UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K


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

                   For the fiscal year ended December 31, 2005

                                       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 if the  registrant  is a  well-known  seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

         Indicate  by check mark if the  registration  is not  required  to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

         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. [X]

         Indicate by check mark whether the  registrant  is a large  accelerated
filer,  an  accelerated  filer or a  non-accelerated  filer.  See  definition of
"accelerated  filer and large  accelerated  filer" in Rule 12b-2 of the Exchange
Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

         Indicate by check mark whether the  registrant  is a shell  company (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  $51,515,376  based upon the closing price of
the Common Stock on June 30, 2005.

         Number of shares of Common Stock of the  Registrant  outstanding  as of
March 30, 2006: 30,543,763.


<PAGE>


                       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 2006 Annual Meeting of  Shareholders  are  incorporated  by
reference into Part III of this Report.


<PAGE>


                              TARRANT APPAREL GROUP
                               INDEX TO FORM 10-K

PART I                                                                      PAGE

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

Item 1A.      Risk Factors.................................................   10

Item 1B.      Unresolved Staff Comments....................................   15

Item 2.       Properties...................................................   16

Item 3.       Legal Proceedings............................................   16

Item 4.       Submission of Matters to a Vote of Security Holders..........   16

PART II

Item 5.       Market for Registrant's Common Equity, Related Stockholder
                 Matters and Issuer Purchases of Equity Securities.........   17

Item 6.       Selected Financial Data......................................   17

Item 7.       Management's Discussion and Analysis of Financial
                 Condition and Results of Operations.......................   20

Item 7A.      Quantitative and Qualitative Disclosures about Market Risk ..   38

Item 8.       Financial Statements and Supplementary Data..................   38

Item 9.       Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure.......................   38

Item 9A.      Controls and Procedures......................................   38

Item 9B.      Other Information............................................   39

PART III

Item 10.      Directors and Executive Officers of the Registrant...........   39

Item 11.      Executive Compensation.......................................   39

Item 12.      Security Ownership of Certain Beneficial Owners and
                 Management and Related Stockholder Matters................   39

Item 13.      Certain Relationships and Related Transactions...............   39

Item 14.      Principal Accounting Fees and Services.......................   39

PART IV

Item 15.      Exhibits and Financial Statement Schedules...................   39


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                                     PART I

            CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

         This  2005  Annual  Report  on  Form  10-K  contains  statements  which
constitute  forward-looking  statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the  Securities  Exchange Act of 1934,
both as amended.  Those  statements  include  statements  regarding  our intent,
belief or current  expectations.  Prospective  investors are cautioned  that any
such  forward-looking  statements are not guarantees of future  performance  and
involve risks and  uncertainties,  and that actual results may differ materially
from  those  projected  in  the  forward-looking   statements.  Such  risks  and
uncertainties   include,   among  other  things,   our  ability  to  face  stiff
competition,  profitably  manage  a  sourcing  and  distribution  business,  the
financial  strength of our major  customers,  the  continued  acceptance  of our
existing and new products by our existing and new  customers,  dependence on key
customers, the risks of foreign manufacturing,  competitive and economic factors
in the textile and apparel  markets,  the  availability  of raw  materials,  the
ability to manage growth,  weather-related delays,  dependence on key personnel,
general economic conditions,  global  manufacturing costs and restrictions,  and
other risks and uncertainties that may be detailed herein.
See "Item 1A. Risk Factors."

ITEM 1.     BUSINESS

OVERVIEW

         Tarrant  Apparel  Group is a design and  sourcing  company  for private
label and private brand casual apparel  serving mass  merchandisers,  department
stores, branded wholesalers and specialty chains located primarily in the United
States.  Our  major  customers  include  retailers,   such  as  Chico's,  Macy's
Merchandising  Group, the Avenue,  Lane Bryant,  Lerner New York,  Mothers Work,
J.C. Penney, Kohl's, Sears, Mervyn's and Wal-Mart. Our products are manufactured
in a variety of woven and knit  fabrications  and  include  jeans  wear,  casual
pants, t-shirts, shorts, blouses, shirts and other tops, dresses and jackets.

         In 2003 and 2004,  our net sales were $320  million  and $155  million,
respectively.  In 2005,  our net sales  increased by 38.1% to $215  million.  In
2003,  we  experienced  a net loss of $35.9  million,  which  included  non-cash
charges of inventory write-down of $11 million and an impairment of asset charge
of $22.3 million.  In 2004, we experienced a net loss of $104.7  million,  which
included non-cash charges of $22.8 million of foreign currency  translation loss
and $78.0 million of asset  impairments.  In 2005, we experienced  net income of
$1.0 million.  See "Item 7.  Management's  Discussion  and Analysis of Financial
Condition and Results of Operations."

         We launched our private brands  initiative in 2003, in which we acquire
ownership of or license  rights to a brand name and sell apparel  products under
the brand,  generally to a single retail company within a geographic  region. At
March 31, 2006, we are selling  apparel  products under the following  brands at
the following retailers:

         BRAND                              STORES
         ----------------                   --------------------------

         American Rag CIE                   Macy's Merchandising Group
         Alain Weiz                                  Dillard's


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<PAGE>


         In addition to these brands,  we own or license  rights to "Souvenir by
Cynthia  Rowley",  "Gear 7" and brands  associated with Jessica  Simpson,  which
include "JS by Jessica  Simpson",  "Princy by Jessica Simpson" and "Sweet Kisses
by Jessica  Simpson".  With the exception of Souvenir by Cynthia Rowley,  during
2005 we sold apparel  products  under all of these private  brands and under the
brand "House of Dereon by Tina Knowles".

         During 2005 we sold Gear 7 branded apparel to K-Mart. During the fourth
quarter  of  2005,  K-Mart  decided  to  discontinue  this  line,  and we do not
anticipate  sales of Gear 7 products in 2006.  Additionally,  in March 2006,  we
terminated our license  agreement for the brand House of Dereon by Tina Knowles,
and sold our remaining inventory to the licensor. As a result, we will no longer
sell  apparel  products  under this  private  brand.  In March  2006,  we became
involved in a dispute with the licensor of the Jessica  Simpson  brands over our
continued  rights to these brands.  Accordingly,  we do not anticipate  sales of
Jessica Simpson branded apparel after the first quarter of 2006 unless and until
we successfully resolve our dispute with the licensor.

         The expertise  acquired in designing and  developing our private brands
collections has created new  opportunities  within the private label business to
use that same  operating  method to market new  initiatives  for Sears,  Mothers
Work,  Avenue,  Chico's,  and other retailers.  These  initiatives were launched
during 2005.

BUSINESS STRATEGY

         We believe that the following  trends are currently  affecting  apparel
retailing and manufacturing:

         o        Consolidation  among apparel  retailers  has  increased  their
                  ability   to  demand   value-added   services   from   apparel
                  manufacturers,  including fashion  expertise,  rapid response,
                  just-in-time   delivery,   Electronic  Data   Interchange  and
                  favorable pricing.

         o        Increased competition among retailers due to consolidation has
                  resulted in an increased  demand for private label and private
                  brand apparel, which generally offers retailers higher margins
                  and permits them to differentiate their products.

         o        The current  fashion  cycle  requires  more design and product
                  development,  in  addition to quickly  responding  to emerging
                  trends.  Apparel  manufacturers  that offer these capabilities
                  are in demand.

         We believe  that we have the  capabilities  to take  advantage of these
trends and remain a principal value-added supplier of casual,  moderately priced
apparel as well as increase our share of the higher  retail,  "branded"  segment
that the major retailers are pursuing.

         DESIGN  EXPERTISE.  As one of the very few sourcing  companies with our
own design team,  we believe  that we have  established  a  reputation  with our
customers as a fashion  resource and  manufacturer  that is capable of providing
design assistance to customers in the face of rapidly changing fashion trends.

         RESEARCH AND DEVELOPMENT CAPABILITIES. We believe our design capability
combined with our fabric research and development provide a major advantage that
our customers respond to, and that we have skills in the advanced development of
washes and finishes that give us a position of competitive strength.

         MARKETING EXPERTISE. We have the understanding and resources to develop
strong "brand-like"  product marketing to support the need to extend traditional
store brands into product  presentations that have more value to the consumer in
terms of product design and imaging.


                                       2
<PAGE>


         SAMPLE-MAKING  AND  MARKET-TESTING  CAPABILITIES.  We seek  to  support
customers  with our design  expertise,  sample-making  capability and ability to
rapidly produce small test orders of products.

         ON-TIME   DELIVERY.   We  have  developed  a  diversified   network  of
international  contract  manufacturers and fabric suppliers,  which enable us to
accept  orders of varying  sizes and delivery  schedules  and to produce a broad
range of  garments  at  varying  prices  depending  upon  lead  time  and  other
requirements of the customer.

         QUALITY AND  COMPETITIVELY  PRICED  PRODUCTS.  We believe that our long
time  presence  in the Far East and our  experienced  product  management  teams
provide a superior supply chain that enables us to meet the individual  needs of
our customers in terms of quality and lead time.

         PRODUCT  DIVERSIFICATION.  Our experiencing in designing and delivering
complete apparel  collections for some of our customers has improved our overall
ability to  deliver  product  classifications  beyond  our core  casual  bottoms
offerings,  which has  further  diversified  the  merchandise  we offer to other
customers.

         PRIVATE BRANDS. With a private brand  relationship,  we own and control
the brand and thus build equity in the brand as the product gains  acceptance by
consumers. In a private label relationship, we source products for our customers
who own and control the brand and thus benefit from any increase in value of the
brand.

         We believe that forming strong alliances with premier  retailers allows
us greater  penetration  of apparel  categories  in  addition to our core casual
bottoms business.  In addition to the increased breadth of  classifications,  we
have  improved  our  ability to compete  for  private  label  business  based on
expertise gained from our private brand  development.  We receive higher margins
for development of product by design and marketing assistance.

PRODUCTS

         Women's jeans historically have been, and continue to be, our principal
product.  In recent  years,  we have  expanded  our sales of  moderately  priced
women's apparel to include casual,  non-denim,  fabrications including twill and
other cotton and cotton blends,  in woven tops and bottoms.  Our women's apparel
products currently include jeans wear, casual pants, t-shirts,  shorts, blouses,
shirts,  other tops,  dresses and jackets.  These products are  manufactured  in
petite,  standard and large sizes and are sold at a variety of wholesale  prices
generally  ranging  from less than  $5.00 to over  $35.00 per  garment.  We have
produced men's and children's apparel in varying significance for the last seven
years.

         Over the past three years,  approximately 70% of net sales were derived
from the sales of pants and  jeans,  approximately  6% from the sale of  shorts,
approximately 10% from the sale of shirts, blouses and tops and approximately 6%
from the sale of skirts and  skort-alls.  The balance of net sales  consisted of
sales of dresses, jackets and other products.

CUSTOMERS

         We  generally  market our  products to  high-volume  retailers  that we
believe can grow into major accounts.  By limiting our customer base to a select
group of larger accounts, we seek to build stronger long-term  relationships and
leverage our operating costs against large bulk orders.  Although we continue to
diversify our customer  base,  the majority of sales growth is most  predictable
from existing customers.


                                       3
<PAGE>


         The  following  table shows the  percentage  of our net sales in fiscal
year 2005  attributable to each customer that accounted for more than 10% of net
sales.

                                                    PERCENTAGE OF NET SALES
                                                --------------------------------
         CUSTOMER                                            2005
         ------------------------------------   --------------------------------
         Kohl's..............................                13.5
         Macy's Merchandising Group..........                13.4
         Mervyn's............................                11.2
         Wal-Mart............................                11.1


         We  currently  serve  over 20  customers,  which in  addition  to those
identified above, include, Lerner New York, Lane Bryant, Chico's,  Mothers Work,
Sears, the Avenue,  Dillard's and J.C. Penney. In 2003, 2004 and 2005, net sales
of private brands represented  approximately 6%, 14% and 26%,  respectively,  of
our total net sales. We launched our private brands initiative in 2003, in which
we  acquire  ownership  of or license  rights to a brand  name and sell  apparel
products  under  this  brand,  generally  to a single  retail  company  within a
geographic region. We sell products in our brands "American Rag Cie" exclusively
to Macy's  Merchandising  Group, and our licensed brand "Alain Weiz" exclusively
to  Dillard's.  During 2005,  we also sold  products  under the Gear 7, House of
Dereon by Tina Knowles and Princy and JS by Jessica Simpson  brands.  Gear 7 was
discontinued by K-Mart,  JS by Jessica Simpson was purchased by Charming Shoppes
for early fall only,  and we terminated our agreement to design and market House
of Dereon by Tina Knowles in March 2006. We are currently in  disagreement  with
the licensor for Jessica Simpson brand apparel over licensing rights.

          We do not have long-term  contracts  with any of our customers  except
for Macy's Merchandising Group for American Rag Cie and, therefore, there can be
no assurance  that other  customers will continue to place orders with us of the
same  magnitude  as it has in the past,  or at all.  In  addition,  the  apparel
industry  historically has been subject to substantial cyclical variation,  with
consumer  spending for purchases of apparel and related goods tending to decline
during  recessionary  periods.  To the extent that these financial  difficulties
occur,  there can be no assurance  that our  financial  condition and results of
operations would not be adversely affected. See "Item 1A. Risk Factors."

DESIGN, MERCHANDISING AND SALES

         While many private label producers only arrange for the bulk production
of styles  specified by their customers,  we not only design garments,  but also
assist some of our customers in market testing new designs.  We believe that our
design,  sample-production  and  test-run  capabilities  give  us a  competitive
advantage in obtaining  bulk orders from our  customers.  We also often  receive
bulk orders for  garments we have not  designed  because  many of our  customers
allocate bulk orders among more than one producer.

         We have developed integrated teams of design, merchandising and support
personnel, some of whom serve on more than one team, that focus on designing and
producing  merchandise  that  reflects  the style and image of their  customers.
Teams  are  divided  between  private  label and  private  brands  for  sourcing
operations.

         Each team is  responsible  for all  aspects  of its  customer's  needs,
including  designing  products,  developing  product  samples  and  test  items,
obtaining  orders,  coordinating  fabric  choices  and  procurement,  monitoring
production  and  delivering  finished  products.  The  team  seeks  to  identify
prevailing  fashion trends that meet its customer's retail strategies and design
garments  incorporating those trends. The team also works with the buyers of its
customer to revise designs as necessary to better


                                       4
<PAGE>


reflect the style and image that the customer  desires to project to  consumers.
During  the  production  process,  the team is  responsible  for  informing  the
customer about the progress of the order,  including any difficulties that might
affect the  timetable  for  delivery.  In this way, our customer and we can make
appropriate  arrangements  regarding any delay or other change in the order.  We
believe  that  this  team   approach   enables  our   employees  to  develop  an
understanding of the customer's  distinctive styles and production  requirements
in order to respond effectively to the customer's needs.

         From  time to time  and at  scheduled  seasonal  meetings,  we  present
samples to the  customer's  buyers who determine  which,  if any, of the samples
will be produced on a test run or a bulk order.  Samples are often  presented in
coordinated groupings or as part of a product line. Some customers, particularly
specialty  retail stores,  may require that a product be tested before placing a
bulk order.  Testing involves the production of as few as several hundred copies
of a given sample in different size, fabric and color combinations. The customer
pays for these test items, which are placed in selected stores to gauge consumer
response.  The  production  of test items  enables  our  customers  to  identify
garments  that may  appeal to  consumers  and also  provides  us with  important
information  regarding the cost and  feasibility  of the bulk  production of the
tested garment. If the test is determined to be successful, we generally receive
a significant  percentage of the customer's total bulk order of the tested item.
In  addition,  as is typical in the  private  label  business,  we receive  bulk
production  orders to produce  merchandise  designed by our competitors or other
designers,  since  most  customers  allocate  bulk  orders  among  a  number  of
suppliers.

SOURCING

GENERAL

         When  bidding  for or  filling  an order,  our  international  sourcing
network enables us to choose from among a number of suppliers and  manufacturers
based on the customer's price requirements,  product specifications and delivery
schedules.  Historically,  we  manufactured  our  products  through  independent
cutting,  sewing and finishing  contractors  located  primarily in Hong Kong and
China, and have purchased our fabric from independent fabric  manufacturers with
weaving mills located primarily in Hong Kong and China. In recent years, we have
expanded our network to include suppliers and manufacturers  located in a number
of additional countries, including India, Nepal, Thailand, Egypt and Mexico. Our
sourcing  strategy is based on a strong  presence in Hong Kong and China,  and a
continued  presence in Southeast Asia. We also continue to source  production in
Mexico and  Nicaragua.  The  following  table sets forth the  percentage  of our
merchandise,  on the basis of the free on board cost at the supplier's plant, or
FOB Basis, by country for the periods indicated:

                                                  2003       2004        2005
                                                -------    --------    -------
         INTERNATIONAL SOURCING:
              Hong Kong, Macau and China......    29.7%      46.9%      71.3%
              Other (1).......................    23.3%      33.4%      14.6%
         DOMESTIC SOURCING:
              United States...................     4.4%       7.1%       9.4%
              Mexico and Central America......    42.6%      12.6%       4.7%
         --------------------
         (1) In  2005,  this  category  consisted  mainly  of  Mongolia,  Egypt,
         Thailand, Vietnam, Nepal and India.

DEPENDENCE ON CONTRACT MANUFACTURERS

         The use of  contract  manufacturers  and the  resulting  lack of direct
control  over the  production  of our  products  could  result in our failure to
receive timely delivery of products of acceptable quality.


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<PAGE>


Although we believe that  alternative  sources of cutting,  sewing and finishing
services are readily available,  the loss of one or more contract  manufacturers
could have a materially  adverse  effect on our results of  operations  until an
alternative source can be located and commence producing our products.

         Although  we have  adopted a code of vendor  conduct  and  monitor  the
compliance  of  our  independent  contractors  with  our  code  of  conduct  and
applicable  labor  laws,  we do not  control  our  contractors  or  their  labor
practices.  The violation of federal,  state or foreign labor laws by one of our
contractors  can result in us being  subject  to fines and our goods,  which are
manufactured in violation of such laws, being seized or their sale in interstate
commerce being prohibited.  Additionally, certain of our customers may refuse to
do business  with us based on our  contractors'  labor  practices.  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 or could  have a
material  adverse effect upon us, and we are not aware of any facts on which any
such sanctions could be based. There can be no assurance,  however,  that in the
future we will not be subject to sanctions or lose  business  from our customers
as a result of violations of applicable labor laws by our  contractors,  or that
such  sanctions or loss of business will not have a material  adverse  effect on
us. In addition,  our  customers  require  strict  compliance  by their  apparel
manufacturers,  including  us, with  applicable  labor laws. To that end, we are
regularly  inspected by some of our major  customers.  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.

