commitment  agreement with Mr. Nacif's  affiliates.  In August
2004,  upon  entering  into an  Agreement  for Purchase of Assets,  Mr.  Nacif's
affiliates agreed to suspend our fabric purchase  obligations under the existing
purchase  commitment,  and we agreed to suspend the  affiliates  of Mr.  Nacif's
lease  payment  obligations  under the lease  agreements  pursuant  to which Mr.
Nacif's affiliates operated our manufacturing  facilities in Mexico. See Note 15
of the "Notes to Consolidated Financial Statements."

We are involved  from time to time in routine  legal  matters  incidental to our
business.  In our opinion,  resolution  of such matters will not have a material
effect on our financial position or results of operations.

12.      EQUITY

We have adopted the disclosure  provisions of Statement of Financial  Accounting
Standards  ("SFAS")  No.  148,   "Accounting  for  Stock-Based   Compensation  -
Transition  and  Disclosure,"  an  amendment  of FASB  Statement  No. 123.  This
pronouncement   requires  prominent  disclosures  in  both  annual  and  interim
financial statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on reported  results.  We account
for stock  compensation  awards under the  intrinsic  value method of Accounting
Principles Board ("APB") Opinion No. 25, rather than the alternative  fair-value
accounting method.  Under the  intrinsic-value  method, if the exercise price of
the employee's  stock options equals the market price of the underlying stock on
the date of the grant, no compensation expense is recognized.

Our Employee Incentive Plan, formerly the 1995 Stock Option Plan, as amended and
restated in May 1999 (the Plan),  has authorized the grant of both incentive and
non-qualified stock options to officers, employees, directors and consultants of
the Company for up to 5,100,000  shares (as adjusted for a stock split effective
May 1998) of our common stock.  The exercise price of incentive  options must be
equal to 100% of fair market  value of common stock on the date of grant and the
exercise price of non-qualified options must not be less than the par value of a
share of common stock on the date of grant.  The Plan was also amended to expand
the types of awards,  which may be  granted  pursuant  thereto to include  stock
appreciation rights,  restricted stock and other performance-based  benefits. At
December 31, 2004, the Plan has 2,918,038 options available for future grant.

In October 1998, we granted 1,000,000  non-qualified stock options not under the
Plan.  The options were granted to our Chairman and Vice  Chairman at $13.50 per
share,  the closing sales price of the common stock on the day of the grant. The
options  expire in 2008 and vest  over  four  years.  In May  2002,  we  granted
3,000,000  non-qualified  stock  options not under the Plan.  The  options  were
granted to our  Chairman,  Vice Chairman and Mr. Kamel Nacif at $5.50 per share,
the closing sales price of the common stock on the day of the grant. The options
expire in 2012 and vest over three  years.  In May 2003,  we  granted  2,000,000
non-qualified  stock  options  not  under  the  Plan to our  Chairman  and  Vice
Chairman.  The options were granted at $3.65 per share,  the closing sales price
of the common stock on the day of the grant. The options expire in 2013 and vest
over four years.  In  December  2003,  we granted  400,000  non-qualified  stock
options not under the Plan to our  President.  The options were granted at $3.94
per share,  the closing sales price of the common stock on the day of the grant.
The options expire in 2013 and vest over four years.


                                      F-27
<PAGE>


A summary of our stock option activity, and related information is as follows:

<TABLE>
<CAPTION>
                                  2002                   2003                   2004
                          ---------------------  ---------------------  ---------------------
                                       WEIGHTED               WEIGHTED               WEIGHTED
                                       AVERAGE                AVERAGE                AVERAGE
                                       EXERCISE               EXERCISE               EXERCISE
                           OPTIONS      PRICE     OPTIONS      PRICE     OPTIONS      PRICE
                          ---------    --------  ---------    --------  ---------    -------
<S>                       <C>          <C>       <C>          <C>       <C>          <C>
Options outstanding at
   beginning of year .    3,520,737    $11.90    6,376,487    $ 8.89    8,926,087    $ 7.13
      Granted ........    3,004,000      5.50    3,288,100      3.67       83,000      3.04
      Exercised ......       (5,500)     4.39         --        --           --        --
      Forfeited ......     (142,750)    12.14     (738,500)     6.91     (677,125)     5.43
                          ---------              ---------              ---------

Outstanding at end of
   year ..............    6,376,487    $ 8.89    8,926,087    $ 7.13    8,331,962    $ 7.22
                          =========              =========              =========

Exercisable at end of
   year ..............    3,535,487    $11.35    4,028,487    $10.56    5,251,250    $ 9.04
Weighted average per
   option fair value
   of options granted
   during the year ...                 $ 2.89                 $ 1.92                 $ 1.36
</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 2004:

                              OPTIONS OUTSTANDING          OPTIONS EXERCISABLE
                  ------------------------------------   -----------------------
                                 WEIGHTED
                                  AVERAGE     WEIGHTED                  WEIGHTED
                                 REMAINING    AVERAGE                   AVERAGE
                     NUMBER     CONTRACTUAL   EXERCISE      NUMBER      EXERCISE
 EXERCISE PRICE   OUTSTANDING      LIFE        PRICE     EXERCISABLE     PRICE
--------------------------------------------------------------------------------
$ 1.39 - $ 3.60      374,350        9.0      $  3.41         86,138    $  3.53
$ 3.65 - $ 3.68    2,255,000        8.4         3.65        625,000       3.65
$ 3.94 - $ 5.09      896,612        7.5         4.37        441,612       4.82
$ 5.50             2,754,000        7.3         5.50      2,002,000       5.50
$ 5.55 - $ 9.97      474,500        3.5         7.02        444,000       7.09
$13.50 - $15.50    1,011,000        3.7        13.51      1,011,000      13.51
$18.44 - $18.50       23,000        3.7        18.50         23,000      18.50
$25.00               500,000        4.3        25.00        500,000      25.00
$33.13 - $39.97       41,500        4.2        39.31         41,500      39.31
$45.50                 2,000        4.3        45.50          2,000      45.50
                  ----------                             ----------

$ 1.39 - $45.50    8,331,962        6.8      $  7.22      5,176,250    $  9.11
                  ==========                             ==========


13.      EQUITY TRANSACTIONS

In  connection  with the twill mill  acquisition  in  December  2002,  we issued
100,000  Series  A  Convertible  Preferred  Shares  ("Preferred  Shares").   The
Preferred  Shares accrue dividends at an annual rate of 7% of the initial stated
value of $88.20 per share and have no voting rights.  The Shares issued had been
converted  into  3,000,000  shares of common stock at the annual meeting held on
May 28, 2003 in accordance  with the original  conversion  terms. We granted the
holder of the shares of common stock  issuable upon  conversion of the Preferred
Shares  "piggyback"  registration  rights,  which provide such holder the right,
under certain circumstances, to have such shares registered for resale under the
Securities  Act  of  1933.  In the  event  of our  liquidation,  dissolution  or
winding-up,  the  Preferred  Shares  were  entitled  to  receive,  prior  to any
distribution  on the common stock,  a  distribution  equal to the initial stated
value of the Preferred Shares plus all accrued and unpaid dividends.


                                      F-28
<PAGE>


In  October  2003,  we sold an  aggregate  of  881,732  shares  of the  Series A
Convertible  Preferred  Stock,  at $38 per  share,  to a group of  institutional
investors   and  high  net  worth   individuals   and  raised  an  aggregate  of
approximately  $31 million,  after payment of commissions and expenses.  We used
the  proceeds  of this  offering  to pay down  vendors  and  reduce  debts.  The
preferred stock was convertible  into shares of our common stock at an effective
price of $3.80 per share.  The closing  price of our stock was $4.65 on the date
of issuance.  The preferred  stock was converted  into an aggregate of 8,817,320
shares of common  stock  following  a special  meeting of  shareholders  held on
December 4, 2003 in accordance with the original conversion terms. The intrinsic
value of the conversion feature of the Series A Convertible  Preferred Stock was
approximately  $7.5 million and has been  recorded as a return to the  preferred
shareholders  over the period from the date of issuance through December 4, 2003
(the earliest date of conversion).  The return to the preferred shareholders has
been  reflected  in the  accompanying  statement  of  stockholders'  equity as a
reduction  of retained  earnings  and a  corresponding  increase in  contributed
capital  for the year  ended  December  31,  2003.  See Note 22 of the "Notes to
Consolidated Financial Statements."

We have  registered  the shares of common  stock issued upon  conversion  of the
Series A Preferred Stock with the Securities and Exchange  Commission for resale
by the investors.  In conjunction  with the private  placement  transaction,  we
issued a warrant to purchase  881,732  shares of common  stock to the  placement
agent. The warrants are exercisable beginning April 17, 2004 through October 17,
2008 and have a per share  exercise  price of $4.65.  Warrants were valued using
the  Black-Scholes  option  valuation  model  with  the  following  assumptions:
risk-free  interest rate of 4%; dividend yields of 0%; volatility factors of the
expected  market price of our common stock of 0.51; and an expected life of four
years.