         Except for a  commitment  to  purchase  $5  million of fabric  annually
manufactured  at  facilities  in  Mexico  that we  previously  owned and sold to
affiliates of Mr. Nacif, a shareholder at the time of transaction in 2004, we do
not have any long-term contracts with independent fabric suppliers.  The loss of
any of our major fabric  suppliers  could have a material  adverse effect on our
financial condition and results of operations until alternative arrangements are
secured.

DIVERSIFIED PRODUCTION NETWORK

         We have a production  network that is capable of servicing a wide range
of customer needs. Some customers place a priority on "speed to market," and are
willing to pre-approve  several different fabric styles,  and pay air freight in
order to quickly get the most current styling into their stores. Other customers
seek lower costs,  and are willing to source  production  from more remote areas
with  long  lead-times.  Although  mass  merchandisers,  such as  Wal-Mart,  are
beginning  to operate on  shorter  lead  times,  they are  occasionally  able to
estimate  their  needs as much as six  months  to nine  months  in  advance  for
"program"  business--basic  products  that do not change in style  significantly
from season to season. Our ability to operate on different  production schedules
helps us to meet our customers' varying needs.

         By allocating an order among different  manufacturers,  we seek to fill
the  high-volume   orders  of  our  customers,   while  meeting  their  delivery
requirements.  Upon receiving an order,  we determine which of our suppliers and
manufacturers can best fill the order and meet the customer's price, quality and
delivery  requirements.  We consider,  among other things,  the price charged by
each  manufacturer  and the  manufacturer's  available  production  capacity  to
complete the order, as well as the availability of quota, if applicable, for the
product from various countries and the  manufacturer's  ability to produce goods
on a  timely  basis  subject  to  the  customer's  quality  specifications.  Our
personnel  also consider the  transportation  lead times  required to deliver an
order from a given  manufacturer  to the customer.  In addition,  some customers
prefer not to carry excess  inventory and therefore  require that we stagger the
delivery of products over several weeks.


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<PAGE>


INTERNATIONAL SOURCING

         We conduct and monitor our sourcing  operations from our  international
offices. At December 31, 2005, we had offices in Hong Kong, Mexico and Thailand.
The staffs at these  locations have extensive  knowledge  about,  and experience
with, sourcing and production in their respective regions, including purchasing,
manufacturing  and  quality  control.  Several  times each year,  members of our
senior  management,  including local staff, visit and inspect the facilities and
operations of our international suppliers and manufacturers.

         Foreign   manufacturing  is  subject  to  a  number  of  risk  factors,
including,   among  other  things,   transportation  delays  and  interruptions,
political instability,  expropriation,  currency fluctuations and the imposition
of tariffs,  import and export controls,  other non-tariff  barriers  (including
changes in the  allocation of quotas),  natural  disasters and cultural  issues.
Each of these factors could have a material adverse effect on us.

         While we are in the process of establishing business relationships with
manufacturers  and suppliers located in countries other than Hong Kong, Macau or
China, such as in India, Nepal, Vietnam,  Thailand and Egypt, we still primarily
contract with manufacturers and suppliers located in Hong Kong and China for our
international  sourcing needs,  and currently expect that we will continue to do
so for the foreseeable  future. Any significant  disruption in our operations or
our  relationships  with our manufacturers and suppliers located in Hong Kong or
China could have a material adverse effect on us.

THE IMPORT SOURCING PROCESS

         As is customary in the apparel  industry,  we do not have any long-term
contracts with our manufacturers.  During the manufacturing process, our quality
control personnel visit each factory to inspect garments when the fabric is cut,
as it is being sewn and as the garment is being finished.  Daily  information on
the  status  of  each  order  is  transmitted  from  the  various  manufacturing
facilities  to our offices in Hong Kong and Los Angeles.  We, in turn,  keep our
customers  apprised,  often through daily telephone  calls and frequent  written
reports. These calls and reports include candid assessments of the progress of a
customer's order, including a discussion of the difficulties,  if any, that have
been encountered and our plans to rectify them.

         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.  For
our longstanding program business,  we may purchase or produce fabric in advance
of receiving the order, but in accordance with the customer's specifications. By
procuring fabric for an entire order from one source, we believe that production
costs per garment are reduced and customer  specifications  as to fabric quality
and color can be better controlled.

         The  anti-terrorist  measures  adopted  by the U.S.  government  and in
particular,  by the U.S. Customs, have meant more stringent inspection processes
before  imported goods are cleared for delivery into the U.S. In some instances,
these  measures  have caused delays in the  pre-planned  delivery of products to
customers.

DISTRIBUTION

         Based on our world wide  sourcing  capability  and in order to properly
fulfill orders,  we have tailored our  distribution  system to meet the needs of
the customer.  Some  customers,  like Wal-Mart and Kohl's,  use Electronic  Data
Interchange, or "EDI", to send orders and receive merchandise and invoices.


                                       7
<PAGE>


The EDI distribution  function has been centralized in our Los Angeles corporate
headquarters  in order to  expedite  and  control  the flow of  merchandise  and
electronic  information,  and to insure that the special requirements of our EDI
customers are met.

         For  orders  sourced   outside  the  United  States  and  Mexico,   the
merchandise is shipped from the production  facility by truck to a port where it
is consolidated and loaded on  containerized  vessels for ocean transport to the
United States. For customers with West Coast and Mid West distribution  centers,
the  merchandise  is  brought  into  the  port  of Los  Angeles.  After  Customs
clearance,  the  merchandise  is  shipped  by truck to  either  our Los  Angeles
warehouse facility or an independent bonded warehouse in Ohio.  Proximity to the
customer's   distribution   center  is  important  for  customer  support.   For
merchandise  produced in the Middle East and destined for an East Coast customer
distribution center, the port of entry is New York. After Customs clearance, the
merchandise is trucked to an  independent  public  warehouse in New Jersey.  The
independent  warehouses are instructed in writing by the Los Angeles office when
to ship the merchandise to the customer.

BACKLOG

         As of March 22, 2006, we had unfilled  customer orders of approximately
$74 million as compared to  approximately  $73 million as of March 22, 2005.  We
believe  that all of our  backlog of orders as of March 22,  2006 will be filled
before  the end of the third  quarter  of fiscal  2006.  Backlog is based on our
estimates  derived  from  internal  management  reports.  The amount of unfilled
orders at a particular  time is affected by a number of factors,  including  the
scheduling  of  manufacturing  and  shipping  of  the  product,  which  in  some
instances, depends on the customer's requirements.  Accordingly, a comparison of
unfilled orders from period to period is not necessarily  meaningful and may not
be indicative of eventual  annual bookings or actual  shipments.  Our experience
has been that the  cancellations,  rejections  or  returns  of  orders  have not
materially reduced the amount of sales realized from our backlog.

SEGMENT INFORMATION

         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 four  geographic
regions: the United States, Asia, Mexico and Luxembourg. 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.  For
information  regarding the revenues and assets  associated  with our  geographic
regions, see Note 16 of the "Notes to Consolidated Financial Statements."

IMPORT RESTRICTIONS

QUOTAS

         We  imported   approximately   90%  of  our  products   sold  in  2005.
Approximately 5% of this merchandise was imported from Mexico,  which is subject
to special  rules under  NAFTA.  NAFTA  allows for the duty and quota free entry
into the United States of certain qualifying merchandise.

         A majority of the merchandise  imported by us in 2005 was  manufactured
in  various  countries  (e.g.,  China)  with  which the U.S.  had  entered  into
bilateral trade agreements.

         As of  January  1,  2005,  quota on  apparel  from  all WTO  countries,
including  China  (except that certain  commodities  still  require  quotas as a
result of "safeguard measures"), was eliminated. As China is


                                       8
<PAGE>


now a member of the WTO,  its  exports of textiles  and apparel to the U.S.  are
covered by the WTO Agreement on Textiles and Clothing.

DUTIES AND TARIFFS

         As with all goods imported into the U.S.,  our imported  merchandise is
subject to duty (unless  statutorily  exempt from duty) at rates  established by
U.S.  law.  These  rates  range,   depending  on  the  type  of  product,   from
approximately 2% to 35% of the FOB value of the product.  In addition to duties,
in the ordinary course of our business, we are occasionally subject to claims by
the U.S.  Bureau of Customs  and Border  Protection  for  penalties,  liquidated
damages and other charges relating to import  activities.  Similarly,  we are at
times  entitled to refunds  from  Customs,  resulting  from the  overpayment  of
duties.

         Products  imported from China into the United  States  receive the same
preferential tariff treatment accorded goods from other countries granted Normal
Trade Relations ("NTR") status.  This status has been in place conditionally for
a number of years and is now  guaranteed  on a more  permanent  basis by China's
accession to WTO membership in December 2001.

         Our continued  ability to source products from foreign countries may be
adversely  affected or improved by future  trade  agreements  and  restrictions,
changes in U.S. trade policy,  embargoes, the disruption of trade from exporting
countries as a result of political  instability  or the imposition of additional
duties,  taxes and other  charges or  restrictions  on all imports or  specified
classes of imports.

COMPETITION

         There is intense  competition in the sectors of the apparel industry in
which we participate.  We compete with many other  manufacturers,  many of which
are larger and have greater resources than us. We also face competition from our
own customers and potential  customers,  many of which have established,  or may
establish, their own internal product development and sourcing capabilities.  We
believe   that  we  compete   favorably  on  the  basis  of  design  and  sample
capabilities,  the quality and value of our products,  price, and the production
flexibility that we enjoy as a result of our sourcing network.

TRADEMARKS

         As part of our private  brands  strategy,  we acquire  ownership  of or
rights to a brand  name and sell  apparel  products  under this  brand.  We have
ownership  rights to the registered  trademarks  "American Rag Cie," "Gear7" and
"NO! Jeans." In addition,  we have acquired license rights to design, market and
distribute  certain apparel  products under the Cynthia  Rowley,  Alain Weiz and
Jessica Simpson brands.

SEASONALITY

         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.

EMPLOYEES

         At December 31, 2005, we had approximately  183 full-time  employees in
the United States, 14 in Mexico, 138 in Hong Kong, 3 in China and 8 in Thailand.
None of our  employees  are  unionized.  We  consider  our  relations  with  our
employees to be satisfactory in all areas of our operations.


                                       9
<PAGE>


ITEM 1A.    RISK FACTORS

         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.

         Four  customers  accounted  for  approximately  49% of our net sales in
fiscal year 2005.  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 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
experience  similar  delays  in  the  future  especially  during  peak  seasons.
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 affect our results of operations.

UNPREDICTABLE  DELAYS  AS  THE  RESULT  OF  INCREASED  AND  INTENSIFIED  CUSTOMS
ACTIVITY.

         U.S.  Customs has stepped up efforts to  scrutinize  imports  from Hong
Kong in order to verify all details of  shipments  under the OPA rules  allowing
certain  processes to be performed in China without shipping under China country
of origin  documentation.  Such "detentions" are unpredictable and cause serious
interruption of normally expected freight movement timetables.


                                       10
<PAGE>


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.

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 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, 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.

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
debt and equity  securities,  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.


                                       11
<PAGE>


         Substantially  all of our  import  operations  are  subject  to tariffs
imposed on imported  products,  safeguards and growth  targets  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 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  or reducing  tariffs.  The  elimination of quotas on World
Trade Organization  member countries in 2005 has resulted in explosive growth in
textile imports from China, and subsequent  safeguard measures including embargo
of  certain  China  country of origin  products.  Actions  taken to avoid  these
measures caused  disruption,  and a negative impact on margins.  Such disruption
may continue to affect us to some extent in the future.

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 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


                                       12
<PAGE>


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 DEPENDENCE ON THIRD PARTIES FOR BRANDED APPAREL PRODUCTS REDUCES OUR ABILITY
TO CONTROL THE MARKETING  PROCESS,  WHICH COULD HARM OUR SALES,  REPUTATION  AND
OVERALL PROFITABILITY.

         For certain branded apparel lines, in particular  celebrity  brands, we
depend on the cooperation and efforts of the celebrity personality and/or master
licensor to support our design and  marketing  efforts for apparel  products.  A
celebrity's  failure to adequately support our marketing efforts could adversely
affect the sales for new products and lines. In addition,  we are subject to the
terms of our agreements  with the master licensor for licensed  brands,  and our
rights to exploit certain brands may therefore be limited. Further, we may, from
time to time,  become involved in disputes with the master licensor with respect
to our  contractual  relationship.  To the  extent  we are not  able to  receive
adequate  support from the master  licensor  and/or  celebrity or maintain  good
working relationships with master licensors, our business would be harmed.

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

         Approximately  90% of our products  were imported from outside the U.S.
in fiscal 2005. 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.


                                       13
<PAGE>


         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.

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 $7.7 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, 2006,  our  executive  officers and directors and their
affiliates  owned  approximately  43% of the  outstanding  shares of our  common
stock.  Gerard Guez, our Chairman,  and Todd Kay, our Vice  Chairman,  alone own
approximately  33.1% and 8.4%,  respectively,  of the outstanding  shares of our
common  stock at  March  31,  2006.  Accordingly,  our  executive  officers  and


                                       14
<PAGE>


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.

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 1B.    UNRESOLVED STAFF COMMENTS

         None.


                                       15
<PAGE>


ITEM 2.     PROPERTIES

         At March 31, 2006, we conducted our operations from 9 facilities,  7 of
which were leased. Our leased facilities included:

<TABLE>
<CAPTION>
                                                            Annual
Location                                Purpose          Rental Amount     Expiration
-----------------------------    --------------------   ---------------   -------------
<S>                              <C>                    <C>               <C>
Los Angeles, CA                  Executive offices      $656,000          Monthly
(Washington Blvd.)
New York, NY                     Showroom               $150,000          August 2007
New York, NY                     Showroom               $535,000          June 2015
Ruleville, MS  (2 facilities)    Office and warehouse   Own
Hong Kong                        Office and warehouse   $420,000          December 2006
Hong Kong                        Warehouse              $17,000           July 2007
Bangkok                          Office                 $6,000            March 2007
Tehuacan, Mexico                 Storage                $5,000            Monthly
</TABLE>

         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. Our Los Angeles  offices and  warehouse is leased on a
month to month  basis.  On  January 1,  2006,  we entered  into a one year lease
agreement with Lynx International Limited for our office space in Hong Kong.

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

         We extended our lease for the facility in Bangkok  through  March 2007.
We extended the lease for our Hong Kong warehouse facility through July 2007.

         We entered  into a new lease  agreement in June 2005 in New York as our
showroom  through June 2015. This is currently the location used for the private
brands sales, design and technical departments,  which functions were moved from
our Los Angeles executive office.

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

ITEM 3.     LEGAL PROCEEDINGS

         From time to time, we are involved in various routine legal proceedings
incidental to the conduct of our business.  Our management does not believe that
any of these  legal  proceedings  will  have a  material  adverse  impact on our
business, financial condition or results of operations, either due to the nature
of the claims,  or because our  management  believes that such claims should not
exceed the limits of the our insurance coverage.

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

         There were no matters  submitted to a vote of our  shareholders  during
the fourth quarter of 2005.


                                       16
<PAGE>


                                     PART II

ITEM 5.     MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS
            AND ISSUER PURCHASES OF EQUITY

NASDAQ NATIONAL MARKET

         Our common stock has been quoted on The NASDAQ Stock Market's  National
Market System under the symbol "TAGS" since 1995.

         The following table sets forth, for the periods indicated, the range of
high and low sale prices for our common stock as reported by NASDAQ.

                                                            Low          High
                                                          ---------    --------
2004
First Quarter......................................         1.68         3.73
Second Quarter.....................................         1.45         2.53
Third Quarter......................................         0.79         1.57
Fourth Quarter.....................................         0.78         2.44

2005
First Quarter......................................         1.50         2.62
Second Quarter.....................................         1.35         3.88
Third Quarter......................................         2.76         4.12
Fourth Quarter.....................................         1.02         3.15

         On March 24, 2006,  the last reported sale price of our common stock as
reported by NASDAQ was $1.27.  As of March 24, 2006, we had 26  shareholders  of
record.

DIVIDEND POLICY

         We have not declared dividends on our common stock during either of the
last two fiscal  years.  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.


                                       17
<PAGE>


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,
                                  -------------------------------------------------------------
                                     2001         2002         2003        2004          2005
                                  ---------    ---------    ---------    ---------    ---------
                                             (In thousands, except per share data)
<S>                               <C>          <C>          <C>          <C>          <C>
INCOME STATEMENT DATA:
Net sales .....................   $ 330,253    $ 347,391    $ 320,423    $ 155,453    $ 214,648
Cost of sales .................     277,525      302,082      288,445      134,492      169,767
                                  ---------    ---------    ---------    ---------    ---------
   Gross profit ...............      52,728       45,309       31,978       20,961       44,881
Selling and distribution
   expenses ...................      14,345       10,757       11,329        9,291       10,726
General and administrative
   expenses ...................      33,136       30,082       31,767       32,084       26,865
Royalty expense ...............         500          656          242          605        3,665
Amortization of
   Intangibles (2) ............       3,317         --           --           --           --
Impairment charges (3) ........        --           --         22,277       77,982         --
Cumulative translation loss (4)        --           --           --         22,786         --
                                  ---------    ---------    ---------    ---------    ---------

Income (loss) from operations .   $   1,430        3,814      (33,637)    (121,787)       3,625
Interest expense ..............      (7,808)      (5,444)      (5,603)      (2,857)      (4,625)
Interest income ...............       3,256        4,748          425          377        2,081
Minority interest .............        (412)      (4,581)       3,461       15,331          (75)
Interest in income of equity
   method investee ............        --           --           --            770          560
Other income (1) ..............       1,853        2,648        4,784        6,366          354
Other expense (1) .............        (356)      (1,348)      (1,183)        (529)        --
                                  ---------    ---------    ---------    ---------    ---------
Income (loss) before provision
   for income taxes and
   cumulative effect of
   accounting change ..........      (2,037)        (163)     (31,753)    (102,329)       1,920
Provision for income taxes ....        (852)      (1,051)      (4,132)      (2,348)        (927)
                                  ---------    ---------    ---------    ---------    ---------
Income (loss) before cumulative
   effect of accounting change    $  (2,889)   $  (1,214)   $ (35,885)   $(104,677)   $     993
Cumulative effect of
   accounting change (2) ......        --         (4,871)        --           --           --
                                  ---------    ---------    ---------    ---------    ---------
Net income (loss) .............   $  (2,889)   $  (6,085)   $ (35,885)   $(104,677)   $     993
Dividend to preferred
   stockholders ...............        --           --         (7,494)        --           --
                                  ---------    ---------    ---------    ---------    ---------
Net income (loss) available to
   common stockholders (as
   restated) ..................   $  (2,889)   $  (6,085)   $ (43,379)   $(104,677)   $     993
                                  =========    =========    =========    =========    =========

Net income (loss) per share -
Basic:
   Before cumulative effect of
   accounting change (as
   restated) ..................   $   (0.18)   $   (0.08)   $   (2.38)   $   (3.64)   $    0.03
   Cumulative effect of
     accounting change ........        --          (0.30)        --           --           --
   After cumulative effect of
     accounting change (as
     restated) ................   $   (0.18)   $   (0.38)   $   (2.38)   $   (3.64)   $    0.03
Net income (loss) per share -
Diluted:
   Before cumulative effect of
     accounting change (as
     restated) ................   $   (0.18)   $   (0.08)   $   (2.38)   $   (3.64)   $    0.03


                                       18
<PAGE>


   Cumulative effect of
     accounting change ........        --          (0.30)        --           --           --
   After cumulative effect of
     accounting change (as
     restated) ................   $   (0.18)   $   (0.38)   $   (2.38)   $   (3.64)   $    0.03

Weighted average shares
   outstanding (000)
   Basic ......................      15,825       15,834       18,215       28,733       29,729
   Diluted ....................      15,825       15,834       18,215       28,733       29,734
</TABLE>


<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                  -------------------------------------------------------------
                                     2001         2002         2003        2004          2005
                                  ---------    ---------    ---------    ---------    ---------
                                                         (In thousands)
<S>                               <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
Working capital ............      $  25,109    $  11,731    $ (18,018)   $ (12,295)   $ (11,004)
Total assets ...............        288,467      316,444      253,105      131,811      151,242
Bank borrowings, convertible
   debenture and long-term
   obligations .............        111,336      106,937       68,587       48,455       56,148
Shareholders' equity .......        125,164      121,161      107,709       30,678       35,360
</TABLE>

----------
(1)   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."
(2)   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.
(3)   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."
(4)   Cumulative  translation loss  attributable to liquidated Mexico operations
      in 2004 was due to our decision to cease our Mexico operations.


                                       19
<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,  2003,  2004 and 2005.
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" and "Item 1A. Risk
Factors."

OVERVIEW

         Tarrant  Apparel  Group is a design and  sourcing  provider  of private
label and private brand casual apparel  serving mass  merchandisers,  department
stores, branded wholesalers and specialty chains located primarily in the United
States. Our private brands include American Rag Cie, No! Jeans, Alain Weiz, Gear
7, Souvenir by Cynthia Rowley and brands associated with Jessica Simpson,  which
include "JS by Jessica  Simpson",  "Princy by Jessica Simpson" and "Sweet Kisses
by Jessica Simpson.

         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 income  (loss) for the
years  ended  December  31,  2003,  2004 and 2005 were as  follows  (dollars  in
thousands):

REVENUES AND NET LOSS:                  2003             2004             2005
                                     ---------        ---------        ---------

Net sales ....................       $ 320,423        $ 155,453        $ 214,648
Net income (loss) ............       $ (35,885)       $(104,677)       $     993


         Cash flows for the years ended December 31, 2003, 2004 and 2005 were as
follows (dollars in thousands):

CASH FLOWS:                                  2003          2004          2005
                                           --------      --------      --------

Net cash provided by (used in)
   operating activities ..............     $  9,935      $ 12,168      $(12,900)
Net cash provided by (used in)
   investing activities ..............     $ (1,504)     $  1,250      $  3,555
Net cash provided by (used in)
   financing activities ..............     $ (6,295)     $(15,552)     $  9,772


SIGNIFICANT DEVELOPMENTS IN 2005

PRIVATE LABEL

         Private  label  business has been our core  competency  for over twenty
years, and involves a one to one relationship with a large, centrally controlled
retailer   with  whom  we  can   develop   product   lines  that  fit  with  the
characteristics of their particular  customer.  Private label sales in 2005 were
$159.6 million compared to $133.8 million in 2004.

         The  success  of  our  private  brands   collections  has  created  new
opportunities within the private


                                       20
<PAGE>


label business to add value in the  development and marketing of new initiatives
for Sears, Mothers Work, Avenue, Chico's, and other retailers. These initiatives
were launched  during 2005, and are on track to be significant  growth areas for
2006.

PRIVATE BRANDS

         We launched our private brands initiative in 2003, pursuant to which we
acquire ownership of or license rights to a brand name and sell apparel products
under this brand,  generally  to a single  retail  company  within a  geographic
region.  Private  brands  sales in 2005 were  $55.0  million  compared  to $21.7
million in 2004.  At  December  31,  2005,  we owned or  licensed  rights to the
following private brands:

         o        AMERICAN  RAG CIE:  During  the  first  quarter  of  2005,  we
                  extended our agreement with Macy's Merchandising Group for six
                  years,  pursuant  to  which  we  exclusively   distribute  our
                  American Rag Cie brand through  Macy's  Merchandising  Group's
                  national  Department  Store  organization  of  more  than  500
                  stores.  Net sales of American Rag Cie branded apparel totaled
                  $21.8 million in 2005.

         o        ALAIN WEIZ: We continue to sell Alan Weiz apparel  exclusively
                  to  Dillard's  Department  Stores.  Net  sales of  Alain  Weiz
                  branded apparel totaled $5.3 million in 2005.

         o        SOUVENIR  BY  CYNTHIA  ROWLEY:  We  are  in  discussions  with
                  retailers  to identify a potential  distribution  alliance for
                  the 2006  fall or  holiday  season  for  Souvenir  by  Cynthia
                  Rowley.

         o        GEAR 7: During the fourth quarter of 2005, K-Mart discontinued
                  sales of Gear 7 products, which resulted in a decline in sales
                  for this  brand in the fourth  quarter  of 2005.  Net sales of
                  Gear 7 branded  apparel  totaled  $14.4 million in 2005. We do
                  not anticipate sales of Gear 7 branded apparel in 2006.

         o        JESSICA  SIMPSON  brands:  The JS by Jessica Simpson brand was
                  originally  launched  as a denim line with  Charming  Shoppes.
                  However,  Charming  Shoppes informed us that they would not go
                  forward  with the line,  resulting  in reduced  sales for this
                  brand  in the  fourth  quarter  of  2005.  Net  sales of JS by
                  Jessica  Simpson and Princy by Jessica  Simpson,  which is the
                  department  store and better  specialty  store brand,  totaled
                  $12.6 million in 2005. In March 2006, we became  involved in a
                  dispute with the licensor of the Jessica  Simpson  brands over
                  our continued rights to these brands.  Accordingly,  we do not
                  anticipate  sales of Jessica Simpson branded apparel after the
                  first quarter of 2006 unless and until we successfully resolve
                  our dispute with the licensor.

         o        HOUSE OF DEREON BY TINA KNOWLES:  We began  shipping  products
                  for the House of Dereon by Tina  Knowles  brand in the  fourth
                  quarter of 2005,  resulting  in net sales of $309,000 in 2005.
                  In March 2006,  we terminated  our license  agreement for this
                  brand, and sold our remaining inventory to the licensor. Prior
                  to December  31,  2005,  we had  written  off the  capitalized
                  balance  of  $1.2  million   related  to  the   agreement  and
                  recognized a loss accordingly in 2005. The loss was classified
                  as  royalty   expense  on  our   consolidated   statements  of
                  operations.

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


                                       21
<PAGE>


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 $7.7
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.

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


                                       22
<PAGE>


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,  2005,  the balance in the  allowance  for returns,
discounts and bad debts  reserves was $3.0 million,  compared to $2.4 million at
December 31, 2004.

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.

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 utilized  the  discounted  cash flow  methodology  to estimate  fair
value. At December 31, 2005, we have a goodwill  balance of $8.6 million,  and a
net property and equipment  balance of $1.7  million,  as compared to a goodwill
balance of $8.6 million and a net property and equipment balance of $1.9 million
at December 31, 2004.  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.  During the year ended  December 31,  2005,  we did not
recognize any impairment related to goodwill and property and equipment.

         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.


                                       23
<PAGE>


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.

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,
net of an estimate of returned merchandise and discounts.  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.

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


                                       24
<PAGE>


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."

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

Net sales .....................................      100.0%    100.0%    100.0%
Cost of sales .................................       90.0      86.5      79.1
                                                  --------  --------  --------
Gross profit ..................................       10.0      13.5      20.9
Selling and distribution expenses .............        3.5       6.0       5.0
General and administration expenses ...........        9.9      20.6      12.5
Royalty Expenses ..............................        0.1       0.4       1.7
Impairment charges ............................        7.0      50.2      --
Cumulative translation loss ...................       --        14.7      --
                                                  --------  --------  --------

Income (loss) from operations .................      (10.5)    (78.4)      1.7
Interest expense ..............................       (1.7)     (1.8)     (2.2)
Interest income ...............................        0.1       0.2       1.0
Minority interest .............................        1.0       9.9       0.0
Interest in income of equity method investee ..        0.0       0.5       0.3
Other income ..................................        1.5       4.1       0.1
Other expense .................................       (0.3)     (0.3)     (0.0)
                                                  --------  --------  --------

Income (loss) before provision for income taxes       (9.9)    (65.8)      0.9
Provision for income taxes ....................       (1.3)     (1.5)     (0.4)
                                                  --------  --------  --------

Net Income (loss) .............................      (11.2)%   (67.3)%     0.5%
                                                  ========  ========  ========


COMPARISON OF 2005 TO 2004

         Net sales increased by $59.2 million,  or 38.1%, from $155.5 million in
2004 to $214.6  million in 2005.  The increase in net sales was primarily due to
increased sales of private brands, which was $55.0


                                       25
<PAGE>


million in 2005 compared to $21.7 million in 2004. Gear 7, JS by Jessica Simpson
and Princy by Jessica Simpson recorded  significant sales contributions in 2005,
as compared to sales of $1.2 million for these  brands in 2004.  We expect sales
of these brands to decline  significantly in 2006 due to the  discontinuance  of
the Gear 7 line by K-Mart,  the dispute over our continued rights to the Jessica
Simpson line and the discontinuation of House of Dereon.  Private label sales in
2005 were $159.6 million  compared to $133.8 million in 2004,  with the increase
resulting primarily from increased sales in 2005 to Wal-Mart,  Chico's,  Mothers
Work and Macy's Merchandising Group.

         Gross profit  consists of net sales less product  costs,  direct labor,
manufacturing overhead, duty, quota, freight in, and brokerage. Gross profit for
2005 was $44.9 million,  or 20.9% of net sales,  compared to $21.0  million,  or
13.5 % of net sales,  for 2004,  representing  an increase  of $23.9  million or
114.1%.  The increase in gross profit for 2005 occurred  primarily because of an
increase in sales volume and gross margin.  The  improvement  in gross margin is
primarily  attributable  to the change of  relative  product mix in favor of the
higher margin  private  brands  business as compared to private label as well as
improved  margins in the private label business due to expansion of our business
to include more  knitwear and woven tops at better  margins  using private brand
product developments.

         Selling and distribution  expenses increased by $1.4 million, or 15.5%,
from $9.3  million in 2004 to $10.7  million  in 2005.  As a  percentage  of net
sales,  these variable expenses  decreased from 6.0% in 2004 to 5.0% in 2005 due
to the significant increase in sales volume during 2005.

         General and  administrative  expenses  decreased  by $5.2  million,  or
16.3%,  from $32.1  million in 2004 to $26.9  million in 2005.  The decrease was
primarily due to the  depreciation and amortization of our Mexico assets of $6.8
million and $1.1  million of  severance  paid to the Mexican  workers in 2004 as
compared to no such  expense in 2005 after  disposition  of our fixed  assets in
Mexico in late 2004. As a percentage of net sales, these expenses decreased from
20.6% in 2004 to 12.5% in 2005.

         Royalty and marketing  allowance expenses increased by $3.1 million, or
505.8%,  to $3.7  million  in 2005  from  $605,000  in 2004.  The  increase  was
primarily  due to  increased  sales  under the  licensed  Alain Weiz and Jessica
Simpson  brands and a  write-off  of the  remaining  balance of $1.2  million of
prepaid  royalty  on House of Dereon in 2005 as a result of  termination  of our
agreement  to design,  market and sell House of Dereon by Tina  Knowles  branded
apparel  in March  2006.  See Note 11 of the  "Notes to  Consolidated  Financial
Statements." As a percentage of net sales,  these expenses  increased to 1.7% in
2005 from 0.4% in 2004.

         Impairment  charges were $78.0 million in 2004 or (50.2)% of net sales,
compared to no such expense in 2005.  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.  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 2005.  We incurred this charge upon the sale of our fixed assets
in Mexico in the fourth quarter of 2004.

         Income from  operations was $3.6 million in 2005, or 1.7% of net sales,
compared to loss from  operation  of $121.8  million in 2004,  or (78.4)% of net
sales, due to the factors described above.

         Interest expense increased by $1.7 million, or 61.9%, from $2.9 million
in 2004 to $4.6  million in 2005.  As a  percentage  of net sales,  this expense
increased to 2.2% in 2005 from 1.8% in 2004.  The increase was  primarily due to
an interest  expense of $1.3  million in 2005  related to  interest  payments to
holders of convertible debentures and amortization of debt discount arising from
issuing convertible


                                       26
<PAGE>


debentures,  compared to no such expense in 2004.  Interest income  increased by
$1.7  million,  or 451.3%  from  $378,000 in 2004 to $2.1  million in 2005.  The
increase  was  primarily  due to the interest  earned from the notes  receivable
related  to the sale of our fixed  assets in  Mexico  of $1.9  million  in 2005,
compared to no such income in 2004. Other income  decreased by $6.0 million,  or
94.4%,  from $6.4  million in 2004 to $354,000 in 2005,  due  primarily  to $5.5
million of lease income  received for the lease of our  facilities and equipment
in Mexico  in 2004,  compared  to no such  income in 2005 due to the sale of our
Mexico operations in the fourth quarter of 2004. Other expenses were $529,000 in
2004 compared to $1,000 in 2005.

         In 2005,  we allocated  $75,000 of profit to minority  interest,  which
consisted of profit  shared with the  minority  partner in the PBG7,  LLC.  Loss
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.

         Income  before  provision for income taxes was $1.9 million in 2005 and
loss before provision for income taxes was $102.3 million in 2004,  representing
0.9% and  (65.8)% of net sales,  respectively.  The  increase  in income  before
provision for income taxes was due to the factors discussed above.

         Provision  for  income  taxes was  $927,000  in 2005  compared  to $2.3
million in 2004, representing (0.4)% and (1.5)% of net sales, respectively.

         Net income was $1.0  million in 2005 as  compared to net loss of $104.7
million in 2004,  representing  0.5% and  (67.3)%  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. There were no such charges in
2005.

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 in 2004.  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  for  2004 was  $21.0  million,  or  13.5% 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.


                                       27
<PAGE>


         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.

         Royalty and  marketing  allowance  expenses  increased by $363,000,  or
149.5%, to $605,000 in 2004 from $242,000 in 2003. As a percentage of net sales,
these expenses increased to 0.4% in 2004 from 0.1% in 2003.

         Impairment  charges were $78.0 million in 2004 or (50.2)% of net sales,
compared  to $22.3  million in 2003 or (7.0)% of net sales.  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 $121.8  million  in 2004,  or (78.4)% of net
sales,  compared to $33.6 million in 2003,  or (10.5)% 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 $1.6 million,  or 33.1%,  from $4.8 million in 2003 to $6.4 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 $1.2 million in 2003 to $529,000 in 2004.

         Loss  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.  Loss
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.

         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 taxes 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.


                                       28
<PAGE>


         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.

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
                     2004      2004      2004      2004      2005      2005     2005      2005
                    ------    ------    ------    ------    ------    ------  ------     ------
<S>                 <C>       <C>       <C>       <C>       <C>       <C>      <C>       <C>
Net Sales .......   $ 42.2    $ 38.5    $ 38.1    $ 36.7    $ 44.8    $ 50.5   $ 69.6    $ 49.7
Gross profit ....      7.5       5.3       4.1       4.1       8.9      11.5     14.5      10.0
Operating income
 (loss) .........     (6.0)    (84.6)     (3.6)    (27.6)      0.2       1.5      3.0      (1.1)
Net income (loss)     (3.0)    (68.6)     (4.0)    (29.1)     (0.1)      0.9      1.7      (1.5)
</TABLE>

<TABLE>
<CAPTION>
                                                   QUARTER ENDED

                   MAR. 31   JUN. 30   SEP. 30   DEC. 31   MAR. 31   JUN. 30   SEP. 30   DEC. 31
                     2004      2004      2004      2004      2005      2005      2005      2005
                    ------    ------    ------    ------    ------    ------    ------    ------
<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 ....     17.8      13.7      10.9      11.1      20.0      22.7      20.9     20.0
Operating income
 (loss) .........    (14.1)   (219.8)     (9.5)    (75.2)      0.5       2.8       4.3     (2.1)
Net income (loss)     (7.1)   (178.1)    (10.5)    (79.3)     (0.2)      1.7       2.5     (3.0)
</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.


                                       29
<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 in 2004 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.

         Certain of our private  brands  product lines are generally  associated
with higher selling,  general and  administrative  expenses,  due to significant
design, development, and marketing costs compared to our private label business.


                                       30
<PAGE>


         Cash flows for the years ended December 31, 2003, 2004 and 2005 were as
follows (dollars in thousands):

CASH FLOWS:                                  2003          2004          2005
                                           --------      --------      --------

Net cash provided by (used in)
   operating activities ..............     $  9,935      $ 12,168      $(12,900)
Net cash provided by (used in)
   investing activities ..............     $ (1,504)     $  1,250      $  3,555
Net cash provided by (used in)
   financing activities ..............     $ (6,295)     $(15,552)     $  9,772


         Net cash used in operating  activities  was $12.9  million in 2005,  as
compared to net cash  provided by operating  activities in 2004 of $12.2 million
and $9.9 million in 2003. Net cash used in operating activities in 2005 resulted
primarily  from a net  income of $1.0  million,  reduced by  increases  of $16.8
million in accounts  receivable and $8.5 million in inventory,  partially offset
by depreciation and amortization of $2.1 million and an increase of $9.2 million
in accounts payable. The increase in accounts receivable, inventory and accounts
payable in 2005 was primarily due to increase in sales volume.

         During  2005,  net  cash  provided  by  investing  activities  was $3.6
million,  as  compared  to net cash  provided by  investing  activities  of $1.3
million in 2004 and net cash used in  investing  activities  of $1.5  million in
2003. Cash provided by investing activities in 2005 included  approximately $2.5
million  of  collection  of  advances  from our  Chairman  and $1.2  million  of
collection on notes receivable.