In November  2003,  we issued an aggregate of 200,000  shares of common stock to
Antonio  Haddad Haddad,  Miguel Angel Haddad Yunes,  Mario Alberto Haddad Yunes,
and  Marco  Antonio  Haddad  Yunes  in  partial  settlement  of the  balance  of
approximately  $2.5 million in obligations  owed these parties  arising from our
acquisition  of their  factories  in 1998.  The fair value of the  common  stock
issued on the date of issuance was $3.94 per share,  resulting in a reduction of
our obligation by $788,000.  Each of these investors  represented to us that the
investor  was an  "accredited  investor"  within  the  meaning  of  Rule  501 of
Regulation  D under  the  Securities  Act of 1933,  and that  the  investor  was
purchasing  the  securities  for  investment  and  not  in  connection   with  a
distribution  thereof. The issuance and sale of the common stock was exempt from
the  registration  and prospectus  delivery  requirements  of the Securities Act
pursuant to Section 4(2) of the  Securities  Act and  Regulation  D  promulgated
thereunder as a transaction not involving any public offering.

During the year of 2003,  we retired a total of 248,872  shares of common  stock
relating  to  shares   repurchased  but  uncancelled   before  2001  and  shares
repurchased  this year from Gabe Zeitouni,  upon exercising his put option under
an agreement dated July 10, 2000.

In January 2004, we sold an aggregate of 1,200,000 shares of our common stock at
a price of $3.35 per share, for aggregate  proceeds to us of approximately  $3.7
million after payment of placement  agent fees and other offering  expenses.  We
used the proceeds of this offering for working capital purposes.  The securities
sold in the  offering  were  registered  under the  Securities  Act of 1933,  as
amended,  pursuant to our effective shelf registration statement. In conjunction
with this public offering,  we issued a warrant to purchase 30,000 shares of our
common stock to the placement agent. This warrant has an exercise price of $3.35
per share,  is fully vested and  exercisable  and has a term of five years.  The
warrant  was valued  using the  Black-Scholes  option  valuation  model with the
following  assumptions:  risk-free  interest rate of 3%;  dividend yields of 0%;
volatility  factors of the  expected  market  price of warrants of 0.51;  and an
expected life of four years.

In November  2003, our board of directors  adopted a  shareholders  rights plan.
Pursuant  to the plan,  we issued a dividend  of one right for each share of our
common  stock  held by  shareholders  of record as of the close of  business  on
December 12, 2003.  Each right  initially  entitled  shareholders  to purchase a
fractional share of our Series B Preferred Stock for $25.00. However, the rights
are not  immediately  exercisable  and will  become  exercisable  only  upon the
occurrence  of certain  events.  Generally,  if a person or group  acquires,  or
announces a tender or exchange offer that would result in the acquisition of 15%
or more of our common stock while the shareholder  rights plan remains in place,
then, unless the rights are redeemed by us for $0.001 per right, the rights will
become  exercisable,  by all rights  holders other than the acquiring  person or
group,  for our shares or shares of the third party  acquirer  having a value of
twice the right's  then-current  exercise price. The shareholder  rights plan is
designed to guard against  partial tender offers and other  coercive  tactics to
gain control of our company without offering a fair and adequate price and terms
to all of our shareholders.  The plan was not adopted in response to any efforts
to acquire our company, and we are not aware of any such efforts.


                                      F-29
<PAGE>


Our credit  agreement  prohibits the payment of dividends during the term of the
agreement.

14.      SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

                                                YEAR ENDED DECEMBER 31,
                                    --------------------------------------------
                                        2002             2003            2004
                                    -----------      -----------     -----------

Cash paid for interest ........     $ 2,361,000      $ 2,856,000     $ 1,796,000
                                    ===========      ===========     ===========

Cash paid (refunded) for
   income taxes ...............     $(5,086,000)     $   378,000     $ 1,196,000
                                    ===========      ===========     ===========


In 2002, we acquired  certain assets of a twill mill located in Puebla,  Mexico.
Included in the  consideration  paid were  100,000  shares of Series A Preferred
Stock valued at $8.8 million, a 25% equity stake in our wholly-owned subsidiary,
Tarrant Mexico and the  cancellation of  approximately  $56.9 million of certain
notes and accounts  receivable  due from the sellers and their  affiliates for a
total  purchase price of $87.4 million.  These non-cash  transactions  have been
excluded from the respective statements of cash flows.

In 1999, we acquired  Industrial  Exportadora  Famian from the Haddad family. In
accordance  with the  acquisition  agreement,  we had to pay  certain  amount of
earnouts to the vendors annually. As of October 31, 2003, total earnouts accrued
but not paid amounted to about $2.5 million.  In November  2003, we entered into
an  agreement  with the Haddad  family to satisfy  the amount owed by issuing to
four family members a total of 200,000 shares of common stock, with a fair value
of  $788,000.  In  addition,  we gave them  400,000  yards of our stock  fabric,
100,000  pairs of pants,  and a fleet of old  vehicles,  with an aggregate  book
value of  approximately  $1.5  million.  Included in other  income was a gain of
$236,000 resulting from this settlement in 2003.

In 2003, we reduced a shareholder  receivable  for $722,000 from Mr. Kamel Nacif
against vendor payables owed to entities controlled by Mr. Nacif.

In 2004,  as  consideration  for the sale of our  assets  and real  property  in
Mexico, we received $45.4 million of notes  receivable.  See Note 5 of "Notes to
Consolidated Financial Statements."

On December 14, 2004, we completed a $10 million  financing through the issuance
of 6% Secured  Convertible  Debentures  ("Debentures"),  we issued  warrants  to
purchase up to 1,250,000 shares of our common stock. The warrants were valued at
$866,000 using the Black-Scholes  option valuation model. The placement agent in
the financing,  for its services were paid $620,000 in cash and issued five year
warrants  to purchase  up to 200,000  shares of our common  stock at an exercise
price of $2.50 per share. The 200,000 warrants were valued at $138,000 using the
Black-Scholes option valuation model.

15.      RELATED-PARTY TRANSACTIONS

Related-party  transactions,  consisting  primarily  of  purchases  and sales of
finished goods and raw materials, are as follows:

                                                YEAR ENDED DECEMBER 31,
                                       -----------------------------------------
                                           2002           2003           2004
                                       -----------    -----------    -----------

Sales to related parties ..........    $ 4,864,000    $22,296,000    $ 3,598,000
Purchases from related parties ....    $76,231,000    $72,329,000    $17,875,000


As of December 31, 2003 and 2004,  related party  affiliates were indebted to us
in the amounts of $22.9 million and $13.1 million,  respectively.  These include
amounts due from our  shareholders  of $4.8 million and $2.5 million at December
31,  2003 and  2004,  respectively,  which  have  been  shown as  reductions  to
shareholders' equity in the accompanying  financial  statements.  Total interest
paid by related  party  affiliates,  the  Chairman  and the Vice  Chairman  were
$374,000  and  $370,000  for  the  years  ended  December  31,  2003  and  2004,
respectively.

From time to time in the past, we borrowed  funds from,  and advanced  funds to,
certain officers and principal shareholders, including Gerard Guez and Todd Kay.
The greatest outstanding balance of such advances to Mr. Guez


                                      F-30
<PAGE>


during 2004 was  approximately  $4,796,000.  At December  31,  2003,  the entire
balance due from Mr. Guez  totaling $4.8 million was reflected as a reduction of
shareholders'  equity.  In January and  February  of 2005,  Mr. Guez repaid $2.3
million of this  indebtedness.  As a result,  $2.3 million was reclassified to a
short-term  asset and included in due from related  parties in the  accompanying
consolidated  balance sheet as of December 31, 2004.  The  remaining  balance of
$2,466,000   is  payable  on  demand  and  had  been  shown  as   reductions  to
shareholders' equity as of December 31, 2004. There were no outstanding advances
from or borrowing to Mr. Kay during 2004. All advances to, and borrowings  from,
Mr. Guez bore  interest at the rate of 7.75% during the period.  Total  interest
paid by Mr. Guez was $374,000 and $370,000 for the years ended December 31, 2003
and 2004,  respectively.  Mr. Guez paid expenses on our behalf of  approximately
$456,000  and  $400,000  for  the  years  ended  December  31,  2003  and  2004,
respectively,  which  amounts  were  applied  to  reduce  accrued  interest  and
principal on Mr. Guez's loan. Since the enactment of the  Sarbanes-Oxley  Act in
2002, no further  personal loans (or amendments to existing  loans) have been or
will be made to officers or directors of Tarrant.