         During 2005, net cash provided by financing activities was $9.8 million
as compared to net cash used in financing  activities  of $15.6  million in 2004
and $6.3  million in 2003.  Net cash  provided by financing  activities  in 2005
included  $13.9  million net proceeds from our credit  facilities  and offset by
$4.1 million net repayment of our short-term bank borrowings.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

         Following is a summary of our  contractual  obligations  and commercial
commitments available to us as of December 31, 2005 (in millions):

<TABLE>
<CAPTION>
                                                     PAYMENTS DUE BY PERIOD
                                   ---------------------------------------------------------
CONTRACTUAL OBLIGATIONS              Total     Less than    Between    Between      After
                                                 1 year    2-3 years  4-5 years    5 years
---------------------------------- ---------- ------------ ---------- --------- ------------
<S>                                  <C>         <C>         <C>        <C>         <C>
Long-term debt(1).................   $ 36.3      $ 36.1      $  0.2     $  --       $  --
Convertible debentures, net.......   $  6.9      $  --       $  6.9     $  --       $  --
Operating leases..................   $  6.8      $  1.2      $  1.3     $  1.2      $  3.1
Minimum royalties.................   $ 17.2      $  4.9      $  5.5     $  2.2      $  4.6
Purchase commitment...............   $ 45.4      $  5.4      $ 10.0     $ 10.0      $ 20.0
                                   ---------- ------------ ---------- --------- ------------
Total Contractual Cash Obligations   $112.6      $ 47.6      $ 23.9     $ 13.4      $ 27.7
</TABLE>

----------
(1)   Excludes  interest on long-term  debt  obligations.  Based on  outstanding
      borrowings  as of December  31, 2005,  and assuming all such  indebtedness
      remained   outstanding   during  2006  and  the  interest  rates  remained
      unchanged,  we estimate that our interest cost on long-term  debt would be
      approximately $3.4 million.


                                       31
<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...........................        $61.9        $61.9        --        --         --
Letters of credit (within lines of credit)        $16.9        $16.9        --        --         --
Total Commercial Commitments..............        $61.9        $61.9        --        --         --
</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 bore interest at
10.25% per annum at December 31, 2005.  Under this facility,  we were subject to
certain restrictive  covenants,  including that we maintain a specified tangible
net worth,  fixed charge ratio, and leverage ratio. On June 27, 2005, we amended
the  letter of credit  facility  with UPS to extend the  expiration  date of the
facility  from June 30, 2005 to August 31, 2005 and to reduce the  tangible  net
worth requirement at June 30, 2005. On August 31, 2005, we amended the letter of
credit  facility with UPS to further extend the expiration  date of the facility
to October 31, 2005,  immediately  reduce the maximum  amount of  borrowings  to
$14.5  million on  September 1, 2005 and further  reduced the maximum  amount of
borrowing to $14.0  million on October 1, 2005.  On October 31, 2005, we further
amended the letter of credit  facility with UPS to extend the expiration date of
the  facility to January 31, 2006 and amend the  interest  rate to "prime  rate"
plus 3%. The  facility  amendment  also  provided  for  reduction in the maximum
amount of borrowings  to $13.5 million  commencing on November 1, 2005, to $13.0
million  commencing  on December 1, 2005,  and to $12.5  million  commencing  on
January 1, 2006.  Additionally,  Gerard Guez,  our Chairman,  pledged to UPS 4.6
million  shares of our common  stock held by Mr. Guez to secure the  obligations
under the credit facility. On January 27, 2006, we further amended the letter of
credit  facility  with UPS to extend the  expiration  date of the facility  from
January 31, 2006 to July 31, 2006.  The amendment  provides for reduction of the
maximum amount of borrowings  under the facility to $12.0 million  commencing on
April 1, 2006, $11.5 million commencing on May 1, 2006, $11.0 million commencing
on June 1,  2006 and to $10.5  million  commencing  on July 1,  2006.  Under the
amended  letter of credit  facility,  we are  subject to  restrictive  financial
covenants  of  maintaining  tangible net worth of $25 million as of December 31,
2005  and 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, 2005, we were in compliance with the covenants.  As of December 31,
2005,  $9.2  million  was  outstanding  under  this  facility  with  UPS  and an
additional $2.5 million was available for future borrowings.  In addition,  $1.3
million of open letters of credit was outstanding as of December 31, 2005.

         On December 31,  2004,  our Hong Kong  subsidiaries  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.  This  facility  bore interest at 9.25% per annum at December 31, 2005. On
June 27, 2005, we amended the loan agreement with UPS to reduce the tangible net
worth  requirement at June 30, 2005.  Under the amended loan  agreement,  we are
subject to restrictive  financial covenants of maintaining tangible net worth of
$25  million  at  December  31,  2005 and 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, 2005,  we were in  compliance  with the


                                       32
<PAGE>


covenants.  As  of  December  31,  2005,  $2.7  million  was  outstanding.   The
obligations  under the loan  agreement are  collateralized  by the same security
interests and guarantees  provided under our letter of credit facility with UPS.
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, our Chairman, of 4.6 million shares of our common stock.

         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,  2005,  $2.9
million was outstanding under this facility.  In addition,  $1.1 million of open
letters of credit was outstanding and $0 was available for future  borrowings as
of  December  31,  2005.  In  October  2005,  a tax loan for HKD  6.233  million
(equivalent   to  US  $804,000)  was  also  made  available  to  our  Hong  Kong
subsidiaries.  As of December 31, 2005,  $675,000 was outstanding under this tax
loan.

         On October 1, 2004,  we amended and  restated our  previously  existing
debt facility with GMAC Commercial  Credit,  LLC ("GMAC") by entering into a new
factoring agreement with 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 our sale of  merchandise  or rendition of service  created on a going
forward basis. At our request, GMAC, in its discretion,  may make advances to us
up to the lesser of (a) up to 90% of our  accounts on which GMAC has the risk of
loss and (b) $40  million,  minus in each case,  any amount  owed by us to GMAC.
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) $5
million minus in each case, any amounts owed to GMAC by PBG7. The facility bears
interest at 7.385% per annum and the facility  under PBG7, LLC bears interest at
7.75% per annum at December 31, 2005.  Restrictive  covenants  under the revised
facility include a limit on quarterly  capital expenses of $800,000 and tangible
net worth of $25  million at  December  31,  2005 and at the end of each  fiscal
quarter  thereafter.  As of December 31, 2005,  we were in  compliance  with the
covenants.  A total of $30.6 million was outstanding with respect to receivables
factored under the GMAC facility at December 31, 2005.

          In May 2005,  we amended our factoring  agreement  with GMAC to permit
our subsidiaries  party thereto and us, to borrow up to the lesser of $3 million
or fifty percent (50%) of the value of eligible  inventory.  In connection  with
this  amendment,  we granted GMAC a lien on certain of our inventory  located in
the United  States.  On January  23,  2006,  we further  amended  our  factoring
agreement  with GMAC to increase the amount we may borrow  against  inventory to
the  lesser of $5  million  or 50% of the value of  eligible  inventory.  The $5
million limit will be reduced to $4 million on April 1, 2006 and will be further
reduced to $3 million on July 1, 2006. The maximum borrowing  availability under
the  factoring  agreement,  based on the borrowing  base formula  remains at $40
million.  A total of $3.0  million was  outstanding  under the GMAC  facility at
December 31, 2005 with respect to collateralized inventory.

         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


                                       33
<PAGE>


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  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.

         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,  received compensation for its services in
the amount of $620,000 in cash and issuance of five year warrants to purchase up
to 200,000 shares of our common stock at an exercise price of $2.50 per share.

         In June 2005, holders of our Debentures  converted an aggregate of $2.3
million of Debentures into 1,133,687 shares of our common stock. In August 2005,
holders of our Debentures  converted an aggregate of $820,000 of Debentures into
410,000 shares of our common stock.  The Debentures were converted at the option
of the holders at a price of $2.00 per share.  Debt discount of $248,000 related
to the intrinsic  value of the  conversion  option of $804,000 was expensed upon
the  conversion.  Of the $620,000  financing  cost paid to the placement  agent,
$191,000 was expensed upon the conversion. The intrinsic value of the conversion
option,  and the value of the  warrant  amortized  in 2005 was  $474,000.  Total
deferred  financing cost amortized in 2005 was $189,000.  Total interest paid to
the holders of the  Debentures  in 2005 was  $539,000.  As of December 31, 2005,
$6.0 million,  net of $0.9 million of debt discount,  remained outstanding under
the Debentures.

         On February  14,  2005,  we borrowed $5 million  from Max Azria,  which
amount  bore  interest  at the rate of 4% per  annum and was  payable  in weekly
installments  of $250,000  beginning on February 28, 2005. In early August 2005,
we repaid the  remaining  balance of this loan in its  entirety.  On January 19,
2006, we borrowed an  additional  $4 million from Max Azria,  which amount bears
interest at the rate of 5.5% per annum and is payable in weekly  installments of
$200,000 beginning on March 1, 2006. This is an unsecured loan.

         We had three equipment loans  outstanding at December 31, 2005 totaling
$83,000.  One  of  these  equipment  loans  bears  interest  at  6%  payable  in
installments  through 2009,  the second loan bears  interest at 15.8% payable in
installments through 2007, and the third loan bears interest at 6.15% payable in
installments through 2007.

         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


                                       34
<PAGE>


7.0% to 7.5%,  and were payable in  semiannual  payments  commencing in February
2000. All remaining balances under these notes were 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  $(561,000),  $367,000 and
$0 for the years ended  December 31, 2003,  2004 and 2005,  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, 2005, $1.0 million was outstanding
under this  facility  and $7.1 million of letters of credit were open under this
arrangement. We pay a commission of 2.25% on all letters of credits issued under
this arrangement.

         The  effective  interest  rates  on  short-term  bank  borrowing  as of
December 31, 2004 and 2005 were 5.7% and 7.8%, 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), and sales of equity and debt securities.
Our  short-term  funding relies very heavily on our major  customers,  banks and
suppliers.  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.

         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.

         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 $7.7
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.


                                       35
<PAGE>


         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.  Our Los
Angeles offices and warehouse is leased on a month to month basis. On January 1,
2006, we entered into a one year lease agreement with Lynx International Limited
for our office space in Hong Kong. We paid  $1,330,000 in each of 2003 and 2004,
and  $1,019,000  in 2005 in 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.  This amount
was repaid in the first quarter of 2005.

         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,  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 $3.6 million and $5.3 million of
fabric under this agreement in 2003 and 2004, respectively.

         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  purchase  commitment  agreement  with  Mr.  Nacif's
affiliates to replace our previous purchase commitment  agreement.  Pursuant the
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".  In 2005, we purchased $6.4
million of fabric,  of which $2.4  million was paid in cash and $4.0 million was
offset against the notes  receivable  principal and accrued interest on the note
receivable from the affiliates of Mr. Kamel Nacif. Net amount due from Mr. Kamel
Nacif and his affiliates was $236,000 as of December 31, 2005.

         From time to time in the past,  we borrowed  funds from,  and  advanced
funds to, Mr. Guez.  The greatest  outstanding  balance of such  advances to Mr.
Guez during 2005 was approximately  $4,766,000. At December 31, 2005, the entire
balance due from Mr. Guez  totaling $2.3 million was reflected as a reduction of
shareholders'  equity.  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,  $370,000 and $209,000 for the years ended December 31, 2003, 2004
and 2005, respectively. Mr. Guez paid expenses on our


                                       36
<PAGE>


behalf of  approximately  $400,000 and $397,000 for the years ended December 31,
2004 and 2005,  respectively,  which  amounts  were  applied  to reduce  accrued
interest and  principal on Mr.  Guez's loan.  These  amounts  included  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.  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.

         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 the
brothers 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 $37.1 million, $11.5 million and $135,000
of finished goods and service from Azteca and its affiliates for the years ended
December 31, 2003,  2004 and 2005,  respectively.  Our total sales of fabric and
service to Azteca in 2003,  2004 and 2005 were $9.9  million,  $1.0  million and
$88,000, respectively.

         Since June 2003, UAV had 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 in the year ended December 31, 2003,  2004 and 2005 were $8.1 million,
$2.6 million and $0, respectively.

         At December 31, 2005,  Messrs.  Guez and Kay beneficially owned 590,000
and 1,003,500  shares,  respectively,  of common stock of Tag-It  Pacific,  Inc.
("Tag-It"),  collectively  representing 8.7% of Tag-It Pacific's common stock at
December  31,  2005.  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 $16.8 million,
$1.0  million and $450,000 of trim from Tag-It  during the years ended  December
31, 2003, 2004 and 2005. We sold to Tag-It $1.5 million from our trim and fabric
inventory for the year ended  December 31, 2003. In the past, we 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.


                                       37
<PAGE>


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         FOREIGN CURRENCY RISK. Our earnings are affected by fluctuations in the
value of the U.S. dollar as compared to foreign  currencies as a result of doing
business in Mexico as well as certain debt denominated in Euro. As a result,  we
bear the risk of exchange rate gains and losses that may result in the future as
a result of this financing. At times we use forward exchange contracts to reduce
the effect of fluctuations of foreign  currencies on purchases and  commitments.
These  short-term  assets  and  commitments  are  principally  related  to trade
payables  positions  and fixed  asset  purchase  obligations.  We do not utilize
derivative financial  instruments for trading or other speculative  purposes. We
actively evaluate the  creditworthiness  of the financial  institutions that are
counter parties to derivative  financial  instruments,  and we do not expect any
counter parties to fail to meet their obligations.

         INTEREST RATE RISK.  Because our  obligations  under our various credit
agreements  bear interest at floating  rates  (primarily  prime  rates),  we are
sensitive  to  changes in  prevailing  interest  rates.  Any major  increase  or
decrease in market  interest rates that affect our financial  instruments  would
have a material impact on earning or cash flows during the next fiscal year.

         Our interest  expense is  sensitive to changes in the general  level of
U.S.  interest  rates.  In this regard,  changes in U.S.  interest  rates affect
interest paid on our debt. A majority of our credit  facilities  are at variable
rates.

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

         None.

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, 2005,  the end of the 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 further quarter of 2005 that have  materially  affected,  or
are reasonably likely to materially  affect, our internal control over financial
reporting.  Based upon that  evaluation,  the Chief Executive  Officer and Chief
Financial  Officer  concluded  that our  disclosure  controls and procedures are
effective.

         CHANGES IN CONTROLS AND PROCEDURES

         There were no significant  changes in our internal controls or in other
factors that could  significantly  affect internal controls,  known to the Chief
Executive Officer or the Chief Financial  Officer,  during the fourth quarter of
2005.


                                       38
<PAGE>


ITEM 9B.    OTHER INFORMATION

         None.

                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS

         The  information  concerning our directors and executive  officers will
appear in our definitive  Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of our last fiscal  year (the "Proxy  Statement"),
and is incorporated herein by reference.

ITEM 11.    EXECUTIVE COMPENSATION

         The information  concerning  executive  compensation will appear in our
definitive Proxy Statement and is incorporated herein by reference.

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

         The information concerning the security ownership of certain beneficial
owners  and  management  and  related  stockholder  matters  will  appear in our
definitive Proxy Statement and is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The   information   concerning   certain   relationships   and  related
transactions  will appear in our definitive  Proxy Statement and is incorporated
herein by reference.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The information  concerning principal accountant fees and services will
appear  in  our  definitive  Proxy  Statement  and  is  incorporated  herein  by
reference.

                                     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.


                                       39
<PAGE>


                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULE


                                                                            PAGE
                                                                            ----

Financial Statements

    Report of Independent Registered Public Accounting Firm,
       Singer Lewak Greenbaum & Goldstein LLP................................F-2

    Report of Independent Registered Public Accounting Firm,
       Grant Thornton LLP....................................................F-3

    Consolidated Balance Sheets--December 31, 2004 and 2005..................F-4

    Consolidated Statements of Operations and Comprehensive
       Loss--Three year period ended December 31, 2005.......................F-5

    Consolidated Statements of Shareholders' Equity--Three
       year period ended December 31, 2005...................................F-6

    Consolidated Statements of Cash Flows--Three year period
       ended December 31, 2005...............................................F-7

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

Financial Statement Schedule

    Schedule II--Valuation and Qualifying Accounts..........................F-40


                                      F-1
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
Tarrant Apparel Group
Los Angeles, California


We have audited the  consolidated  balance  sheet of Tarrant  Apparel  Group and
subsidiaries  (collectively,  the  "Company")  as of December 31, 2005,  and the
related  consolidated  statement of  operations,  stockholders'  equity and cash
flows for the year then ended.  Our audit also included the financial  statement
schedule  of  Tarrant  Apparel  Group,  listed in Item  15(a).  These  financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements 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.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provided  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Tarrant  Apparel
Group and  subsidiaries  as of  December  31,  2005,  and the  results  of their
operations and their cash flows for the year then ended, in conformity with U.S.
generally  accepted  accounting  principles.  Also, in our opinion,  the related
financial  statement  schedule,   when  considered  in  relation  to  the  basic
consolidated  financial  statements,  taken as a whole,  presents  fairly in all
material respects the information set forth therein.


/S/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
March 15, 2006


                                      F-2
<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
the related  consolidated  statements  of  operations  and  comprehensive  loss,
shareholders'  equity,  and cash  flows for each of the two years in the  period
ended December 31, 2004. 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 financial  position of Tarrant  Apparel
Group and subsidiaries as of December 31, 2004 and the results of its operations
and its cash flows for each of the two years in the period  ended  December  31,
2004 in conformity with accounting  principles  generally accepted in the United
States of America.

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


                                           /S/ GRANT THORNTON LLP
                                           -------------------------
                                           GRANT THORNTON LLP


Los Angeles, California
March 24, 2005, except for Note 19,
as to which the date is March 30, 2005,
and Note 13, as to which the date is May 31, 2005


                                      F-3
<PAGE>


<TABLE>
                              TARRANT APPAREL GROUP

                           CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                                       DECEMBER 31,
                                                             ------------------------------
                                                                 2004              2005
                                                             -------------    -------------
<S>                                                          <C>              <C>
                                ASSETS
Current assets:
  Cash and cash equivalents ..............................   $   1,214,944    $   1,641,768
  Accounts receivable, net ...............................      37,759,343       54,598,443
  Due from related parties ...............................      10,651,914        3,100,928
  Inventory ..............................................      19,144,105       31,628,960
  Current portion of note receivable from related party ..       5,323,733        5,139,387
  Prepaid expenses .......................................       1,251,684        1,292,441
  Prepaid royalties ......................................       2,257,985        1,123,531
  Income taxes receivable ................................         144,796           25,468
                                                             -------------    -------------

    Total current assets .................................      77,748,504       98,550,926

  Property and equipment, net ............................       1,874,893        1,702,840
  Notes receivable - related party, net of current portion      40,107,337       36,268,446
  Due from related parties ...............................            --          2,994,945
  Equity method investment ...............................       1,880,281        2,138,865
  Deferred financing cost, net ...........................       1,203,259          838,786
  Other assets ...........................................         414,161          164,564
  Goodwill, net ..........................................       8,582,845        8,582,845
                                                             -------------    -------------

    Total assets .........................................   $ 131,811,280    $ 151,242,217
                                                             =============    =============

        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Short-term bank borrowings .............................   $  17,951,157    $  13,833,532
  Accounts payable .......................................      24,394,553       33,278,959
  Accrued expenses .......................................      11,243,179        9,503,806
  Income taxes ...........................................      16,826,383       16,828,538
  Current portion of long-term obligations and factoring
     arrangement .........................................      19,628,701       36,109,699
                                                             -------------    -------------

    Total current liabilities ............................      90,043,973      109,554,534

Long-term obligations ....................................       2,544,546          239,935
Convertible debentures, net ..............................       8,330,483        5,965,098
Deferred tax liabilities .................................         213,784           47,098

Minority interest in PBG7 ................................            --             75,241

Commitments and contingencies
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized;
   no shares (2004) and no shares (2005) issued and
   outstanding ...........................................            --               --
Common stock, no par value, 100,000,000 shares authorized;
   28,814,763 shares (2004) and 30,553,763 shares (2005)
   issued and outstanding ................................     111,515,091      114,977,465
Warrant to purchase common stock .........................       2,846,833        2,846,833
Contributed capital ......................................       9,965,591       10,004,331
Accumulated deficit ......................................     (91,182,959)     (90,189,615)
Notes receivable from officer/shareholder ................      (2,466,062)      (2,278,703)
                                                             -------------    -------------

    Total shareholders' equity ...........................      30,678,494       35,360,311
                                                             -------------    -------------

    Total liabilities and shareholders' equity ...........   $ 131,811,280    $ 151,242,217
                                                             =============    =============
</TABLE>


                             See accompanying notes.


                                      F-4
<PAGE>


<TABLE>
                              TARRANT APPAREL GROUP

          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                        2003             2004             2005
                                                    -------------    -------------    -------------
<S>                                                 <C>              <C>              <C>
Net sales .......................................   $ 320,422,850    $ 155,452,663    $ 214,648,218
Cost of sales ...................................     288,445,173      134,492,460      169,767,051
                                                    -------------    -------------    -------------

Gross profit ....................................      31,977,677       20,960,203       44,881,167
Selling and distribution expenses ...............      11,329,414        9,290,819       10,726,425
General and administrative expenses .............      31,767,122       32,083,637       26,864,789
Write-off of prepaid expenses ...................       2,771,989             --               --
Royalty expense .................................         242,426          604,888        3,664,454
Impairment charges ..............................      19,504,521       77,982,034             --
Cumulative translation loss attributable to
   liquidated Mexico operations .................            --         22,786,125             --
                                                    -------------    -------------    -------------

Income (loss) from operations ...................     (33,637,795)    (121,787,300)       3,625,499
Interest expense ................................      (5,602,556)      (2,857,096)      (4,624,590)
Interest income .................................         424,518          377,587        2,081,456
Minority interest ...............................       3,461,243       15,331,171          (75,241)
Interest in income of equity method investee ....            --            769,706          559,634
Other income ....................................       4,784,479        6,366,637          354,347
Other expense ...................................      (1,182,920)        (529,257)            (580)
                                                    -------------    -------------    -------------

Income (loss) before provision for income taxes .     (31,753,031)    (102,328,552)       1,920,525
Provision for income taxes ......................       4,131,629        2,348,119          927,181
                                                    -------------    -------------    -------------

Net income (loss) ...............................   $ (35,884,660)   $(104,676,671)   $     993,344
                                                    =============    =============    =============

Net income (loss) per share - Basic (as restated,
  see Note 13): .................................   $       (2.38)   $       (3.64)   $        0.03
                                                    =============    =============    =============

Net income (loss) per share - Diluted (as
  restated, see Note 13) ........................   $       (2.38)   $       (3.64)   $        0.03
                                                    =============    =============    =============

Weighted average common and common equivalent
shares outstanding:
Basic ...........................................      18,215,071       28,732,796       29,728,997
                                                    =============    =============    =============

Diluted .........................................      18,215,071       28,732,796       29,734,291
                                                    =============    =============    =============


Net income (loss) ...............................   $ (35,884,660)   $(104,676,671)   $     993,344
Foreign currency translation adjustment .........      (9,945,727)            --               --
                                                    -------------    -------------    -------------
Total comprehensive income (loss) ...............   $ (45,830,387)   $(104,676,671)   $     993,344
                                                    =============    =============    =============
</TABLE>


                             See accompanying notes.


                                      F-5
<PAGE>


<TABLE>
                              TARRANT APPAREL GROUP

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005




                                                   PREFERRED         NUMBER           COMMON           NUMBER
                                                     STOCK          OF SHARES          STOCK         OF SHARES         WARRANTS
                                                 -------------    -------------    -------------    -------------    -------------
<S>                                              <C>                    <C>        <C>                 <C>           <C>
Balance at January 1, 2003 ...................   $   8,820,573          100,000    $  69,368,239       15,846,315    $        --
   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 ..................................            --               --               --               --               --
   Issuance of common stock ..................            --               --            788,000          200,000             --
   Retirement of stock .......................            --               --           (311,427)        (248,872)            --
   Compensation expense ......................            --               --               --               --               --
   Repayment from shareholders ...............            --               --               --               --               --
                                                 -------------    -------------    -------------    -------------    -------------

Balance at December 31, 2003 (as restated,
see Note 13) .................................            --               --        107,891,426       27,614,763        1,798,733
   Currency translation ......................            --               --               --               --               --
   Net loss ..................................            --               --               --               --               --
   Cumulative translation loss attributable to
      liquidated Mexico operations ...........            --               --               --               --               --
   Compensation expense ......................            --               --               --               --               --
   Issuance of common stock ..................            --               --          3,623,665        1,200,000           44,100
   Issuance of warrants with debentures ......            --               --               --               --          1,004,000
   Intrinsic value of beneficial conversion
      associated with convertible debentures .            --               --               --               --               --
   Repayment from shareholders ...............            --               --               --               --               --
   Reclassification of shareholders'
      receivable to current asset ............            --               --               --               --               --
                                                 -------------    -------------    -------------    -------------    -------------

Balance at December 31, 2004 .................   $        --               --      $ 111,515,091       28,814,763    $   2,846,833
   Net income ................................            --               --               --               --               --
   Compensation expense ......................            --               --               --               --               --
   Issuance of common stock ..................            --               --            375,000          195,313             --
   Conversion of debentures ..................            --               --          3,087,374        1,543,687             --
   Repayment from shareholders ...............            --               --               --               --               --
                                                 -------------    -------------    -------------    -------------    -------------
Balance at December 31, 2005 .................   $        --               --      $ 114,977,465       30,553,763    $   2,846,833
                                                 =============    =============    =============    =============    =============


<CAPTION>
                                                                  RETAINED       ACCUMULATED
                                                                   EARNINGS          OTHER                              TOTAL
                                                  CONTRIBUTED    (ACCUMULATED     COMPREHENSIVE     NOTES FROM       SHAREHOLDERS'
                                                    CAPITAL         DEFICIT)      INCOME (LOSS)    SHAREHOLDERS        EQUITY
                                                 -------------   -------------    -------------    -------------    -------------
<S>                                              <C>             <C>              <C>              <C>              <C>
Balance at January 1, 2003 ...................       1,434,259      56,873,094       (9,733,458)      (5,601,804)     121,160,903
   Net loss ..................................            --       (35,884,660)            --               --        (35,884,660)
   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      (7,494,722)            --               --               --
   Issuance of common stock ..................            --              --               --               --            788,000
   Retirement of stock .......................            --              --               --               --           (311,427)
   Compensation expense ......................          71,572            --               --               --             71,572
   Repayment from shareholders ...............            --              --               --            805,376          805,376
                                                 -------------   -------------    -------------    -------------    -------------

Balance at December 31, 2003 (as restated,
see Note 13) .................................       9,000,553      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            --               --               --            161,038
   Issuance of common stock ..................            --              --               --               --          3,667,765
   Issuance of warrants with debentures ......            --              --               --               --          1,004,000
   Intrinsic value of beneficial conversion
      associated with convertible debentures .         804,000            --               --               --            804,000
   Repayment from shareholders ...............            --              --               --             30,366           30,366
   Reclassification of shareholders'
      receivable to current asset ............            --              --               --          2,300,000        2,300,000
                                                 -------------   -------------    -------------    -------------    -------------

Balance at December 31, 2004 .................   $   9,965,591   $ (91,182,959)   $        --      $  (2,466,062)   $  30,678,494
   Net income ................................            --           993,344             --               --            993,344
   Compensation expense ......................          38,740            --               --               --             38,740
   Issuance of common stock ..................            --              --               --               --            375,000
   Conversion of debentures ..................            --              --               --               --          3,087,374
   Repayment from shareholders ...............            --              --               --            187,359          187,359
                                                 -------------   -------------    -------------    -------------    -------------
Balance at December 31, 2005 .................   $  10,004,331   $ (90,189,615)   $        --      $  (2,278,703)   $  35,360,311
                                                 =============   =============    =============    =============    =============
</TABLE>


                             See accompanying notes


                                      F-6
<PAGE>


<TABLE>
                              TARRANT APPAREL GROUP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                         -----------------------------------------------
                                                             2003             2004              2005
                                                         -------------    -------------    -------------
<S>                                                      <C>              <C>              <C>
Operating activities:
Net Income (loss) ....................................   $ (35,884,660)   $(104,676,671)   $     993,344
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
   Deferred taxes ....................................        (132,622)         (61,345)        (166,686)
   Depreciation and amortization .....................      16,097,595        8,337,946        2,126,585
   Receipt of merchandise in lieu of interest on notes
      receivable, related party ......................            --               --         (1,742,540)
   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             --               --
   Prepaid royalties write-off .......................            --               --          1,165,970
   Income from equity method investment ..............            --           (769,706)        (559,634)
   Loss (gain) on sale of fixed assets ...............         593,626          (15,272)        (124,041)
   Unrealized (gain) loss on foreign currency ........         560,602         (367,262)            --
   Minority interest .................................      (3,218,069)     (15,331,171)          75,241
   Gain on legal settlement ..........................        (235,785)            --               --
   Compensation expense related to stock options .....          71,572          161,038           38,740
   Change in the provision for returns and discounts .        (324,387)      (1,747,060)         (78,060)
   Changes in operating assets and liabilities:
      Restricted cash ................................      (2,759,742)       2,759,742             --
      Accounts receivable ............................       7,856,700       21,224,454      (16,761,040)
      Due to/from related parties ....................     (14,801,324)        (122,389)       2,702,047
      Inventory ......................................       9,626,509        4,162,158       (8,503,086)
      Prepaid expenses ...............................         590,046       (1,860,955)          47,055
      Other assets ...................................         450,782             --               --
      Accounts payable ...............................      (4,207,552)         687,758        9,248,667
      Accrued expenses and income tax payable ........       2,388,976         (981,196)      (1,362,218)
                                                         -------------    -------------    -------------

   Net cash (used in) provided by operating activities       9,934,930       12,168,228      (12,899,656)

Investing activities:
Purchase of fixed assets .............................        (368,113)        (111,836)        (559,081)
Proceeds from sale of fixed assets ...................         209,788        1,219,904          130,552
Investment in equity investment method ...............      (1,434,375)        (137,000)            --
Distribution from equity investment method ...........            --            460,800          301,050
Collection on notes receivable, related party ........            --               --          1,194,722
Investment in joint venture ..........................            --           (211,963)            --
Collection of advances from shareholders/officers ....          88,723           30,366        2,487,360
                                                         -------------    -------------    -------------

   Net cash provided by (used in) investing activities      (1,503,977)       1,250,271        3,554,603

Financing activities:
Short-term bank borrowings, net ......................        (161,194)     (11,342,166)      (4,117,625)
Proceeds from long-term obligations ..................     239,280,109      129,667,084      218,367,495
Payment of financing costs ...........................            --         (1,124,668)            --
Payment of long-term obligations and bank borrowings .    (275,640,677)    (146,375,987)    (204,477,993)
Repayments of borrowings from shareholders/officers ..        (486,379)            --               --
Proceeds from issuance of preferred stock and warrant       31,024,774        3,623,665             --
Proceeds from convertible debentures, net ............            --         10,000,000             --
Repurchase of shares .................................        (311,427)            --               --
                                                         -------------    -------------    -------------

   Net cash provided by (used in) financing activities      (6,294,794)     (15,552,072)       9,771,877

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

Increase (decrease) in cash and cash equivalents .....       1,931,482       (2,105,020)         426,824
Cash and cash equivalents at beginning of year .......       1,388,482        3,319,964        1,214,944
                                                         -------------    -------------    -------------

Cash and cash equivalents at end of year .............   $   3,319,964    $   1,214,944    $   1,641,768
                                                         =============    =============    =============
</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,  and its majority owned  Subsidiaries
located  primarily in the U.S.,  Mexico,  and Asia. At December 31, 2005, 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, an unrelated party.

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 7 and  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 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

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 $7.7 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>


RISK AND UNCERTAINTIES - 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,
net of an estimate of returned merchandise and discounts.  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  $1,817,000,  $783,000 and $667,000 for
the years ended December 31, 2003, 2004 and 2005, respectively.  We did not bill
customers for shipping and handling  costs for the years 2003 and 2004. In 2005,
we did some billing for freight to specialty  stores although the amount was not
material.

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.  Cash and cash equivalents held
in foreign  financial  institutions  totaled  $1,206,000  and  $1,062,000  as of
December 31, 2004 and 2005, respectively. Cash is deposited with what we believe
are highly credited quality  financial  institutions and may exceed FDIC insured
limits.

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 to us could be reduced by a material  amount.  As of  December  31, 2004 and
2005, the balance of the allowance for returns, discounts and bad debts was $2.4
million and $3.0 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, and brokerage.

SELLING AND DISTRIBUTION EXPENSES

Selling and distribution  expenses  include expenses related to samples,  travel
and entertainment, salaries, rent, warehouse handling 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.

ROYALTY EXPENSES

Royalty  expenses consist of the royalty payments and marketing fund commitments
according to the various  licensing  agreements  we have entered  into.  Royalty
expenses are calculated based on a certain percentage of net sales. All of these
agreements include minimum royalties.  See Note 11 of the "Notes to Consolidated
Financial Statements" regarding various agreements we have entered into.

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  $1,306,000,  $2,106,000  and  $3,009,000 in 2003,  2004 and 2005,
respectively.

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.
The estimated useful lives of the assets are as follows:

       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 or Estimated useful life


                                      F-10
<PAGE>


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,  2005,  we have a  goodwill  balance  of $8.6  million,  and a net
property  and  equipment  balance of $1.7  million,  as  compared  to a goodwill
balance of $8.6 million and a net property and equipment balance of $1.9 million
at December 31, 2004.  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.

During the year ended  December 31, 2005, we did not  recognize  any  impairment
related to goodwill and property and equipment.

DEFERRED FINANCING COST

Deferred  financing  costs were $1,203,000 and $839,000 at December 31, 2004 and
2005,  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
$408,000,  $387,000 and $1,399,000  for the years ended December 31, 2003,  2004
and 2005, respectively.

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, 2005, no domestic tax provision has been provided for
$41.9 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.


                                      F-11
<PAGE>


NET INCOME (LOSS) PER SHARE

Basic and diluted  income (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,
                                                       -----------------------------------------------
                                                             2003            2004             2005
                                                       -------------    -------------    -------------
<S>                                                    <C>              <C>              <C>
Basic EPS Computation:
Numerator:
Reported net income (loss) .........................   $ (35,884,660)   $(104,676,671)   $     993,344
Dividend to the preferred stockholders .............      (7,494,722)            --               --
                                                       -------------    -------------    -------------
Net income (loss) available to common
   stockholders.....................................   $ (43,379,382)   $(104,676,671)   $     993,344

Denominator:
Weighted average common shares outstanding .........      18,215,071       28,732,796       29,728,997

Basic EPS ..........................................   $       (2.38)   $       (3.64)   $        0.03
                                                       =============    =============    =============

Diluted EPS Computation:
Numerator:
Reported net income (loss) .........................   $ (35,884,660)   $(104,676,671)   $     993,344
Dividend to the preferred stockholders .............      (7,494,722)            --               --
                                                       -------------    -------------    -------------
Net income (loss) available to common
   stockholders.....................................   $ (43,379,382)   $(104,676,671)   $     993,344

Denominator:
Weighted average common shares outstanding .........      18,215,071       28,732,796       29,728,997
Incremental shares from assumed exercise of
warrants ...........................................            --               --               --
convertible debentures .............................            --               --               --
options ............................................            --               --              5,294
                                                       -------------    -------------    -------------
Total shares .......................................      18,215,071       28,732,796       29,734,291

Diluted EPS ........................................   $       (2.38)   $       (3.64)   $        0.03
                                                       =============    =============    =============
</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:

                                     2003         2004         2005
                                  ----------   ----------   ----------
         Options ..............    8,926,087    8,331,962    6,727,756
         Warrants .............      881,732    2,361,732    2,361,732
         Convertible debentures         --      5,000,000    3,456,313
                                  ----------   ----------   ----------
            Total .............    9,807,819   15,693,694   12,545,801

DIVIDENDS

We did not declare or pay any cash dividends in 2003, 2004 or 2005. 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


                                      F-12
<PAGE>


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.

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, 2004 and 2005,
approximately  19.6%  and  22.5%  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                                      2003   2004   2005
         -----------------------------------------     ----   ----   ----
         Kohl's ..................................      6.6   16.4   13.5
         Macy's Merchandising Group ..............      5.2   10.3   13.4
         Mervyn's ................................      5.9   15.4   11.2
         Wal-Mart ................................      8.7    5.9   11.1
         Lerner New York .........................      8.3   15.0    8.6
         Lane Bryant .............................     12.1    2.0    4.9
         The Limited (1) .........................     15.3    4.6    0.0

         (1) Includes Express and Limited stores

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 generally  accepted
accounting principles 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, inventory, 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, 2003,  2004 and 2005,  $72,000,
$161,000 and $39,000 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 2003, 3% to 4% for 2004, 4% for 2005; dividend
yields of 0% for 2003, 2004 and 2005; weighted-average volatility factors of the
expected  market  price of our common  stock of 0.65 for 2003,  0.51 to 0.55 for
2004 and 0.55 for 2005;  and a  weighted-average  expected life of the option of
four years for 2003, 2004 and 2005.