In February  2004, our Hong Kong  subsidiary  entered into a 50/50 joint venture
with Auto Enterprises  Limited, an unrelated third party, to source products for
Seven  Licensing  Company,  LLC and our Private  Brands  subsidiary  in mainland
China. On May 31, 2004,  after realizing an accumulated loss from the venture of
approximately  $200,000  (our share being half),  we sold our interest for $1 to
Asia Trading  Limited,  a company owned by Jacqueline Rose, wife of Gerard Guez.
The venture owed us $221,000 as of December 31, 2004.

On July 1, 2001, we formed an entity to jointly market,  share certain risks and
achieve   economics  of  scale  with  Azteca  Production   International,   Inc.
("Azteca"),  a corporation  owned by the brothers of Gerard Guez,  our Chairman,
called  United  Apparel  Ventures,  LLC  ("UAV").  This  entity  was  created to
coordinate  the  production  of apparel  for a single  customer  of our  branded
business. UAV is owned 50.1% by Tag Mex, Inc., our wholly owned subsidiary,  and
49.9% by Azteca. Results of the operation of UAV have been consolidated into our
results  since July 2001 with the  minority  partner's  share of gain and losses
eliminated through the minority interest line in our financial  statements.  Due
to the restructuring of our Mexico operations, we discontinued manufacturing for
UAV  customers  in the second  quarter  of 2004.  UAV makes  purchases  from two
related parties in Mexico, an affiliate of Azteca and Tag-It Pacific, Inc.

Since June 2003, United Apparel Venture, LLC has been selling to Seven Licensing
Company, LLC ("Seven Licensing"),  jeans wear bearing the brand "Seven7",  which
is ultimately  purchased by Express.  Seven Licensing is  beneficially  owned by
Gerard  Guez.  In the third  quarter  of 2004,  in order to  strengthen  our own
private brand  business,  we decided to discontinue  sourcing for Seven7.  Total
sales to Seven Licensing  during the years ended December 31, 2003 and 2004 were
$8.1 million and $2.6  million,  respectively.  In 1998,  a  California  limited
liability  company owned by our Chairman and Vice Chairman  purchased  2,300,000
shares of the common stock of Tag-It Pacific,  Inc. ("Tag-It") (or approximately
37% of such  common  stock  then  outstanding).  Tag-It is a  provider  of brand
identity  programs to  manufacturers  and retailers of apparel and  accessories.
Starting from 1998, Tag-It assumed the  responsibility for managing and sourcing
all trim and packaging used in connection  with products  manufactured  by or on
behalf of us in Mexico. We believe that the terms of this arrangement,  which is
subject to the  acceptance of our  customers,  are no less  favorable to us than
could be obtained from unaffiliated  third parties.  Due to the restructuring of
our  Mexico  operations,  Tag-It  no  longer  manages  our  trim  and  packaging
requirements. We purchased $23.9 million, $16.8 million and $1.0 million of trim
inventory  from Tag-It for the years ended  December  31,  2002,  2003 and 2004,
respectively.  We also  sold to Tag-It  $1.5  million  from our trim and  fabric
inventory  for the year ended  December 31, 2003.  We purchased  $37.0  million,
$37.1  million and $11.5  million of finished  goods and service from Azteca and
its  affiliates  for  the  years  ended  December  31,  2002,   2003  and  2004,
respectively.  Azteca is owned by the brothers of our Chairman, Gerard Guez, and
is the minority  member of our  subsidiary,  United Apparel  Ventures,  LLC. Our
total  sales of fabric and  service  to Azteca in 2002,  2003 and 2004 were $2.9
million, $9.9 million and $1.0 million,  respectively.  Two and one half percent
of gross sales as  management  fees were paid in 2002,  2003 and 2004 to each of
the members of UAV, per the operating agreement.  The amount paid to Azteca, the
minority member of UAV, totaled $2.0 million, $1.7 million and $179,000 in 2002,
2003 and 2004,  respectively.  Net amounts due from these related  parties as of
December 31, 2003 and 2004 were $17.5 million and $7.8 million, respectively.

On December 2, 1998, we contracted to acquire a fully operational facility being
constructed  in Puebla,  Mexico by Tex Transas,  S.A. de C.V.  ("Tex  Transas").
Construction of this facility commenced in the third quarter of 1998, and it was
anticipated  that we would take  possession  of this facility in fiscal 2000. On
October 16,  2000,  we revised our  agreement  regarding  the fully  operational
facility to extend our option to purchase the facility.


                                      F-31
<PAGE>


On December 31, 2002, we acquired  certain  assets of this twill mill located in
Puebla,  Mexico from Tex Transas,  S.A. de C.V. ("Tex Transas") and Inmobiliaria
Cuadros,  S.A. de C.V.  ("Cuadros"),  both of which were  affiliated  with Kamel
Nacif. The price paid for the asset acquisition consisted of 100,000 shares (the
Shares) of our Series A Preferred  Stock  valued at $8.8  million,  a 25% equity
stake in Tarrant's wholly-owned  subsidiary,  Tarrant Mexico S. de R.L. de C.V.,
the  cancellation of  approximately  $56.9 million of certain notes and accounts
receivables due from the sellers and their affiliates and a cash payment of $500
resulting in a total  purchase price of $87.4  million.  The  acquisition of the
twill mill had been  accounted for as the  acquisition  of a discrete  operating
asset.  Therefore no amounts were  recorded as goodwill,  but were  allocated to
either the  assets  acquired  or the  consideration  paid  based on  independent
valuations  received by us. As discussed in Note 7 of the "Notes to Consolidated
Financial  Statements," we ceased  operating our facilities in Mexico and leased
these assets back to affiliates of Mr. Kamel Nacif.

On December  31,  2002,  we recorded  $4.5  million of  interest  income,  which
represented  accrued  interest  on one of the  canceled  notes  receivable.  The
interest  was recorded as the cash was  collected.  Pursuant to the terms of the
purchase  agreement,  interest was accrued through  December 31, 2002 as part of
the purchase price.

On December 31, 2002, our wholly owned subsidiaries,  Tarrant Mexico and Tarrant
Luxembourg Sarl (previously known as Machrima Luxembourg Sarl), acquired a denim
and twill manufacturing plant in Tlaxcala,  Mexico,  including all machinery and
equipment  used in the plant,  the  buildings,  and the real estate on which the
plant is located. Pursuant to an Agreement for the Purchase of Assets and Stock,
dated as of December  31,  2002,  Tarrant  Mexico  purchased  from Trans  Textil
International,  S.A. de C.V. ("Trans Textil") all of the machinery and equipment
used in and located at the plant, and the Purchasers  acquired from Jorge Miguel
Echevarria   Vazquez  and  Rosa  Lisette  Nacif  Benavides  (the   "Inmobiliaria
Shareholders")  all the issued and  outstanding  capital  stock of  Inmobiliaria
Cuadros,  S.A.  de C.V.  ("Inmobiliaria"),  which  owns the  buildings  and real
estate.  The  purchase  price  for  the  machinery  and  equipment  was  paid by
cancellation  of $42  million in  indebtedness  owed by Trans  Textil to Tarrant
Mexico.  The purchase price for the  Inmobiliaria  shares consisted of a nominal
cash payment to the Inmobiliaria  Shareholders of $500, and subsequent repayment
by us and our  affiliates  of  approximately  $34.7 million in  indebtedness  of
Inmobiliaria  to Kamel Nacif Borge,  his daughter Rosa Lisette Nacif  Benavides,
and certain of their affiliates, which payment was made by: (i) delivery to Rosa
Lisette  Nacif  Benavides  of 100,000  shares of our newly  created,  non-voting
Series A Convertible  Preferred Stock, which shares will become convertible into
3,000,000  shares  of  common  stock  if our  common  stockholders  approve  the
conversion at the Annual Meeting;  (ii) delivery to Rosa Lisette Nacif Benavides
of an ownership interest representing twenty-five percent of the voting power of
and  profit   participation  in  Tarrant  Mexico;   and  (iii)  cancellation  of
approximately $14.9 million of indebtedness of Mr. Nacif and his affiliates. The
Series A Preferred  Stock was converted  into  3,000,000  shares of common stock
following  approval  of  the  conversion  by  our  shareholders  at  the  annual
shareholders' meeting held on May 28, 2003.

Trans  Textil,  an entity  controlled by Mr. Nacif and his family  members,  was
initially  commissioned  by us to  construct  and  develop the plant in December
1998. Subsequent to completion, Trans Textil purchased and/or leased the plant's
manufacturing  equipment  from us and entered into a production  agreement  that
gave us the first right to all production capacity of the plant. This production
agreement  included the option for us to purchase  the facility and  discontinue
the  production  agreement  with Trans Textil  through  September  30, 2002.  We
exercised  the option and acquired the plant as  described  above.  We purchased
$12.3 million, $14.9 million and $0 million of fabric from Trans Textil in 2002,
2003 and 2004,  respectively.  We sold $2.0 million, $2.6 million and $0 million
of fabric to Trans Textil in 2002, 2003 and 2004, respectively.