On September  23,  2005,  the Board of Directors  approved the  acceleration  of
vesting of all our unvested stock options.  In total,  1.7 million stock options
with an average  exercise  price of $3.69 and an average  remaining  contractual
life of 7.9 years were subject to this  acceleration.  The  exercise  prices and
number  of  shares  subject  to the  accelerated  options  were  unchanged.  The
acceleration  was effective as of September 23, 2005.  Had the  acceleration  of
these stock  options not been  undertaken,  the future  compensation  expense we
would  recognize in the fiscal years of 2006,  2007, 2008 and 2009 would be $1.4
million, $810,000, $10,000 and $3,000, respectively.  Our decision to accelerate
the vesting of these stock  options was based upon the  accounting  of this $2.2
million of compensation  expense from  disclosure-only in 2005 to being included
in our statement of operations in 2006 to 2009 based on our adoption of SFAS No.
123 (revised 2004) "Share-Based Payment" effective in January 2006.

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:


                                      F-14
<PAGE>


<TABLE>
<CAPTION>
                                                      2003              2004               2005
                                                ---------------   ---------------    ---------------
<S>                                             <C>               <C>                <C>
Net income (loss) as reported ...............   $   (35,884,660)  $  (104,676,671)   $       993,344
Add stock-based employee compensation charges
reported in net loss ........................   $        71,572   $       161,038    $        38,740
Pro forma compensation expense, net of tax ..   $    (4,115,263)  $    (3,852,990)   $    (4,298,193)
                                                ---------------   ---------------    ---------------
Pro forma net loss ..........................   $   (39,928,351)  $  (108,368,623)   $    (3,266,109)

Net income (loss) per share
Basic (as restated, see Note 13) ............   $         (2.38)  $         (3.64)   $          0.03
Add stock-based employee compensation charges
reported in net loss
Basic .......................................   $          0.00   $          0.01    $          0.00
Pro forma compensation expense per share
Basic .......................................   $         (0.22)  $         (0.14)   $         (0.14)
                                                ---------------   ---------------    ---------------
Pro forma loss per share
Basic (as restated, see Note 13)                $         (2.60)  $         (3.77)   $         (0.11)

Net income (loss) per share
Diluted (as restated, see Note 13) ..........   $         (2.38)  $         (3.64)   $          0.03
Add stock-based employee compensation charges
reported in net loss
Diluted .....................................   $          0.00   $          0.01    $          0.00
Pro forma compensation expense per share
Diluted .....................................   $         (0.22)  $         (0.14)   $         (0.14)
                                                ---------------   ---------------    ---------------
Pro forma loss per share
Diluted (as restated, see Note 13) ..........   $         (2.60)  $         (3.77)   $         (0.11)
</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 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 share-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 is effective as of
the beginning of our first annual or interim  reporting period that begins after
June 15, 2005. On April 14, 2005, the Securities and Exchange Commission adopted
a new rule amending the effective date for Statement 123R for public  companies.
Under the effective  date  provisions  included in Statement  123R,  registrants
would have been required to implement  the  Statement's  requirements  as of the
beginning of the first interim or annual period  beginning  after June 15, 2005,
or after  December  15,  2005 for small  business  issuers.  The new rule allows
registrants  to implement  Statement  123R at the beginning of their next fiscal
year, instead of the next interim period,  that begins after June 15, 2005. SFAS
No. 123R offers alternative methods of adopting this final rule. We have not yet
determined  which  alternative  method we will use.  We have not  completed  the
process of  evaluating  the impact that will result from adopting SFAS No. 123R,
but  believe  the impact  upon  adoption  will be an  increase  to  compensation
expense.

In May 2005,  the FASB issued SFAS No.  154,  "Accounting  for Changes and Error
Corrections."  SFAS 154  establishes  standards for the accounting and reporting
for changes in  accounting  principles.  SFAS 154  replaces  APB 20  "Accounting
Changes"  and FASB  Interpretation  No.  20 ("FIN  20"),  "Reporting  Accounting


                                      F-15
<PAGE>


Changes   under  AICPA   Statements  of   Position."   The  Statement   requires
retrospective  application  for changes in  accounting  principle,  unless it is
impracticable to determine either the cumulative  effect or the  period-specific
effects of the change. When it is impracticable to determine the period-specific
effects  of an  accounting  change  on  one or  more  individual  prior  periods
presented,  this  Statement  would  require  that the new  accounting  policy be
applied to the  balances of assets and  liabilities  as of the  beginning of the
earliest  period for which  retrospective  application is practicable and that a
corresponding adjustment be made to the opening balance of retained earnings for
the period.  When it is impracticable  for an entity to determine the cumulative
effect of applying a change in accounting  principle to all prior periods,  this
Statement would require the new accounting principle to be applied as if it were
made prospectively from the earliest date practicable.  SFAS 154 is effective as
of the beginning of our first annual reporting period that begins after December
15, 2005. The adoption of this new accounting  pronouncement  is not expected to
have a material impact on our consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155,  "Accounting  for Certain Hybrid
Financial  Instruments",  which amends SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities" and SFAS No. 140,  "Accounting for Transfers
and Servicing of Financial Assets and  Extinguishment of Liabilities".  SFAS 155
amends  SFAS  133  to  narrow  the  scope   exception  for   interest-only   and
principal-only   strips  on  debt   instruments  to  include  only  such  strips
representing  rights to receive a specified portion of the contractual  interest
or  principle  cash flows.  SFAS 155 also  amends  SFAS 140 to allow  qualifying
special-purpose  entities  to hold a  passive  derivative  financial  instrument
pertaining to beneficial  interests that itself is a derivative  instrument.  We
are currently evaluating the impact this new Standard,  but believe that it will
not have a material impact 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.
There were no exchange contracts at December 31, 2004 and December 31, 2005.

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,
                                                   ----------------------------
                                                       2004            2005
                                                   ------------    ------------
U.S. trade accounts receivable .................   $  3,248,887    $  2,893,217
Foreign trade accounts receivable ..............     17,148,600      19,619,172
Factored accounts receivable ...................     19,452,756      33,222,354
Other receivables ..............................        346,965       1,815,450
Allowance for returns, discounts and bad debts .     (2,437,865)     (2,951,750)
                                                   ------------    ------------
                                                   $ 37,759,343    $ 54,598,443
                                                   ============    ============

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


                                      F-16
<PAGE>


was amended and  converted  to a factoring  arrangement.  At December  31, 2005,
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,
                                                     ---------------------------
                                                        2004            2005
                                                     -----------     -----------
Raw materials, fabric and trim accessories .....     $ 1,164,977     $ 5,079,428
Finished goods shipments-in-transit ............       9,283,022       8,800,014
Finished goods .................................       8,696,106      17,749,518
                                                     -----------     -----------
                                                     $19,144,105     $31,628,960
                                                     ===========     ===========

4.       PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

                                                            DECEMBER 31,
                                                   -----------------------------
                                                       2004            2005
                                                   ------------    ------------
Land ...........................................   $     85,000    $     85,000
Buildings ......................................        819,372         819,372
Equipment ......................................      5,966,453       6,249,487
Furniture and fixtures .........................      2,228,375       2,308,537
Leasehold improvements .........................      2,605,763       2,684,720
Vehicles .......................................        330,564         322,487
                                                   ------------    ------------
                                                     12,035,527      12,469,603

Less accumulated depreciation and amortization .    (10,160,634)    (10,766,763)
                                                   ------------    ------------
                                                   $  1,874,893    $  1,702,840
                                                   ============    ============

Depreciation  expense,  including  amortization of assets recorded under capital
leases,  totaled  $15,663,000,  $7,853,000  and  $727,000  for the  years  ended
December 31, 2003, 2004 and 2005, 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,  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


                                      F-17
<PAGE>


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,  $1.1  million  and $0 of  severance  costs  in 2003,  2004  and  2005,
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  $41.4  million  notes  receivable  -  related  party  on  the
accompanying  balance  sheet as of December  31, 2005 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
                      ------------------------   -----------
                      2006 ...................   $ 5,139,387
                      2007 ...................     4,866,963
                      2008 ...................     3,835,953
                      2009 ...................     3,898,575
                      2010 ...................     4,077,855
                      2011 and after..........    19,589,100
                                                 -----------
                      Total ..................    41,407,833

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 a previously 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 and are allowed to be offset  against  annual
principal and interest requirements.  Included in the current maturities balance
is  $429,000  related  to the  2005  balance  due,  which  we  believe  is fully
collectible  and are allowed to be offset against annual  principal and interest
requirements.  We expect to  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-18
<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  $1.9 million and
$2.1 million at December 31, 2004 and 2005, 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 2005 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
                 Share of income ...............       559,634
                 Distribution ..................      (301,050)
                                                   -----------
                 Balance as of December 31, 2005   $ 2,138,865
                                                   ===========

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".  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 and 2005 was  approximately  $9
million and $10 million,  respectively.  The amount of royalty income paid by us
to American Rag in 2003,  2004 and 2005 was  $250,000,  $500,000  and  $575,000,
respectively. 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 and nothing has given rise to
a re-evaluation of the investment for  consolidation  under FIN 46. 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 on the  accompanying  consolidated  balance  sheets  represents  the as
"excess of costs over fair value of net assets  acquired  in  previous  business
combination".  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.

In 2003, we ceased  directly  operating a substantial  majority of our equipment
and  fixed  assets  in  Mexico,  and  started


                                      F-19
<PAGE>


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 was 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 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, 2004 and 2005. The reporting
unit  below is one level  below the  reportable  segments  included  in Note 16,
"Operations by Geographic Areas". The reporting unit FR TCL-Chazz & MGI Division
was included  within the United  States  geographical  segment of Note 16 of the
"Notes to the Consolidated Financial Statements."

                                                  REPORTING UNITS
                                                  FR TCL - CHAZZZ
                                                  & MGI DIVISION
                                                  ---------------
               Balance as of January 1, 2004 .    $     8,582,845
               Activities for the year .......               --
                                                  ---------------
               Balance as of December 31, 2004    $     8,582,845
               Activities for the year .......               --
                                                  ---------------
               Balance as of December 31, 2005    $     8,582,845
                                                  ===============


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,
                                                 ------------------------------
                                                     2004              2005
                                                 ------------      ------------
Short-term bank borrowings:
Import trade bills payable - UPS, DBS
Bank and Aurora Capital ....................     $  3,902,714      $  4,165,306
Bank direct acceptances - UPS and DBS
Bank .......................................       10,447,855         1,471,476
Other Hong Kong credit facilities -
UPS and DBS Bank ...........................        3,600,588         8,196,750
                                                 ------------      ------------
                                                 $ 17,951,157      $ 13,833,532
                                                 ============      ============
Long-term debt:
Vendor financing ...........................     $    135,145      $       --
Equipment financing ........................           78,038            83,206
Term loan - UPS ............................        5,000,000         2,708,333
Debt facility - GMAC .......................       16,960,064        33,558,095
                                                 ------------      ------------
                                                   22,173,247        36,349,634
Less current portion .......................      (19,628,701)      (36,109,699)
                                                 ------------      ------------
                                                 $  2,544,546      $    239,935
                                                 ============      ============


                                      F-20
<PAGE>


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 facility.  This facility bore interest at
10.25% per annum at December 31, 2005.  Under this facility,  we were subject to
certain restrictive  covenants,  including that we maintain a specified tangible
net worth,  fixed charge ratio, and leverage ratio. On June 27, 2005, we amended
the  letter of credit  facility  with UPS to extend the  expiration  date of the
facility  from June 30, 2005 to August 31, 2005 and to reduce the  tangible  net
worth requirement at June 30, 2005. On August 31, 2005, we amended the letter of
credit  facility with UPS to further extend the expiration  date of the facility
to October 31, 2005,  immediately  reduce the maximum  amount of  borrowings  to
$14.5  million on  September 1, 2005 and further  reduced the maximum  amount of
borrowing to $14.0  million on October 1, 2005.  On October 31, 2005, we further
amended the letter of credit  facility with UPS to extend the expiration date of
the  facility to January 31, 2006 and amend the  interest  rate to "prime  rate"
plus 3%. The  facility  amendment  also  provided  for  reduction in the maximum
amount of borrowings  to $13.5 million  commencing on November 1, 2005, to $13.0
million  commencing  on December 1, 2005,  and to $12.5  million  commencing  on
January 1, 2006.  Additionally,  Gerard Guez,  our Chairman,  pledged to UPS 4.6
million  shares of our common  stock held by Mr. Guez to secure the  obligations
under the credit facility. On January 27, 2006, we further amended the letter of
credit  facility  with UPS to extend the  expiration  date of the facility  from
January 31, 2006 to July 31, 2006.  The amendment  provides for reduction of the
maximum amount of borrowings  under the facility to $12.0 million  commencing on
April 1, 2006, $11.5 million commencing on May 1, 2006, $11.0 million commencing
on June 1,  2006 and to $10.5  million  commencing  on July 1,  2006.  Under the
amended  letter of credit  facility,  we are  subject to  restrictive  financial
covenants  of  maintaining  tangible net worth of $25 million as of December 31,
2005  and 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, 2005, we were in compliance with the covenants.  As of December 31,
2005,  $9.2 million was  outstanding  under this facility  with UPS  (classified
above as follows:  $1.9 million in import trade bills  payable;  $1.0 million in
bank direct  acceptances and $6.3 million in other Hong Kong credit  facilities)
and an additional $2.5 million was available for future borrowings. In addition,
$1.3 million of open letters of credit was outstanding as of December 31, 2005.

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,  2005,  $2.9
million was outstanding under this facility.  In addition,  $1.1 million of open
letters of credit was outstanding and $0 was available for future  borrowings as
of  December  31,  2005.  In  October  2005,  a tax loan for HKD  6.233  million
(equivalent   to  US  $804,000)  was  also  made  available  to  our  Hong  Kong
subsidiaries.  As of December 31, 2005,  $675,000 was outstanding under this tax
loan.

As of December 31, 2005, the total balance outstanding under the DBS Bank credit
facilities was $3.6 million (classified above as follows: $1.3 million in import
trade bills payable, $0.5 million in bank direct acceptances and $1.8 million in
other Hong Kong credit facilities).

From time to time, we open letters of credit under an uncommitted line of credit
from Aurora  Capital  Associates  which issues  these  letters of credits out of
Israeli  Discount  Bank. As of December 31, 2005,  $1.0 million was  outstanding
under this facility (classified above under import trade bills payable) and $7.1
million  of  letters  of  credit  were open  under  this  arrangement.  We pay a
commission fee of 2.25% on all letters of credits issued under this arrangement.

LOAN FROM MAX AZRIA

On February 14, 2005, we borrowed $5.0 million from Max Azria, which amount bore
interest at the rate of 4% per annum and was payable in weekly  installments  of
$250,000  beginning on February 28, 2005.  This was an unsecured  loan. In early
August 2005, we repaid the remaining balance of this loan in its entirety.


                                      F-21
<PAGE>


EQUIPMENT FINANCING

We had three equipment loans  outstanding at December 31, 2005 totaling $83,000.
One of these  equipment  loans  bears  interest  at 6% payable  in  installments
through 2009,  the second loan bears  interest at 15.8%  payable in  installment
through 2007 and the third loan bears  interest at 6.15% payable in  installment
through 2007.

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 were  payable in
semiannual  payments  commencing in February 2000. All remaining  balances under
these  notes  were  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  $(561,000),  $367,000 and $0 for the years
ended  December  31,  2003,  2004 and 2005,  respectively.  These  amounts  were
recorded in other income (expense) in the accompanying  consolidated  statements
of operations.

TERM LOAN - UPS

On  December  31,  2004,  our Hong  Kong  subsidiaries  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.  This  facility  bore interest at 9.25% per annum at December 31, 2005. On
June 27, 2005, we amended the loan agreement with UPS to reduce the tangible net
worth  requirement at June 30, 2005.  Under the amended loan  agreement,  we are
subject to restrictive  financial covenants of maintaining tangible net worth of
$25  million  at  December  31,  2005 and 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, 2005,  we were in  compliance  with the
covenants.  As  of  December  31,  2005,  $2.7  million  was  outstanding.   The
obligations  under the loan  agreement are  collateralized  by the same security
interests and guarantees  provided under our letter of credit facility with UPS.
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, our Chairman, of 4.6 million shares of our common stock.

DEBT FACILITY AND FACTORING AGREEMENT - 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  with GMAC by
entering  into a new  factoring  agreement  with 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 our sale of  merchandise  or rendition of service  created on a going
forward basis. At our request, GMAC, in its discretion,  may make advances to us
up to the lesser of (a) up to 90% of our  accounts on which GMAC has the risk of
loss and (b) $40  million,  minus in each case,  any amount  owed by us to GMAC.
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


                                      F-22
<PAGE>


loss,  and (b) $5 million minus in each case,  any amounts owed to GMAC by PBG7.
The facility bears interest at 7.385% per annum and the facility under PBG7, LLC
bears  interest at 7.75% per annum at December 31, 2005.  Restrictive  covenants
under the revised  facility  include a limit on  quarterly  capital  expenses of
$800,000  and  tangible net worth of $25 million at December 31, 2005 and at the
end of each fiscal  quarter  thereafter.  As of December  31,  2005,  we were in
compliance  with the covenants.  A total of $30.6 million was  outstanding  with
respect to receivables factored under the GMAC facility at December 31, 2005.

In May 2005,  we  amended  our  factoring  agreement  with  GMAC to  permit  our
subsidiaries  party  thereto and us, to borrow up to the lesser of $3 million or
fifty percent (50%) of the value of eligible inventory.  In connection with this
amendment,  we granted  GMAC a lien on certain of our  inventory  located in the
United States.  On January 23, 2006, we further amended our factoring  agreement
with GMAC to increase the amount we may borrow  against  inventory to the lesser
of $5 million or 50% of the value of eligible  inventory.  The $5 million  limit
will be reduced to $4 million on April 1, 2006 and will be further reduced to $3
million on July 1, 2006. The maximum borrowing  availability under the factoring
agreement,  based on the borrowing base formula remains at $40 million.  A total
of $3.0  million was  outstanding  under the GMAC  facility at December 31, 2005
with respect to collateralized inventory.

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 $36.1 million (2006), $7.1 million (2007), $14,000 (2008),
and $5,000 (2009).  The effective  interest rate on short-term bank borrowing as
of December 31, 2003, 2004 and 2005 were 5.3%, 5.7% and 7.8%, respectively.

GUARANTEES

Guarantees had 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.  In April 2005, we terminated these guarantees with
respect to Tag-It's obligations arising after the date of termination.

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 Debentures  contain customary events of default and permit the
holder 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 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 at December 31, 2004.


                                      F-23
<PAGE>


The placement agent in the financing,  received compensation for its services in
the amount of $620,000 in cash and issuance of five year warrants to purchase up
to 200,000  shares of our common stock at an exercise  price of $2.50 per share.
The  warrants  to  purchase  200,000  shares of our common  stock 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  warrants  to purchase  200,000  shares of our common
stock 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.