On October 16, 2003, we entered into a lease with affiliates of Mr. Kamel Nacif,
a substantial  portion of our manufacturing  facilities and operations in Mexico
including real estate and equipment.  The lease was effective as of September 1,
2003.  We leased our twill mill in  Tlaxcala,  Mexico,  and our sewing  plant in
Ajalpan,  Mexico,  for a period of 6 years and for an annual  rental  fee of $11
million.  Mr.  Nacif  was a  shareholder  at the  time  of the  transaction.  In
connection  with this  transaction,  we also entered into a management  services
agreement  pursuant to which Mr. Nacif's affiliates managed the operation of our
remaining  facilities in Mexico.  The term of the management  services agreement
was also for a period  of 6 years.  Additionally,  we  entered  into a  purchase
commitment  agreement  with Mr.  Nacif's  affiliates to purchase  annually,  six
million yards of fabric manufactured at the facilities leased and/or operated by
Mr.  Nacif's  affiliates  at  market  prices  to  be  negotiated.  See  Note  11
"Commitments  and  Contingencies",  of  the  "Notes  to  Consolidated  Financial
Statements."  Using current  market  prices,  the purchase  commitment  would be
approximately $18 million per year. We had to pay $1 for each yard of


                                      F-32
<PAGE>


fabric that we fail to purchase under the  agreement.  We purchased $3.6 million
and $5.3 million of fabric from  Acabados y Terminados  under this  agreement in
2003 and 2004. Net amount due from these related parties as of December 31, 2004
was $183,000.

In August  2004,  we entered  into an  Agreement  for  Purchase  of Assets  with
affiliates  of Mr. Kamel Nacif,  a shareholder  at the time of the  transaction,
with  agreement  was  amended in October  2004.  Pursuant to the  agreement,  as
amended,  on November 30, 2004, we sold to the purchasers  substantially  all of
our assets and real property in Mexico,  including the equipment and  facilities
we previously leased to Mr. Nacif's  affiliates.  Upon consummation of the sale,
we entered into a purchase commitment agreement with the purchasers, pursuant to
which  we have  agreed  to  purchase  annually  over  the  ten-year  term of the
agreement,  $5 million of fabric  manufactured at our former facilities acquired
by the  purchasers at  negotiated  market  prices.  This  agreement  replaced an
existing purchase commitment agreement with Mr. Nacif's affiliates.

We were  indebted to Mr.  Kamel Nacif and his  affiliates  in the amount of $5.4
million and $0 as of December 31, 2003 and December 31, 2004, respectively.

Under  lease  agreements  we entered  into  between two  entities,  GET and Lynx
International  Limited.,  owned  by our  Chairman  and  Vice  Chairman,  we paid
$1,330,000  in rent  annually  in 2002,  2003 and 2004 for office and  warehouse
facilities. We currently lease both facilities on a month-to-month basis.

We reimbursed Mr. Guez, our Chairman,  for fuel and related expenses incurred by
477 Aviation LLC, a company  owned by Mr. Guez,  when our  executives  used this
company's aircraft for business purposes.

At December  31, 2003 and 2004,  we had various  employees  receivable  totaling
$450,000 and $403,000, respectively, included in due from related parties.

We  entered  into  lease   agreements  with  the  former  owners  of  Industrial
Exportadora  Famian and our  former  employees.  Under  theses  leases,  we paid
$843,000  and $943,000 in 2002 and 2003,  respectively,  for rent for sewing and
washing  facilities  in  Tehuacan,  Mexico.  All  these  lease  agreements  were
cancelled in November 2003.

In the second quarter of 2003, we acquired a 45% equity interest in the owner of
the trademark  "American Rag CIE" and the operator of American Rag retail stores
for $1.4 million,  and our subsidiary,  Private Brands, Inc., acquired a license
to certain  exclusive  rights to this trademark.  The investment in American Rag
Cie, LLC totaling  $1.9 million at December 31, 2004 was accounted for under the
equity method and included in equity  method of  investment on the  accompanying
consolidated balance sheets.

We believe that each of the  transactions  described above has been entered into
on terms no less favorable to us than could have been obtained from unaffiliated
third parties.


                                      F-33
<PAGE>


16.      OPERATIONS BY GEOGRAPHIC AREAS

Our predominant business is the design,  distribution and importation of private
label and private brand casual  apparel.  Substantially  all of our revenues are
from the sales of apparel. We are organized into three geographic  regions:  the
United States, Asia and Mexico. We evaluate  performance of each region based on
profit or loss from operations  before income taxes not including the cumulative
effect of change in accounting  principles.  Information about our operations in
the United States, Asia, and Mexico is presented below.  Inter-company  revenues
and assets have been eliminated to arrive at the consolidated amounts.

<TABLE>
<CAPTION>
                                                                                    ADJUSTMENTS
                                                                                        AND
                               UNITED STATES          ASIA            MEXICO        ELIMINATIONS          TOTAL
                               -------------     -------------    --------------    -------------    --------------
<S>                            <C>               <C>              <C>               <C>              <C>
2002
----
Sales......................    $ 332,877,000     $   3,943,000    $   10,571,000    $          --    $  347,391,000
Inter-company sales........       14,474,000        90,830,000        82,531,000     (187,835,000)               --
                               -------------     -------------    --------------    -------------    --------------
Total revenue..............    $ 347,351,000     $  94,773,000    $   93,102,000    $(187,835,000)   $  347,391,000
                               =============     =============    ==============    =============    ==============

Income (loss) from operations  $   6,916,000     $   4,950,000    $   (7,396,000)   $          --    $    4,470,000
                               =============     =============    ==============    =============    ==============
Interest income............    $     287,000     $   4,453,000    $        8,000    $          --    $    4,748,000
                               =============     =============    ==============    =============    ==============
Interest expense...........    $   5,160,000     $          --    $      284,000    $          --    $    5,444,000
                               =============     =============    ==============    =============    ==============
Provision for depreciation
 and amortization..........    $   1,542,000     $     452,000    $    8,447,000    $          --    $   10,441,000
                               =============     =============    ==============    =============    ==============
Capital expenditures.......    $     367,000     $      34,000    $    2,584,000    $          --    $    2,985,000
                               =============     =============    ==============    =============    ==============

Total assets...............    $ 165,036,000     $ 107,266,000    $  292,113,000    $(247,971,000)   $  316,444,000
                               =============     =============    ==============    ===============  ==============

2003
----
Sales......................    $ 291,993,000     $   7,359,000    $   21,071,000    $          --    $  320,423,000
Inter-company sales........       33,441,000       112,481,000        75,716,000     (221,638,000)               --
                               -------------     -------------    --------------    -------------    --------------
Total revenue..............    $ 325,434,000     $ 119,840,000    $   96,787,000    $(221,638,000)   $  320,423,000
                               =============     =============    ==============    =============    ==============

Income (loss) from operations  $ (10,835,000)    $   7,556,000    $  (30,116,000)   $          --    $  (33,395,000)
                               =============     =============    ==============    =============    ==============
Interest income............    $     419,000     $          --    $        6,000    $          --    $      425,000
                               =============     ==============   ==============    =============    ==============
Interest expense...........    $   5,215,000     $      41,000    $      347,000    $          --    $    5,603,000
                               =============     =============    ==============    =============    ==============
Provision for depreciation
 and amortization..........    $   1,547,000     $     261,000    $   14,290,000    $          --    $   16,098,000
                               =============     =============    ==============    =============    ==============
Capital expenditures.......    $      94,000     $      84,000    $      190,000    $          --    $      368,000
                               =============     =============    ==============    =============    ==============

Total assets...............    $ 128,058,000     $ 117,783,000    $  201,050,000    $(193,786,000)   $  253,105,000
                               =============     =============    ==============    =============    ==============

2004
----
Sales......................    $ 149,568,000     $   1,838,000    $    4,047,000    $          --    $  155,453,000
Inter-company sales........               --        80,420,000         7,453,000      (87,873,000)               --
                               --------------    -------------    --------------    -------------    --------------
Total revenue..............    $ 149,568,000     $  82,258,000    $   11,500,000    $ (87,873,000)   $  155,453,000
                               =============     =============    ==============    =============    ==============

Income (loss) from operations  $ (12,659,000)    $   3,663,000    $  (89,400,000)   $ (22,786,000)   $(121,182,000)
                               =============     =============    ==============    ==============   =============
Interest income............    $     378,000     $          --    $           --    $          --    $      378,000
                               ==============    =============    ==============    =============    ==============
Interest expense...........    $   2,764,000     $      55,000    $      38,0000    $          --    $    2,857,000
                               =============     =============    ==============    =============    ==============
Provision for depreciation
 and amortization..........    $   1,283,000     $     219,000    $    6,836,000    $          --    $    8,338,000
                               =============     =============    ==============    =============    ==============
Capital expenditures.......    $      48,000     $      64,000    $           --    $          --    $      112,000
                               =============     =============    ==============    =============    ==============

Total assets...............    $ 113,046,000     $ 121,007,000    $   31,603,000    $(133,845,000)   $  131,811,000
                               =============     =============    ==============    =============    ==============
</TABLE>


                                      F-34
<PAGE>


17.      EMPLOYEE BENEFIT PLANS

On  August  1,  1992,  Tarrant  Hong Kong  established  a  defined  contribution
retirement  plan covering all of its Hong Kong employees whose period of service
exceeds 12 months. Plan assets are monitored by a third-party investment manager
and are segregated from those of Tarrant Hong Kong.  Participants may contribute
up to 5% of their  salary to the plan.  We make annual  matching  contributions.
Costs of the plan  charged to  operations  for 2002,  2003 and 2004  amounted to
approximately $149,000, $157,000 and $131,000, respectively.

On July 1, 1994, we established a defined contribution  retirement plan covering
all of our U.S. employees whose period of service exceeds 12 months. Plan assets
are monitored by a third-party  investment manager and are segregated from those
of  ours.   Participants  may  contribute  from  1%  to  15%  of  their  pre-tax
compensation  up to effective  limitations  specified  by the  Internal  Revenue
Service.  Our  contributions to the plan are based on a 50% (100% effective July
1, 1995) matching of participants' contributions, not to exceed 6% (5% effective
July 1, 1995) of the participants' annual compensation. In addition, we may also
make a discretionary  annual contribution to the plan. Costs of the plan charged
to  operations  for 2002,  2003 and 2004  amounted  to  approximately  $249,000,
$256,000 and $226,000, respectively.

On December 27, 1995, we established a deferred  compensation plan for executive
officers. Participants may contribute a specific portion of their salary to such
plan. We do not contribute to the Plan.

18.      OTHER INCOME AND EXPENSE

Other income and expense consists of the following:

                                                    YEAR ENDED DECEMBER 31,
                                            ------------------------------------

                                               2002         2003         2004
                                            ----------   ----------   ----------

Rental income ...........................   $  495,754   $3,957,365   $5,854,698
Unrealized gain on foreign currency .....         --           --        367,262
Realized gain on foreign currency .......    1,123,076      304,060         --
Unrealized gain on investment ...........         --           --        769,706
Royalty income ..........................       62,166         --           --
Gain on legal settlement ................      473,041      235,785         --
Other items .............................      493,938      287,269      144,677
                                            ----------   ----------   ----------
Total other income ......................   $2,647,975   $4,784,479   $7,136,343
                                            ==========   ==========   ==========

Royalty expense .........................   $  655,691   $  242,426   $  604,888
Unrealized loss on foreign currency .....    1,014,696      560,602         --
Realized loss on foreign currency .......         --           --        511,586
Loss on sale of fixed assets ............         --        593,626         --
Other items .............................      333,686       28,692       17,671
                                            ----------   ----------   ----------
Total other expense .....................   $2,004,073   $1,425,346   $1,134,145
                                            ==========   ==========   ==========


19.      LEGAL PROCEEDINGS

1.       PATRICK BENSIMON

On April 12, 2000,  we formed a company,  Jane Doe  International,  LLC ("JDI").
This company was formed for the purpose of  purchasing  the assets of Needletex,
Inc.,  owner of the Jane Doe brand. JDI was owned 51% by Fashion Resource (TCL),
Inc.,  our  subsidiary,  and 49% by  Needletex,  Inc.  In  connection  with  the
establishment  of JDI, JDI entered  into an  employment  agreement  with Patrick
Bensimon,  the principal shareholder of Needletex,  Inc., which provided for the
payment of a salary to Patrick  Bensimon  and a bonus tied to the new  company's
sales performance.


                                      F-35
<PAGE>


In March 2001, we converted JDI from an operating company to a licensing company
and entered  into two  licenses in regard to the use of the Jane Doe  trademark.
Thereafter  a dispute  arose as to whether  Patrick  Bensimon  had  performed in
accordance  with his terms of employment set forth in the Employment  Agreement.
When an amicable  resolution  of this  dispute  could not be  achieved,  Patrick
Bensimon commenced an arbitration  preceding against his employer,  JDI, Fashion
Resource (TCL), Inc., the managing member of Jane Doe International and us.

On April 7, 2003, the arbitration panel issued a final award in favor of Patrick
Bensimon of $1,425,655 for salary and bonus, plus interest accrued and his costs
and  attorneys  fees in the amount of  $489,640.  We had a total of $1.6 million
reserve for  litigation as of December 31, 2002. In January 2004, we settled the
employment  litigation  with  Patrick  Bensimon  for  $1.2  million  in cash and
forgiveness of approximately $859,000 in debts owed by Needletex Inc. As part of
the  settlement,  we received the remaining 49% interest in JDI. We also settled
with our insurance carrier for a cash payment of $330,000. An additional expense
of  approximately  $379,000 was made in the fourth  quarter of 2003 to cover the
forgiveness of debts.

2.       NICOLAS NUNEZ

In March 2005, we reached a settlement of a dispute  involving a former employee
named  Nicolas  Nunez.  Mr.  Nunez  was  employed  by us  pursuant  to a written
employment  agreement  until he was  terminated  in or about  November  2000. In
connection to this  employment,  we agreed to acquire  Nunez' company by merger.
Mr. Nunez  claimed to be entitled to shares of our common stock up to a value of
$500,000  assuming we did not otherwise have valid  defenses to such claims.  In
connection with the  settlement,  we agreed to compensate Mr. Nunez in the total
amount of $875,000,  by paying him $500,000 cash, payable in April 2005, and the
balance of $375,000 in our common stock (195,313  shares based on the fair value
of our common  stock at March 24,  2005.) The full amount of  $875,000  has been
accrued and included in accrued liabilities in the accompanying balance sheet at
December 31, 2004. All parties to both  proceedings have agreed to exchange full
mutual releases of any and all claims,  known or unknown,  and will dismiss both
proceedings with prejudice, without admitting any liability.

3.       MR. BENJAMIN DOMINGUEZ GONZALEZ

On December  10, 2004 and December 14, 2004,  Mr.  Benjamin  Dominguez  Gonzalez
brought suits against our Mexico Subsidiary, Tarrant Mexico, S. de R.L. de C.V.,
in Puebla,  Puebla,  Mexico: (a) "Juicio Ejecutivo Mercantil  887/2004,  Juzgado
Dicimo de lo Civil del  Estado de Puebla,  Puebla,  Mexico,  Dominguez  Gonzalez
Benjamin vs. Tarrant  Mexico S. de R.L. de C.V. e  Inmobiliaria  Cuadros S.A. de
C.V."; and (b) "Juicio Ejecutivo Mercantil 889/2004,  Juzgado Noveno de lo Civil
del Estado de Puebla,  Puebla,  Mexico,  Dominguez Gonzalez Benjamin vs. Tarrant
Mexico  S. de R.L.  de C.V.  e  Inmobiliaria  Cuadros  S.A.  de  C.V.",  for the
non-payment  of  approximately  $14  million in  principal  amount  and  accrued
interest on two  promissory  notes,  which Mr.  Gonzalez  asserts were issued by
Tarrant Mexico.  The amounts Mr.  Gonzalez  claimed were due and owing under the
notes  previously had been paid in full. In April 2005, Mr.  Gonzalez  agreed to
dismiss his claims,  which  agreement has been submitted to and is pending final
approval of the court.


                                      F-36
<PAGE>


20.      QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)


<TABLE>
<CAPTION>
                                                            QUARTER ENDED
                                            --------------------------------------------
                                             MAR. 31     JUN. 30     SEP. 30     DEC. 31
                                            --------    --------    --------    --------
                                                 (in thousands, except per share data)
2003
----
<S>                                         <C>         <C>         <C>         <C>
Net sales ...............................   $ 78,736    $ 78,194    $ 96,458    $ 67,035
Gross profit ............................      8,802        (432)     11,514      12,094
Operating income (loss) .................     (1,310)    (34,367)      1,448         834
Net income (loss) .......................   $ (3,879)   $(32,571)   $    138    $    427
Net income (loss) per common share
(restated):
   Basic ................................   $  (0.24)   $  (1.94)   $   0.01    $  (0.33)
   Diluted ..............................   $  (0.24)   $  (1.94)   $   0.01    $  (0.33)

Reported net income (loss) ..............   $ (3,879)   $(32,571)   $    138    $    427
Dividend to preferred stockholders ......       --          --          --        (7,494)
Net income (loss) available to common
  stockholders (as restated, see Note 22)   $ (3,879)   $(32,571)   $    138    $ (7,067)

Weighted average shares outstanding:
   Basic ................................     15,837      16,832      18,765      21,426
   Diluted ..............................     15,837      16,832      18,767      21,426


2004
----
Net sales ...............................   $ 42,155    $ 38,489    $ 38,102    $ 36,707
Gross profit ............................      7,500       5,266       4,135       4,060
Operating loss ..........................     (5,921)    (84,393)     (3,442)    (27,426)
Net loss ................................   $ (2,974)   $(68,567)   $ (4,019)   $(29,117)
Net loss per common share:
   Basic ................................   $  (0.10)   $  (2.39)   $  (0.14)   $  (1.01)
   Diluted ..............................   $  (0.10)   $  (2.39)   $  (0.14)   $  (1.01)
Weighted average shares outstanding:
   Basic ................................     28,485      28,649      28,815      28,815
   Diluted ..............................     28,485      28,649      28,815      28,815
</TABLE>


                                      F-37
<PAGE>


21.      SUBSEQUENT EVENTS

On February 14, 2005, we borrowed $5 million from Max Azria,  which amount bears
interest  at the rate of 4% per annum and is payable in weekly  installments  of
$250,000  beginning on February 28, 2005 and  continuing  each Monday until July
11, 2005. This is an unsecured loan.