In June 2005,  holders of our Debentures  converted an aggregate of $2.3 million
of Debentures into 1,133,687 shares of our common stock. In August 2005, holders
of our Debentures  converted an aggregate of $820,000 of Debentures into 410,000
shares of our common stock.  The Debentures  were converted at the option of the
holders at a price of $2.00 per share.  Debt discount of $248,000 related to the
intrinsic  value of the  conversion  option of $804,000  was  expensed  upon the
conversion. Of the $620,000 financing cost paid to the placement agent, $191,000
was expensed upon the conversion.  The intrinsic value of the conversion option,
and the value of the warrant  amortized  in 2005 was  $474,000.  Total  deferred
financing  cost  amortized  in 2005 was  $189,000.  Total  interest  paid to the
holders of the  Debentures in 2005 was $539,000.  As of December 31, 2005,  $6.0
million,  net of $0.9 million of debt discount,  remained  outstanding under the
Debentures.

10.      INCOME TAXES

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

                                             YEAR ENDED DECEMBER 31,
                              -------------------------------------------------
                                 2003               2004                2005
                              -----------        -----------        -----------
Current:
Federal ...............       $ 2,400,000        $ 1,000,000        $      --
State .................          (241,948)             8,511              2,425
Foreign ...............         2,106,199          1,400,953          1,091,442
                              -----------        -----------        -----------
                                4,264,251          2,409,464          1,093,867
Deferred:
Federal ...............              --                 --                 --
State .................              --                 --                 --
Foreign ...............          (132,622)           (61,345)          (166,686)
                              -----------        -----------        -----------
                                 (132,622)           (61,345)          (166,686)
                              -----------        -----------        -----------

Total .................       $ 4,131,629        $ 2,348,119        $   927,181
                              ===========        ===========        ===========


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

                                           YEAR ENDED DECEMBER 31,
                          -----------------------------------------------------
                               2003                2004                2005
                          -------------       -------------       -------------
Federal ............      $ (18,609,818)      $ (14,271,441)      $  (4,481,879)
Foreign ............        (13,143,213)        (88,057,111)          6,402,404
                          -------------       -------------       -------------

Total ..............      $ (31,753,031)      $(102,328,552)      $   1,920,525
                          =============       =============       =============


                                      F-24
<PAGE>


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,
                                                --------------------------------------------
                                                    2003            2004            2005
                                                ------------    ------------    ------------
<S>                                             <C>             <C>             <C>
Income tax (benefit) based on federal
   statutory rate ...........................   $(11,113,561)   $(35,814,993)   $    672,184
State income taxes, net of federal benefit ..       (157,266)          5,532        (246,978)
Effect of foreign income taxes ..............      2,862,550       2,749,376      (1,316,085)
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 ................................      5,998,480       3,944,541       1,818,060
                                                ------------    ------------    ------------

                                                $  4,131,629    $  2,348,119    $    927,181
                                                ============    ============    ============
</TABLE>

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:

<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                   ----------------------------
                                                                      2004            2005
                                                                   ------------    ------------
<S>                                                                <C>             <C>
Deferred tax assets:
Provision for doubtful accounts and unissued credits ...........   $    433,261    $    117,979
Provision for other reserves ...................................      1,533,620       2,874,377
Domestic and foreign loss carry forwards and foreign tax credits      9,789,485      11,162,380
Goodwill impairment ............................................      2,719,294       2,138,984
                                                                   ------------    ------------
Total deferred tax assets ......................................     14,475,660      16,293,720
Deferred tax liabilities:
Other ..........................................................       (213,784)        (47,098)
                                                                   ------------    ------------
                                                                       (213,784)        (47,098)
Valuation allowance for deferred tax assets ....................    (14,475,660)    (16,293,720)
                                                                   ------------    ------------
Net deferred tax liabilities ...................................   $   (213,784)   $    (47,098)
                                                                   ============    ============
</TABLE>

At  December  31,  2005,  we have $32.1  million of federal net  operating  loss
carryforwards  expiring in 2024. We also have foreign tax credits  carryforwards
totaling $833,000 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


                                      F-25
<PAGE>


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 $7.7 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.


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:

2006 ......................................................           $1,188,000
2007 ......................................................              710,000
2008 ......................................................              585,000
2009 ......................................................              600,000
2010 ......................................................              627,000
Thereafter ................................................            3,128,000
                                                                      ----------
Total future minimum lease payments .......................           $6,838,000
                                                                      ==========

Included  in the  future  minimum  lease  payments,  $420,000  payable  to  Lynx
International Limited, a Hong Kong corporation that is owned by Messrs. Guez and
Kay for leasing our warehouse and office space in Hong Kong.  See Note 15 of the
"Notes to Consolidated Financial Statements."

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  $3,101,000,
$2,128,000 and $1,295,000 for 2003, 2004 and 2005, respectively.

We entered  into a new lease  agreement in June 2005 in New York as our showroom
through June 2015.  This is currently the location  used for the private  brands
sales, design and technical  departments,  which functions we moved from our Los
Angeles executive office.

We had open letters of credit of  $5,976,000,  $9,987,000  and  $9,519,000 as of
December 31, 2003, 2004 and 2005, respectively.

We have two  employment  contracts  dated  January  1,  1998,  and  subsequently
amended,   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, 2004 and 2005.

On October 17, 2004,  Private  Brands,  Inc entered into an 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 has
an initial  three-year term, and provided we are in compliance with the terms of
the agreement,  is


                                      F-26
<PAGE>


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  provides
for payment of a sales royalty and advertising  commitment at the rate of 8% and
3%,  respectively,  of net sales, for a total minimum payment obligation of $8.3
million  over  the  initial  term of the  agreement.  On July 19,  2005,  Camuto
Consulting  Group  replaced J.S.  Brand  Management as the master  licensor.  In
December  2004, we advanced $2.2 million as payment for the first year's minimum
royalties.  We applied $1.1 million from the above  advance  against the royalty
and marketing  expenses in 2005. As of December 31, 2005, we had an  outstanding
advance of $1.1 million. In March 2006, we became involved in a dispute with the
licensor  of the  Jessica  Simpson  brands  over our  continued  rights to these
brands.

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.  In the first  quarter of 2005,  we advanced  $1.2
million as payment  for the first  year's  minimum  royalty and  marketing  fund
commitment.  We had applied  $34,000 from the above advance  against the royalty
and  marketing  expenses in 2005.  In March  2006,  we agreed to  terminate  our
agreement  to design,  market and sell House of Dereon by Tina  Knowles  branded
apparel and we agreed to sell all  remaining  inventory  to the  licensor or its
designee.  As a  result,  we will no  longer  be  involved  in the sales of this
private  brand.  Prior to December 31, 2005, we had written off the  capitalized
balance of $1.2 million  related to agreement and recognized a loss  accordingly
in  2005.  The  loss was  classified  as  royalty  expense  on our  consolidated
statements of operations.

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,  2005,  the total  commitment  on royalties
remaining on the term was $9.1 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.

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


                                      F-27
<PAGE>


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, 2005, no further options may be granted under the Plan.

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. The 1,000,000 stock options granted to
Kamel  Nacif  were  forfeited  in  2005.  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.

On September  23,  2005,  the Board of Directors  approved the  acceleration  of
vesting of all our unvested stock options.  In total,  1.7 million stock options
with an average  exercise  price of $3.69 and an average  remaining  contractual
life of 7.9 years were subject to this  acceleration.  The  exercise  prices and
number  of  shares  subject  to the  accelerated  options  were  unchanged.  The
acceleration  was effective as of September 23, 2005.  Had the  acceleration  of
these stock  options not been  undertaken,  the future  compensation  expense we
would  recognize in the fiscal years of 2006,  2007, 2008 and 2009 would be $1.4
million, $810,000, $10,000 and $3,000, respectively.  Our decision to accelerate
the vesting of these stock  options was based upon the  accounting  of this $2.2
million of compensation  expense from  disclosure-only in 2005 to being included
in our statement of operations in 2006 to 2009 based on our anticipated adoption
of SFAS No. 123 (revised 2004) "Share-Based Payment" effective in January 2006.


                                      F-28
<PAGE>


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

<TABLE>
<CAPTION>
                                    2003                        2004                         2005
                           ----------------------      ----------------------      -----------------------
                                         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       6,376,487     $   8.89      8,926,087     $   7.13       8,331,962     $   7.22
      Granted              3,288,100         3.67         83,000         3.04          42,000         2.44
      Exercised                   --           --             --           --              --           --
      Forfeited             (738,500)        6.91       (677,125)        5.43      (1,573,300)       11.40
      Expired                     --           --             --           --         (67,612)        4.50
                           ---------                   ---------                   ----------
Outstanding at end of
   year                    8,926,087     $   7.13      8,331,962     $   7.22       6,733,050     $   6.25
                           =========                   =========                   ==========
Exercisable at end of
   Year                    4,028,487     $  10.56      5,251,250     $   9.04       6,733,050     $   6.25
Weighted average per
   option fair value
   of options granted
   during the year                         $ 1.92                    $   1.36                     $   1.13
</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 2005:

<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                        ------------------------------------     -------------------------
                                       Weighted
                                        Average     Weighted                      Weighted
                                       Remaining     Average                       Average
                           Number     Contractual   Exercise       Number         Exercise
Exercise Price          Outstanding      Life         Price      Exercisable        Price
-----------------       -----------   -----------   --------     -----------      --------
<C>                       <C>             <C>      <C>             <C>            <C>
$  1.39 - $  2.84            56,000       8.1      $  2.41            56,000      $   2.41
$  3.60 - $  3.68         2,388,050       7.5         3.64         2,388,050          3.64
$  3.94 - $  5.09           763,000       7.2         4.30           763,000          4.30
$  5.50                   2,004,000       6.3         5.50         2,004,000          5.50
$  5.55 - $  9.97           444,500       2.4         7.05           444,500          7.05
$ 13.50 - $15.50          1,011,000       2.7        13.51         1,011,000         13.51
$ 18.44 - $18.50             23,000       2.7        18.50            23,000         18.50
$ 33.13 - $39.97             41,500       3.1        39.31            41,500         39.31
$ 45.50                       2,000       3.2        45.50             2,000         45.50
                        -----------                              -----------
$  1.39 - $45.50          6,733,050       6.0       $ 6.25         6,733,050      $   6.25
                        ===========                              ===========
</TABLE>

13.      EQUITY TRANSACTIONS

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 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. 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:


                                      F-29
<PAGE>


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.

As previously  disclosed,  following a review of the accounting treatment of our
October 2003 private  placement of convertible  preferred  stock, we 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. We restated our 2003 and 2004 financial  statements to reflect
the recording of the beneficial conversion feature of approximately $7.5 million
in the fourth  quarter of 2003  relating to the  issuance  of 881,732  shares of
Series A convertible  preferred stock. The beneficial  conversion feature of the
preferred  shares in the  amount of $7.5  million  was  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 did not
change our reported  earnings  (loss) per share for the year ended  December 31,
2004. 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.

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.

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 in 2003 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 March 2005, in connection  with a settlement of a dispute  involving a former
employee  named Nicolas  Nunez,  we agreed to compensate  Mr. Nunez in the total
amount of $875,000.  In April 2005, we issued 195,313 shares of our common stock
(having a value of $375,000) to Mr. Nunez  pursuant to the terms of an agreement
and plan of  reorganization  and paid Mr. Nunez  $500,000 in  settlement  of all
remaining claims by Mr. Nunez against us.

In June 2005,  holders of our Debentures  converted an aggregate of $2.3 million
of Debentures into 1,133,687 shares of our common stock. In August 2005, holders
of our Debentures  converted an aggregate of $820,000 of Debentures into 410,000
shares of our common stock.  See Note 9 of the "Notes to Consolidated  Financial
Statements."

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


                                      F-30
<PAGE>


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.

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,
                                        ----------------------------------------
                                           2003           2004           2005
                                        ----------     ----------     ----------
Cash paid for interest ............     $2,856,000     $1,796,000     $3,335,000
                                        ==========     ==========     ==========
Cash paid for income taxes ........     $  378,000     $1,196,000     $  875,000
                                        ==========     ==========     ==========

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.

In March 2005, in connection  with a settlement of a dispute  involving a former
employee  named Nicolas  Nunez,  we agreed to compensate  Mr. Nunez in the total
amount of $875,000.  In April 2005, we issued 195,313 shares of our common stock
(having a value of $375,000) to Mr. Nunez  pursuant to the terms of an agreement
and plan of  reorganization  and paid Mr. Nunez  $500,000 in  settlement  of all
remaining claims by Mr. Nunez against us.

In June 2005,  holders of our Debentures  converted an aggregate of $2.3 million
of Debentures into 1,133,687 shares of our common stock. In August 2005, holders
of our Debentures  converted an aggregate of $820,000 of Debentures into 410,000
shares of our common stock.

In 2005,  we purchased  $6.4 million of fabric from  Acabados y  Terminados,  of
which $2.4  million  was paid in cash and $4.0  million  was offset  against the
notes receivable  principal and accrued interest on the note receivable from the
affiliates of Mr. Kamel Nacif.


                                      F-31
<PAGE>


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,
                                       -----------------------------------------
                                           2003          2004            2005
                                       -----------    -----------    -----------
Sales to related parties ..........    $22,296,000    $ 3,598,000    $    88,000
Purchases from related parties ....    $72,329,000    $17,875,000    $ 6,987,000

As of December 31, 2004 and 2005,  related party  affiliates were indebted to us
in the amounts of $13.1  million and $8.4 million,  respectively.  These include
amounts due from Gerard  Guez,  our Chairman of $2.5 million and $2.3 million at
December 31, 2004 and 2005, respectively, which have been shown as reductions to
shareholders' equity in the accompanying  financial  statements.  Total interest
paid by Mr.  Guez was  $374,000,  $370,000  and  $209,000  for the  years  ended
December 31, 2003, 2004 and 2005, respectively.

From time to time in the past, we borrowed  funds from,  and advanced  funds to,
Mr. Guez. The greatest  outstanding  balance of such advances to Mr. Guez during
2005 was approximately  $4,766,000. At December 31, 2005, the entire balance due
from  Mr.  Guez   totaling   $2.3  million  was  reflected  as  a  reduction  of
shareholders'  equity.  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,  $370,000 and $209,000 for the years ended December 31, 2003, 2004
and 2005,  respectively.  Mr. Guez paid expenses on our behalf of  approximately
$400,000  and  $397,000  for  the  years  ended  December  31,  2004  and  2005,
respectively,  which  amounts  were  applied  to  reduce  accrued  interest  and
principal on Mr. Guez's loan.  These amounts  included 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.  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.  This amount was repaid in
the first quarter of 2005.

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 had 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, 2004 and 2005
were $8.1  million,  $2.6  million and $0,  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


                                      F-32
<PAGE>


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  $16.8  million,  $1.0  million and
$450,000 of trim  inventory  from Tag-It for the years ended  December 31, 2003,
2004 and 2005,  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  $37.1
million,  $11.5  million and $135,000 of finished  goods and service from Azteca
and its  affiliates  for the  years  ended  December  31,  2003,  2004 and 2005,
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 2003,  2004 and 2005 were $9.9
million,  $1.0  million and $88,000,  respectively.  Two and one half percent of
gross sales as management  fees were paid in 2003,  2004 and 2005 to each of the
members of UAV,  per the  operating  agreement.  The amount paid to Azteca,  the
minority member of UAV, totaled $1.7 million,  $179,000 and $0 in 2003, 2004 and
2005,  respectively.  Net amounts due from these related  parties as of December
31, 2004 and 2005 were $7.8 million and $5.5 million, 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 agreed to pay $1 for each yard of 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, respectively.

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 a
previously existing purchase  commitment  agreement with Mr. Nacif's affiliates.
We purchased $6.4 million of fabric,  of which $2.4 million was paid in cash and
$4.0  million was offset  against  the notes  receivable  principal  and accrued
interest on the note  receivable from the affiliates of Mr. Kamel Nacif in 2005.
Net amount due from these related parties as of December 31, 2005 was $236,000

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. We paid $1,330,000 in rent annually in each of 2003 and
2004 and $1,019,000 in 2005 for office and warehouse facilities. Our Los Angeles
offices and  warehouse is leased on a month to month basis.  On January 1, 2006,
we entered into a one year lease agreement with Lynx  International  Limited for
our office space in Hong Kong.

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, 2004 and 2005,  we had various  employees  receivable  totaling
$403,000 and $370,000, respectively, included in due from related parties.


                                      F-33
<PAGE>


We  entered  into  lease   agreements  with  the  former  owners  of  Industrial
Exportadora  Famian and our  former  employees.  Under  theses  leases,  we paid
$943,000  in 2003,  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  $2.1 million at December 31, 2005 was accounted for under the
equity method and included in equity  method of  investment on the  accompanying
consolidated balance sheets.