On January 3, 2005,  Private Brands,  Inc, our wholly owned subsidiary,  entered
into a term sheet exclusive licensing agreement with Beyond Productions, LLC and
Kids  Headquarters to collaborate on the design,  manufacturing and distribution
of women's  contemporary,  large sizes and junior apparel bearing the brand name
"House of  Dereon",  Couture,  Kick and Soul.  This  agreement  is a  three-year
contract,  and providing  compliance with all terms of the license, is renewable
for one additional three-year term. Minimum net sales are $10 million in year 1,
$20 million in year 2 and $30  million in year 3. The  agreement  also  provides
payment  of  royalty  at the rate of 8% on net  sales  and 3% on net  sales  for
marketing fund commitments.  As of March 30, 2005, we have advanced $1.2 million
as payment for the first year's minimum royalty and marketing fund commitment.

22.      RESTATEMENT OF FINANCIAL RESULTS

As a result  of a review  by  Securities  and  Exchange  Commission  ("SEC")  in
connection  with our filing of a  registration  statement,  we have reviewed the
accounting  treatment  of our October  2003  private  placement  of  convertible
preferred stock. As a result, we have revised our accounting  treatment for this
transaction  to  record a  beneficial  conversion  feature  in  accordance  with
Emerging  Issues  Task Force  ("EITF")  No.  98-5 and to restate  our  financial
statements  for the fiscal years ended December 31, 2003 and 2004 to reflect the
beneficial   conversion   feature  of  the  convertible   preferred  stock.  The
restatement  results in  changes in  classification  of certain  items  included
within  shareholders'  equity on our balance  sheets as of December 31, 2003 and
2004, and a reduction to our earnings per share  calculations for the year ended
December 31, 2003. The restatement  has no impact on total assets,  liabilities,
total  shareholders'  equity,  net income (loss) or cash flows.  The restatement
will not have any effect on reported earnings for future periods.

We have restated our 2003 and 2004 financial statements to reflect the recording
of  the  beneficial  conversion  feature  of  approximately  $7.5  million.  The
beneficial  conversion feature relates to issuance of 881,732 shares of Series A
convertible preferred stock in fiscal 2003. The beneficial conversion feature of
the  preferred  shares in the amount of $7.5  million is  recorded in the fourth
quarter  of  2003,  resulting  in an  increase  in  loss  per  share  to  common
shareholders  for the year ended December 31, 2003 to $(2.38) per share from the
previously  reported $(1.97) per share. The beneficial  conversion  feature does
not change our reported  earnings  (loss) per share for the year ended  December
31, 2004,  nor any  subsequent  period.  The effect of recording the  beneficial
conversion feature on the December 31, 2004 financial statements was an increase
in the  accumulated  deficit  of $7.5  million  and an  offsetting  increase  in
contributed  capital.  The restatement did not change total shareholders' equity
at December 31, 2003 or 2004. A summary of the effects of the  restatement as of
and for the year ended December 31, 2003 and 2004 are as follows:

<TABLE>
<CAPTION>
                                                DECEMBER 31, 2003               DECEMBER 31, 2004
                                          ----------------------------    ----------------------------
                                          AS PREVIOUSLY                   AS PREVIOUSLY
                                            REPORTED      AS RESTATED       REPORTED      AS RESTATED
                                          ------------    ------------    ------------    ------------
<S>                                       <C>             <C>             <C>             <C>
Contributed capital ...................   $  1,505,831    $  9,000,553    $  2,470,869    $  9,965,591
Retained earnings (accumulated deficit)   $ 20,988,434    $ 13,493,712    $(83,688,237)   $(91,182,959)
Net loss per share ....................   $      (1.97)   $      (2.38)   $      (3.64)   $      (3.64)
</TABLE>


                                      F-38
<PAGE>


<TABLE>
                                   SCHEDULE II

                              TARRANT APPAREL GROUP

                        VALUATION AND QUALIFYING ACCOUNTS


<CAPTION>
                                                          ADDITIONS     ADDITIONS
                                           BALANCE AT     CHARGED TO     CHARGED                       BALANCE
                                            BEGINNING     COSTS AND      TO OTHER                      AT END
                                             OF YEAR      EXPENSES       ACCOUNTS     DEDUCTIONS       OF YEAR
                                           -----------   -----------   ------------   -----------    -----------
<S>                                        <C>           <C>           <C>            <C>            <C>
For the year ended December 31, 2002
  Allowance for returns and discounts...   $ 2,681,601   $   453,167   $       --     $      --      $ 3,134,768
  Allowance for bad debt ...............   $ 3,484,647   $      --     $       --     $(2,302,794)   $ 1,181,853
                                           ===========   ===========   ============   ===========    ===========

For the year ended December 31, 2003
  Allowance for returns and discounts...   $ 3,134,768   $      --     $       --     $  (324,387)   $ 2,810,381
  Allowance for bad debt ...............   $ 1,181,853   $   234,149   $       --     $      --      $ 1,416,002
    Inventory reserve ..................   $      --     $10,986,153   $       --     $      --      $10,986,153
                                           ===========   ===========   ============   ===========    ===========

For the year ended December 31, 2004
  Allowance for returns and discounts ..   $ 2,810,381   $   738,326   $       --     $(2,485,386)   $ 1,063,321
  Allowance for bad debt ...............   $ 1,416,002   $   476,016   $       --     $  (517,474)   $ 1,374,544
    Inventory reserve ..................   $10,986,153   $      --     $       --     $(9,869,491)   $ 1,116,662
                                           ===========   ===========   ============   ===========    ===========
</TABLE>


                                      F-39
<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) 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.

                                           TARRANT APPAREL GROUP

                                     By:             /S/ GERARD GUEZ
                                           -------------------------------------
                                                       Gerard Guez
                                                  Chairman of the Board

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

        SIGNATURE                         TITLE                        DATE
        ---------                         -----                        ----

    /S/ GERARD GUEZ            Chairman of the Board of           May 31, 2005
-------------------------      Directors
      Gerard Guez

           *                   Vice Chairman of the Board         May 31, 2005
-------------------------      of Directors
       Todd Kay

           *                   Chief Executive Officer            May 31, 2005
-------------------------      and Director (Principal
      Barry Aved               Executive Officer)

   /S/ CORAZON REYES           Chief Financial Officer,           May 31, 2005
-------------------------      Treasurer and Director
     Corazon Reyes             (Principal Financial and
                               Accounting Officer

           *                   Director                           May 31, 2005
-------------------------
    Milton Koffman

           *                   Director                           May 31, 2005
-------------------------
   Stephane Farouze

           *                   Director                           May 31, 2005
-------------------------
    Mitchell Simbal

           *                   Director                           May 31, 2005
-------------------------
    Joseph Mizrachi

           *                   Director                           May 31, 2005
-------------------------
      Simon Mani


* By:    /S/ CORAZON REYES
         ----------------------------------
         Corazon Reyes, As Attorney-In-Fact


                                      S-1
<PAGE>


                              TARRANT APPAREL GROUP

                                  EXHIBIT INDEX

EXHIBIT
NUMBER                                 DESCRIPTION
------------  ------------------------------------------------------------------

3.1           Restated Articles of Incorporation. (1)

3.1.1         Certificate  of Amendment of Restated  Articles of  Incorporation.
              (9)

3.1.2         Certificate  of Amendment of Restated  Articles of  Incorporation.
              (9)

3.1.3         Certificate  of Amendment of Restated  Articles of  Incorporation.
              (17)

3.2           Restated Bylaws. (1)

4.1           Specimen of Common Stock Certificate. (2)

4.2           Rights  Agreement  dated as of November 21, 2003,  between Tarrant
              Apparel Group and  Computershare  Trust Company,  as Rights Agent,
              including the Form of Rights Certificate and the Summary of Rights
              to Purchase Preferred Stock, attached thereto as Exhibits B and C,
              respectively. (16)

4.3           Certificate   of   Determination   of   Preferences,   Rights  and
              Limitations of Series B Preferred Stock. (18)

4.4           Form of 6% Secured Convertible Debenture.  (25)

10.1          Tarrant Apparel Group Employee Incentive Plan.* (22)

10.2          Tenancy  Agreement dated July 15, 1994 between Lynx  International
              Limited and  Tarrant  Company  Limited as amended by that  certain
              Supplementary  Tenancy  Agreement dated December 30, 1994 and that
              certain Second Supplementary  Tenancy Agreement dated December 31,
              1994. (1)

10.3          Services Agreement dated as of October 1, 1994, by and between the
              Company and Lynx International Limited. (1)

10.4          Indemnification Agreement dated as of March 14, 1995, by and among
              Tarrant Apparel Group, Gerard Guez and Todd Kay. (2)

10.5          Employment  Agreement  effective  January 1, 1998,  by and between
              Tarrant Apparel Group and Gerard Guez.* (4)

10.5.1        First  amendment to Employment  Agreement  dated as of January 10,
              2000 by and between Gerard Guez and Tarrant Apparel Group.* (8)

10.5.2        Second  Amendment  to  Employment  Agreement  dated  April 1, 2003
              between Tarrant Apparel Group and Gerard Guez.* (12)

10.5.3        Third Amendment to Employment Agreement,  effective as of April 1,
              2004, between Tarrant Apparel Group and Gerard Guez.* (23)

10.6          Employment  Agreement  effective  January 1, 1998,  by and between
              Tarrant Apparel Group and Todd Kay.* (4)

10.6.1        First  Amendment to Employment  Agreement  dated as of January 10,
              2000 by and between Todd Kay and Tarrant Apparel Group.* (8)


                                      EX-1
<PAGE>


EXHIBIT
NUMBER                                 DESCRIPTION
------------  ------------------------------------------------------------------

10.6.2        Second  Amendment  to  Employment  Agreement  dated  April 1, 2003
              between Tarrant Apparel Group and Todd Kay.* (12)

10.6.3        Third Amendment to Employment Agreement,  effective as of April 1,
              2004, between Tarrant Apparel Group and Todd Kay.* (23)

10.7          Buying  Agency  Agreement  executed as of April 4, 1995, by Azteca
              Production  International,  Inc. and Tarrant  Company  Ltd.,  with
              Tarrant Apparel Group acknowledging as to certain matters. (2)

10.8          Form of  Indemnification  Agreement  with  directors  and  certain
              executive officers. (3)

10.9          Employment  Agreement  effective  as of  the  twenty-third  day of
              March,  1999, by and between Charles  Ghailian and Tarrant Apparel
              Group to pay CMG Inc.* (5)

10.10         Loan  Agreement  dated  December 30, 1999 by and between  Standard
              Chartered Bank and Tarrant Apparel Group. (6)

10.11         Factoring  Agreement  dated as of September  29, 2004 by and among
              GMAC  Commercial  Finance LLC and Tarrant  Apparel Group,  Fashion
              Resource (TCL), Inc., TAG Mex, Inc., United Apparel Ventures, LLC,
              Private Brands, Inc. and NO! Jeans, Inc. (23)

10.12         Promissory  note  dated  February  28,  2001 in the  amount  of US
              $4,119,545.06 to pay to the order of Standard Chartered Bank (7)

10.13         Amended and Restated Limited Liability Company Operating Agreement
              of United Apparel Ventures,  dated as of October 1, 2002,  between
              Azteca Production International, Inc. and Tag Mex, Inc. (11)

10.14         Guaranty  Agreement  dated as of May 30,  2002 by and  between UPS
              Capital Global Trade Finance Corporation and Tarrant Apparel Group
              and Fashion Resource (TCL), Inc. (9)

10.14.1       Conditional Consent Agreement dated December 31, 2002, between UPS
              Capital  Global Trade  Finance  Corporation  and Fashion  Resource
              (TCL), Inc. (10)

10.15         Guaranty  Agreement  dated as of May 30,  2002 by and  between UPS
              Capital Global Trade Finance Corporation and Gerard Guez. (9)

10.16         Syndicated  Letter of Credit  Facility  dated June 13, 2002 by and
              between  Tarrant  Company  Limited,  Marble Limited and Trade Link
              Holdings Limited as Borrowers and UPS Capital Global Trade Finance
              Corporation  as Agent and Issuer and Certain  Banks and  Financial
              Institutions as Banks. (9)

10.16.1       Charge Over Shares dated June 13, 2002 by Fashion  Resource (TCL),
              Inc. in favor of UPS Capital Global Trade Finance Corporation. (9)

10.16.2       Syndicated  Composite  Guarantee and Debenture dated June 13, 2002
              between  Tarrant  Company  Limited,  Marble Limited and Trade link
              Holdings Limited and UPS Capital Global Trade Finance Corporation.
              (9)

10.16.3       Charge Over Shares  dated  February  26,  2003,  between  Machrima
              Luxembourg   International  Sarl  and  UPS  Global  Trade  Finance
              Corporation. (11)

10.16.4       Fourth Deed of Variation to Syndicated  Letter of Credit  Facility
              dated June 18, 2003 among Tarrant Company Limited,  Marble Limited
              and Trade Link  Holdings  Limited  and UPS  Capital  Global  Trade
              Finance Corporation. (12)


                                      EX-2
<PAGE>


EXHIBIT
NUMBER                                 DESCRIPTION
------------  ------------------------------------------------------------------

10.16.5       Letter  Agreement dated  September 1, 2003,  among Tarrant Company
              Limited,  Marble  Limited,  Trade Link  Holdings  Limited  and UPS
              Capital Global Trade Finance Corporation. (15)

10.16.6       Fifth Deed of Variation to  Syndicated  Letter of Credit  Facility
              dated  December 23, 2003 among  Tarrant  Company  Limited,  Marble
              Limited and Trade Link  Holdings  Limited  and UPS Capital  Global
              Trade Finance Corporation. (20)

10.16.7       Sixth Deed of Variation to  Syndicated  Letter of Credit  Facility
              dated March 17, 2004 among Tarrant Company Limited, Marble Limited
              and Trade Link  Holdings  Limited  and UPS  Capital  Global  Trade
              Finance Corporation. (21)

10.16.8       Seventh Deed of Variation to Syndicated  Letter of Credit Facility
              dated May 5, 2004 among Tarrant  Company  Limited,  Marble Limited
              and Trade Link  Holdings  Limited  and UPS  Capital  Global  Trade
              Finance Corporation. (22)

10.16.9       Eighth Deed of Variation to Syndicated  Letter of Credit  Facility
              effective as of May 10, 2004 among Tarrant Company Limited, Marble
              Limited and Trade Link  Holdings  Limited  and UPS Capital  Global
              Trade Finance Corporation. (22)

10.16.10      Ninth Deed of Variation to  Syndicated  Letter of Credit  Facility
              effective as of September 30, 2004 among Tarrant Company  Limited,
              Marble  Limited  and Trade Link  Holdings  Limited and UPS Capital
              Global Trade Finance Corporation. (23)

10.16.11      Tenth Deed of Variation to  Syndicated  Letter of Credit  Facility
              effective as of December 31, 2004 among Tarrant  Company  Limited,
              Marble  Limited  and Trade Link  Holdings  Limited and UPS Capital
              Global Trade Finance Corporation. (26)

10.16.12      Loan  Agreement  dated  December  31,  2004 by and  among  Tarrant
              Company  Limited,  Marble Limited and Trade Link Holdings  Limited
              and UPS Capital Global Trade Finance Corporation. (26)

10.16.13      Amendment   Agreement  to  Syndicated   Composite   Guarantee  and
              Debenture  dated  December 31, 2004, by and among Tarrant  Company
              Limited,  Marble  Limited and Trade Link Holdings  Limited and UPS
              Capital Global Trade Finance Corporation. (26)

10.16.14      Guaranty and  Security  Agreement  dated  December 31, 2004 by and
              among Tarrant Apparel Group,  Fashion Resource (TCL), Inc. and UPS
              Capital Global Trade Finance Corporation. (26)

10.16.15      Guaranty and  Security  Agreement  dated  December 31, 2004 by and
              between  Tarrant  Luxembourg  Sarl and UPS  Capital  Global  Trade
              Finance Corporation. (26)

10.16.16      Amendment  Agreement to Charge Over Shares dated December 31, 2004
              by and between  Tarrant  Luxembourg  Sarl and UPS  Capital  Global
              Trade Finance Corporation. (26)

10.17         Assignment of Promissory  Note by Tarrant Apparel Group to Tarrant
              Company Limited and to Trade Link Holdings  Company dated December
              26, 2001. (9)

10.18         Exclusive  Distribution  Agreement  dated  April 1, 2003,  between
              Federated  Merchandising  Group,  an  unincorporated  division  of
              Federated Department Stores, and Private Brands, Inc. (11)

10.18.1       Amendment No. 1 to Exclusive  Distribution  Agreement  dated as of
              June  22,  2004,   between  Federated   Merchandising   Group,  an
              unincorporated   division  of  Federated  Department  Stores,  and
              Private Brands, Inc. (22)

10.19         Unconditional  Guaranty of  Performance  dated  April 1, 2003,  by
              Tarrant Apparel Group. (11)


                                      EX-3
<PAGE>


EXHIBIT
NUMBER                                 DESCRIPTION
------------  ------------------------------------------------------------------

10.20         Promissory Note dated May 31, 2003 made by Gerard Guez in favor of
              Tarrant Apparel Group. (12)

10.21         Indemnification  Agreement  dated April 10, 2003  between  Tarrant
              Apparel Group and Seven Licensing Company, LLC. (12)

10.22         Form of  Subscription  Agreement,  by and between  Tarrant Apparel
              Group and the Purchaser to be identified therein. (13)

10.23         Registration Rights Agreement dated October 17, 2003, by and among
              Tarrant  Apparel Group and Sanders Morris Harris Inc. as agent and
              attorney-in-fact for the Purchasers identified therein. (13)

10.24         Placement  Agent  Agreement dated October 13, 2003, by and between
              Tarrant Apparel Group and Sanders Morris Harris Inc. (13)

10.25         Common Stock  Purchase  Warrant  dated  October 17,  2003,  by and
              between Tarrant Apparel Group and Sanders Morris Harris Inc. (13)

10.26         Form of Voting  Agreement,  by and between  Sanders  Morris Harris
              Inc. and the Shareholder to be identified therein. (14)

10.27         Lease  Agreement,  dated as of August 29,  2003,  between  Tarrant
              Mexico S. de R.L. de C.V. and Acabados Y Cortes  Textiles  S.A. de
              C.V. (13)

10.28         Lease  Agreement,  dated as of August 29,  2003,  between  Tarrant
              Mexico S. de R.L. de C.V. and Acabados Y Cortes  Textiles  S.A. de
              C.V. (13)

10.29         Purchase  Commitment  Agreement,  dated October 16, 2003,  between
              Tarrant  Mexico S. de R.L. de C.V. and Acabados Y Cortes  Textiles
              S.A. de C.V. (13)

10.30         Employment  Agreement,  effective as of September 1, 2003, between
              the Company and Barry Aved. (15)

10.31         Employment Agreement,  dated October 24, 2003, between the Company
              and Henry Chu. (15)

10.32         Placement  Agent  Agreement dated January 23, 2004 between Tarrant
              Apparel Group and Sanders Morris Harris Inc. (19)

10.33         Form of Subscription  Agreement  between Tarrant Apparel Group and
              the investor to be identified therein. (19)

10.34         Common  Stock  Purchase  Warrant  dated  January 26, 2004  between
              Tarrant Apparel Group and Sanders Morris Harris Inc. (19)

10.35         Agreement  for  Purchase  of Assets  dated  August 13,  2004 among
              Tarrant Mexico S. de R.L. de C.V., Acabados Y Cortes Textiles S.A.
              de C.V. and Construcciones Solticio S.A. de C.V. (23)

10.35.1       Amendment  No. 1 to Agreement for Purchase of Assets dated October
              29,  2004  among  Tarrant  Mexico S. de R.L.  de C.V.,  Acabados Y
              Cortes Textiles S.A. de C.V. and  Construcciones  Solticio S.A. de
              C.V. (23)

10.36         Termination  Agreement dated August 13, 2004 among Tarrant Mexico,
              S. de R.L.  de  C.V.,  Inmobiliaria  Cuadros,  S.A.,  de C.V.  and
              Acabados y Cortes Textiles S.A. de C.V. (23)

10.37         Securities  Purchase  Agreement  dated  December  6, 2004,  by and
              between  Tarrant  Apparel  Group and the  investors  listed on the
              signature pages thereto. (24)

10.38         Registration  Rights  Agreement  dated  December 14, 2004,  by and
              among  Tarrant  Apparel  Group  and the  investors  listed  on the
              signature pages thereto. (25)


                                      EX-4
<PAGE>


EXHIBIT
NUMBER                                 DESCRIPTION
------------  ------------------------------------------------------------------

10.39         Security  Agreement  dated December 14, 2004, by and among Tarrant
              Apparel  Group and the  investors  listed on the  signature  pages
              thereto. (25)

10.40         Intercreditor  Agreement  dated  December  14,  2004 by and  among
              Tarrant Apparel Group, GMAC Commercial  Finance,  LLC, UPS Capital
              Global Trade Finance Corporation and T.R. Winston & Company,  LLC.
              (25)

10.41         Common Stock  Purchase  Warrant dated  December 14, 2004 issued by
              Tarrant  Apparel  Group in favor of T.R.  Winston & Company,  LLC.
              (25)

10.42         Form of Common Stock Purchase Warrant. (25)

14.1          Code of Ethical Conduct. (20)

21.1          Subsidiaries. (26)

23.1          Consent of Grant Thornton LLP.

23.2          Consent of Ernst & Young LLP.

31.1          Certificate of Chief Executive  Officer pursuant to Rule 13a-14(a)
              under the Securities and Exchange Act of 1934, as amended.

31.2          Certificate of Chief Financial  Officer pursuant to Rule 13a-14(a)
              under the Securities and Exchange Act of 1934, as amended.

32.1          Certificate of Chief Executive  Officer pursuant to Rule 13a-14(b)
              under the Securities and Exchange Act of 1934, as amended.

32.2          Certificate of Chief Financial  Officer pursuant to Rule 13a-14(b)
              under the Securities and Exchange Act of 1934, as amended.

----------
*     Management contract or compensatory plan or arrangement.

(1)   Filed as an exhibit to the  Company's  Registration  Statement on Form S-1
      filed with the Securities and Exchange Commission on May 4, 1995 (File No.
      33-91874).

(2)   Filed as an exhibit to Amendment No. 1 to  Registration  Statement on Form
      S-1 filed with the Securities and Exchange Commission on July 15, 1995.

(3)   Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
      quarter ended June 30, 1997.

(4)   Filed as an exhibit to the  Company's  Annual  Report on Form 10-K for the
      year ended December 31, 1998.

(5)   Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
      quarter ended March 31, 1999.

(6)   Filed as an exhibit to the  Company's  Annual  Report on Form 10-K for the
      year ended December 31, 1999.

(7)   Filed as an exhibit to the  Company's  Annual  Report on Form 10-K for the
      year ending December 31, 2000.

(8)   Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
      quarter ending March 31, 2001.

(9)   Filed as an exhibit to the Company's  Quarterly Report on Form 10Q for the
      quarter ending June 30, 2002.

(10)  Filed as an exhibit  to the  Company's  Annual  Report on Form 10K for the
      year ending December 31, 2002.

(11)  Filed as an exhibit to the Company's  Quarterly Report on Form 10Q for the
      quarter ending March 31, 2003.

(12)  Filed as an exhibit to the Company's  Quarterly Report on Form 10Q for the
      quarter ending June 30, 2003.


                                      EX-5
<PAGE>


(13)  Filed as an  exhibit  to the  Company's  Current  Report on Form 8-K dated
      October 16, 2003.

(14)  Filed as an exhibit to the  Company's  Registration  Statement on Form S-3
      filed with the  Securities  and  Exchange  Commission  on October 30, 2003
      (File No. 333-110090).

(15)  Filed as an exhibit to the Company's  Quarterly Report on Form 10Q for the
      quarter ending September 30, 2003.

(16)  Filed as an  exhibit  to the  Company's  Current  Report on Form 8-K dated
      November 12, 2003.

(17)  Filed as an  exhibit  to the  Company's  Current  Report on Form 8-K dated
      December 4, 2003.

(18)  Filed as an exhibit to the Company's  Amendment to Current  Report on Form
      8-K/A, filed December 12, 2003.

(19)  Filed as an  exhibit  to the  Company's  Current  Report on Form 8-K dated
      January 23, 2004.

(20)  Filed as an exhibit to the  Company's  Annual Report on Form 10-K for year
      ending December 31, 2003.

(21)  Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
      quarter ending March 31, 2004.

(22)  Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
      quarter ending June 30, 2004.

(23)  Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
      quarter ending September 30, 2004.

(24)  Filed as an  exhibit  to the  Company's  Current  Report on Form 8-K dated
      December 6, 2004.

(25)  Filed as an  exhibit  to the  Company's  Current  Report on Form 8-K dated
      December 14, 2004.

(26)  Previously filed on Form 10-K for the year ended December 31, 2004.


                                      EX-6