We believe the 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-34
<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 four geographic  regions:  the
United States,  Asia,  Mexico and  Luxembourg.  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, Mexico and Luxembourg 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        LUXEMBOURG      ELIMINATIONS          TOTAL
                               -------------   -------------   --------------   -------------   --------------    --------------
<S>                            <C>             <C>             <C>              <C>             <C>               <C>
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  $(11,078,000)   $   7,556,000   $  (30,116,000)  $          --   $           --    $  (33,638,000)
                               =============   =============   ==============   =============   ==============    ==============
Interest income............    $     419,000   $     725,000   $        6,000   $          --   $     (725,000)   $      425,000
                               =============   =============   ==============   =============   ==============    ==============
Interest expense...........    $   5,215,000   $      41,000   $      347,000   $     725,000   $     (725,000)   $    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   $ 213,051,000   $ (406,837,000)   $  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  $ (13,231,000)  $   3,663,000   $  (89,400,000)  $     (33,000)  $  (22,786,000)   $ (121,787,000)
                               =============   =============   ==============   ============    ==============    ==============
Interest income............    $     378,000   $     856,000   $           --   $          --   $     (856,000)   $      378,000
                               ==============  =============   ==============   =============   ==============    ==============
Interest expense...........    $   2,766,000   $      55,000   $       38,000   $     854,000   $     (856,000)   $    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   $ 212,165,000   $ (346,010,000)   $  131,811,000
                               =============   =============   ==============   =============   ===============   ==============

2005
---------------------------
Sales......................    $ 213,205,000   $   1,282,000   $      161,000   $          --    $           --    $  214,648,000
Inter-company sales........               --     135,531,000               --              --      (135,531,000)               --
                               --------------  -------------   --------------   -------------    --------------    --------------
Total revenue..............    $ 213,205,000   $ 136,813,000   $      161,000   $          --    $ (135,531,000)   $  214,648,000
                               =============   =============   ==============   =============    ==============    ==============

Income (loss) from operations  $    (928,000)  $   5,071,000   $     (470,000)  $     (48,000)   $          --     $    3,625,000
                               =============   =============   ==============   =============    =============     ==============
Interest income............    $     223,000   $   1,955,000   $           --   $   1,856,000    $   (1,953,000)   $    2,081,000
                               ==============  =============   ==============   =============    ==============    ==============
Interest expense...........    $   4,219,000   $     403,000   $        2,000   $   1,954,000    $   (1,953,000)   $    4,625,000
                               =============   =============   ==============   =============    ==============    ==============
Provision for depreciation
 and amortization..........    $   2,025,000   $     102,000   $           --   $          --    $           --    $    2,127,000
                               =============   =============   ==============   =============    ==============    ==============
Capital expenditures.......    $     335,000   $     224,000   $           --   $          --    $           --    $      559,000
                               =============   =============   ==============   =============    ==============    ==============
Total assets...............    $ 115,327,000   $ 129,737,000   $   15,782,000   $ 212,019,000    $ (321.623.000)   $  151,242,000
                               =============   =============   ==============   =============    ==============    ==============
</TABLE>


                                      F-35
<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 2003,  2004 and 2005  amounted to
approximately $157,000, $131,000 and $160,000, 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 2003,  2004 and 2005  amounted  to  approximately  $256,000,
$226,000 and $199,000, 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,
                                            -----------------------------------
                                               2003         2004          2005
                                            ----------   ----------   ----------
Rental income ...........................   $3,957,365   $5,854,698   $  193,127
Gain on sale of fixed assets ............         --           --        124,041
Unrealized gain on foreign currency .....         --        367,262         --
Realized gain on foreign currency .......      304,060         --           --
Gain on legal settlement ................      235,785         --           --
Other items .............................      287,269      144,677       37,179
                                            ----------   ----------   ----------
Total other income ......................   $4,784,479   $6,366,637   $  354,347
                                            ==========   ==========   ==========

Unrealized loss on foreign currency .....      560,602         --           --
Realized loss on foreign currency .......         --        511,586         --
Loss on sale of fixed assets ............      593,626         --           --
Other items .............................       28,692       17,671          580
                                            ----------   ----------   ----------
Total other expense .....................   $1,182,920   $  529,257   $      580
                                            ==========   ==========   ==========

19.      LEGAL PROCEEDINGS

1.       PATRICK BENSIMON

On April 12, 2000, we formed a company, Jane Doe International,  LLC ("JDI") for
the sole 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.
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


                                      F-36
<PAGE>


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.  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. The full amount of $875,000 had 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.

In April 2005, we issued  195,313  shares of our common stock (having a value of
$375,000)  to Mr.  Nunez  pursuant  to the  terms  of an  agreement  and plan of
reorganization and paid Mr. Nunez $500,000 in settlement of all remaining claims
by Mr. Nunez against us.

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 approved by the court.

4.       BAZAK INTERNATIONAL CORPORATION

Shortly before May 2004, Bazak International  Corp.  commenced an action against
us in the New York  County  Supreme  Court  claiming  that we  breached  an oral
contract to sell a quantity of close-out  goods, as a consequence of which Bazak
was damaged to the extent of $1.3 million.  Bazak  International  Corp.  claimed
that our  liability  exists  under a theory  of  breach  of  contract  or unjust
enrichment.  This case is currently  pending in the United States District Court
for the Southern District of New York and is scheduled for trial on December 18,
2006. We will continue to vigorously  defend  against the breach of contract and
unjust enrichment claim.


                                      F-37
<PAGE>


20.      QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

                                                   QUARTER ENDED
                                   ---------------------------------------------
                                   MAR.  31    JUN.  30    SEP.  30    DEC.  31
--------------------------------   --------    --------    --------    --------
2004                                  (In thousands, except per share data)

Net sales ......................   $ 42,155    $ 38,489    $ 38,102    $ 36,707
Gross profit ...................      7,500       5,266       4,135       4,060
Operating loss .................     (5,963)    (84,585)     (3,626)    (27,613)
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

2005

Net sales ......................   $ 44,830    $ 50,538    $ 69,566    $ 49,714
Gross profit ...................      8,946      11,454      14,545       9,936
Operating income ...............        233       1,437       3,011      (1,056)
Net income (loss) ..............   $   (106)   $    871    $  1,702    $ (1,474)
Net loss per common share:
  Basic ........................   $  (0.00)   $   0.03    $   0.05    $  (0.05)
  Diluted ......................   $  (0.00)   $   0.03    $   0.05    $  (0.05)
Weighted average shares
  outstanding:
  Basic ........................     28,815      29,156      30,366      30,554
  Diluted ......................     28,815      29,163      30,786      30,554


                                      F-38
<PAGE>


21.      SUBSEQUENT EVENTS

On January 19, 2006, we borrowed $4 million from Max Azria pursuant to the terms
of a promissory  note, which amount bears interest at the rate of 5.5% per annum
and is payable in weekly  installments  of $200,000  beginning on March 1, 2006.
This is an unsecured loan.

On January 23, 2006,  we further  amended our factoring  agreement  with GMAC to
increase the amount we may borrow against  inventory to the lesser of $5 million
or 50% of the value of eligible inventory.  The $5 million limit will be reduced
to $4 million on April 1, 2006 and will be further reduced to $3 million on July
1, 2006. The maximum borrowing availability under the factoring agreement, based
on the borrowing base formula remains at $40 million.

On January 27, 2006, we further  amended the letter of credit  facility with UPS
to extend the expiration  date of the facility from January 31, 2006 to July 31,
2006.  The amendment  provides for reduction of the maximum amount of borrowings
under the facility to $12.0 million  commencing on April 1, 2006,  $11.5 million
commencing on May 1, 2006, $11.0 million commencing on June 1, 2006 and to $10.5
million commencing on July 1, 2006. Under the amended letter of credit facility,
we are subject to restrictive  financial  covenants of maintaining  tangible net
worth of $25  million as of  December  31,  2005 and the last day of each fiscal
quarter   thereafter.   There  is  also  a  provision  capping  maximum  capital
expenditures per quarter of $800,000.

In March 2006, we terminated our license agreement for the brand House of Dereon
by Tina  Knowles  branded  apparel,  and sold  our  remaining  inventory  to the
licensor.  As a  result,  we will no  longer  be  involved  in the sales of this
private  brand.  Prior to December 31, 2005, we had written off the  capitalized
balance of $1.2 million  related to agreement and recognized a loss  accordingly
in  2005.  The  loss was  classified  as  royalty  expense  on our  consolidated
statements of operations.

In March 2006, we became  involved in a dispute with the master  licensor of the
JS by Jessica Simpson,  Princy and Sweet Kisses brands over our continued rights
to these brands.  Accordingly,  we do not  anticipate  sales of Jessica  Simpson
branded apparel after the first quarter of 2006 unless and until we successfully
resolve our dispute with the licensor.  Net sales of Jessica  Simpson and Princy
by Jessica Simpson totaled $12.6 million in 2005.


                                      F-39
<PAGE>


                                   SCHEDULE II

                              TARRANT APPAREL GROUP

                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<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, 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
                                         ===========   ===========   ============   ===========    ===========
For the year ended December 31, 2005
Allowance for returns and discounts ..   $ 1,063,321   $   871,208   $       --     $  (949,268)   $   985,261
Allowance for bad debt ...............   $ 1,374,544   $   637,210   $       --     $   (45,265)   $ 1,966,489
Inventory reserve ....................   $ 1,116,662   $      --     $       --     $(1,032,836)   $    83,826
                                         ===========   ===========   ============   ===========    ===========
</TABLE>


                                      F-40
<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

                                POWER OF ATTORNEY

         The  undersigned  directors  and officers of Tarrant  Apparel  Group do
hereby  constitute and appoint Gerard Guez and Corazon Reyes,  and each of them,
with full power of  substitution  and  resubstitution,  as their true and lawful
attorneys  and agents,  to do any and all acts and things in our name and behalf
in our  capacities  as  directors  and  officers  and to  execute  any  and  all
instruments  for us and in our names in the capacities  indicated  below,  which
said  attorney  and  agent,  may deem  necessary  or  advisable  to enable  said
corporation to comply with the  Securities  Exchange Act of 1934, as amended and
any  rules,   regulations  and  requirements  of  the  Securities  and  Exchange
Commission,  in  connection  with this  Annual  Report on Form  10-K,  including
specifically but without  limitation,  power and authority to sign for us or any
of us in our names in the  capacities  indicated  below,  any and all amendments
(including  post-effective  amendments)  hereto,  and we do  hereby  ratify  and
confirm all that said attorneys and agents, or either of them, shall do or cause
to be done by virtue hereof.

         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
----------------------          ------------------------         --------------
                                Chairman of the Board            March 31, 2006
/S/ GERARD GUEZ                   of Directors
----------------------
    Gerard Guez

/S/ TODD KAY                    Vice Chairman of the             March 31, 2006
----------------------           Board of Directors
     Todd Kay

/S/ BARRY AVED                  Chief Executive Officer          March 31, 2006
----------------------          and Director (Principal
    Barry Aved                   Executive Officer)

/S/ CORAZON REYES               Chief Financial Officer,         March 31, 2006
----------------------          Treasurer and Director
    Corazon Reyes               (Principal Financial and
                                Accounting Officer)

/S/ MILTON KOFFMAN              Director                         March 31, 2006
----------------------
    Milton Koffman

/S/ STEPHANE FAROUZE            Director                         March 31, 2006
----------------------
    Stephane Farouze

/S/ MITCHELL SIMBAL             Director                         March 31, 2006
----------------------
    Mitchell Simbal

/S/ JOSEPH MIZRACHI             Director                         March 31, 2006
----------------------
    Joseph Mizrachi

                                Director                         March 31, 2006
----------------------
    Simon Mani


                                       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. (7)

3.1.2       Certificate of Amendment of Restated Articles of Incorporation. (7)

3.1.3       Certificate of Amendment of Restated Articles of Incorporation. (14)

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. (13)

4.3         Certificate of Determination of Preferences,  Rights and Limitations
            of Series B Preferred Stock. (15)

4.4         Form of 6% Secured Convertible Debenture. (22)

10.1        Tarrant Apparel Group Employee Incentive Plan.* (19)

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

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

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

10.4.1      First amendment to Employment Agreement dated as of January 10, 2000
            by and between Gerard Guez and Tarrant Apparel Group.* (6)

10.4.2      Second Amendment to Employment Agreement dated April 1, 2003 between
            Tarrant Apparel Group and Gerard Guez.* (10)

10.4.3      Third  Amendment to Employment  Agreement,  effective as of April 1,
            2004, between Tarrant Apparel Group and Gerard Guez.* (20)

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

10.5.1      First Amendment to Employment Agreement dated as of January 10, 2000
            by and between Todd Kay and Tarrant Apparel Group.* (6)

10.5.2      Second Amendment to Employment Agreement dated April 1, 2003 between
            Tarrant Apparel Group and Todd Kay.* (10)

10.5.3      Third  Amendment to Employment  Agreement,  effective as of April 1,
            2004, between Tarrant Apparel Group and Todd Kay.* (20)


                                      EX-1
<PAGE>


EXHIBIT
 NUMBER     DESCRIPTION
--------    --------------------------------------------------------------------
10.6        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)

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

10.8        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. (20)

10.8.1      First Amendment  Factoring  Agreement dated as of May 9, 2005 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. (25)

10.8.2      Inventory  Security  Agreement 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. (25)

10.9        Promissory  note  dated  February  28,  2001  in  the  amount  of US
            $4,119,545.06 to pay to the order of Standard Chartered Bank (5)

10.10       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. (9)

10.11       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. (7)

10.11.1     Conditional  Consent Agreement dated December 31, 2002,  between UPS
            Capital Global Trade Finance Corporation and Fashion Resource (TCL),
            Inc. (8)

10.12       Guaranty  Agreement  dated  as of May 30,  2002 by and  between  UPS
            Capital Global Trade Finance Corporation and Gerard Guez. (7)

10.13       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. (7)

10.13.1     Charge Over Shares  dated June 13, 2002 by Fashion  Resource  (TCL),
            Inc. in favor of UPS Capital Global Trade Finance Corporation. (7)

10.13.2     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.
            (7)

10.13.3     Charge  Over  Shares  dated  February  26,  2003,  between  Machrima
            Luxembourg   International   Sarl  and  UPS  Global  Trade   Finance
            Corporation. (9)

10.13.4     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. (10)

10.13.5     Letter  Agreement  dated  September 1, 2003,  among Tarrant  Company
            Limited, Marble Limited, Trade Link Holdings Limited and UPS Capital
            Global Trade Finance Corporation. (12)


                                      EX-2
<PAGE>


EXHIBIT
 NUMBER     DESCRIPTION
--------    --------------------------------------------------------------------
10.13.6     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. (17)

10.13.7     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. (18)

10.13.8     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. (19)

10.13.9     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. (19)

10.13.10    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. (20)

10.13.11    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. (23)

10.13.12    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. (23)

10.13.13    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. (23)

10.13.14    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. (23)

10.13.15    Guaranty  and  Security  Agreement  dated  December  31, 2004 by and
            between Tarrant Luxembourg Sarl and UPS Capital Global Trade Finance
            Corporation. (23)

10.13.16    Amendment Agreement to Charge Over Shares dated December 31, 2004 by
            and between  Tarrant  Luxembourg  Sarl and UPS Capital  Global Trade
            Finance Corporation. (23)

10.13.17    Eleventh Deed of Variation to Syndicated  Letter of Credit  Facility
            effective  as of  _______  among  Tarrant  Company  Limited,  Marble
            Limited and Trade Link Holdings Limited and UPS Capital Global Trade
            Finance Corporation. (25)

10.13.18    Twelfth Deed of Variation to  Syndicated  Letter of Credit  Facility
            effective as of June 27, 2005 among Tarrant Company Limited,  Marble
            Limited and Trade Link Holdings Limited and UPS Capital Global Trade
            Finance Corporation. (25)

10.13.19    First Deed of Variation to Loan  Agreement  effective as of June 27,
            2005 among Tarrant  Company  Limited,  Marble Limited and Trade Link
            Holdings  Limited and UPS Capital Global Trade Finance  Corporation.
            (25)

10.13.20    Second Deed of  Variation  to Loan  Agreement  effective as of  July
            29, 2005  among Tarrant  Company  Limited,  Marble Limited and Trade
            Link  Holdings  Limited   and  UPS  Capital   Global  Trade  Finance
            Corporation. (26)


                                      EX-3
<PAGE>


EXHIBIT
 NUMBER     DESCRIPTION
--------    --------------------------------------------------------------------
10.13.21    Thirteenth Deed of Variation to Syndicated Letter of Credit Facility
            effective as of July 29, 2005 among Tarrant Company Limited,  Marble
            Limited and Trade Link Holdings Limited and UPS Capital Global Trade
            Finance Corporation. (26)

10.13.22    Fourteenth Deed of Variation to Syndicated Letter of Credit Facility
            effective  as of August 31,  2005  among  Tarrant  Company  Limited,
            Marble  Limited  and Trade Link  Holdings  Limited  and UPS  Capital
            Global Trade Finance Corporation. (26)

10.13.23    Fifteenth Deed of Variation to Syndicated  Letter of Credit Facility
            effective  as of October 31,  2005 among  Tarrant  Company  Limited,
            Marble  Limited  and Trade Link  Holdings  Limited  and UPS  Capital
            Global Trade Finance Corporation.

10.14       Assignment  of Promissory  Note by Tarrant  Apparel Group to Tarrant
            Company  Limited and to Trade Link Holdings  Company dated  December
            26, 2001. (7)

10.15       Exclusive  Distribution  Agreement  dated  April  1,  2003,  between
            Federated   Merchandising  Group,  an  unincorporated   division  of
            Federated Department Stores, and Private Brands, Inc. (9)

10.15.1     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.
            (19)

10.15.2     Amendment  No. 2 to  Exclusive  Distribution  Agreement  dated as of
            March 7, 2005, between Macy's  Merchandising  Group, LLC and Private
            Brands, Inc. (24)

10.15.3     Trademark  Sublicense  Agreement dated as of March 3, 2005,  between
            Macy's  Merchandising Group, LLC and Private Brands, Inc. (24) 10.16
            Unconditional  Guaranty  of  Performance  dated  April 1,  2003,  by
            Tarrant Apparel Group. (9)

10.17       Promissory  Note dated May 31,  2003 made by Gerard Guez in favor of
            Tarrant Apparel Group. (10)

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

10.19       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. (11)

10.20       Common Stock Purchase Warrant dated October 17, 2003, by and between
            Tarrant Apparel Group and Sanders Morris Harris Inc. (11)

10.21       Employment Agreement, effective as of September 1, 2003, between the
            Company and Barry Aved. (12)

10.22       Employment  Agreement,  dated  September 16, 2005,  between  Tarrant
            Company Limited and Henry Chu. (26)

10.23       Common Stock Purchase Warrant dated January 26, 2004 between Tarrant
            Apparel Group and Sanders Morris Harris Inc. (16)

10.24       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. (20)

10.24.1     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. (20)


                                      EX-4
<PAGE>


EXHIBIT
 NUMBER     DESCRIPTION
--------    --------------------------------------------------------------------
10.25       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. (20)

10.26       Securities Purchase Agreement dated December 6, 2004, by and between
            Tarrant  Apparel  Group and the  investors  listed on the  signature
            pages thereto. (21)

10.27       Registration  Rights Agreement dated December 14, 2004, by and among
            Tarrant  Apparel  Group and the  investors  listed on the  signature
            pages thereto. (22)

10.28       Security  Agreement  dated  December 14, 2004,  by and among Tarrant
            Apparel  Group  and the  investors  listed  on the  signature  pages
            thereto. (22)

10.29       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. (22)

10.30       Common  Stock  Purchase  Warrant  dated  December 14, 2004 issued by
            Tarrant Apparel Group in favor of T.R. Winston & Company, LLC. (22)

10.31       Form of Common Stock Purchase Warrant. (22)

10.32       Promissory  Note in the principal  amount of $5,000,000  dated as of
            February 15, 2005,  issued by Tarrant  Apparel Group in favor of Max
            Azria. (24)

10.33       Tenancy  Agreement,  dated July 1,  2005,  between  Tarrant  Company
            Limited and Lynx International Limited. (26)

14.1        Code of Ethical Conduct. (17)

21.1        Subsidiaries.

23.1        Consent of Singer Lewak Greenbaum & Goldstein LLP.

23.2        Consent of Grant Thornton 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  Annual Report on Form 10-K for
            the year ending December 31, 2000.

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


                                      EX-5
<PAGE>


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(23)        Filed as an exhibit to the Company's  Annual Report on Form 10-K for
            the year ending December 31, 2004.

(24)        Filed as an exhibit to the Company's  Quarterly  Report on Form 10-Q
            for the quarter ending March 31, 2005.

(25)        Filed as an exhibit to the Company's  Quarterly  Report on Form 10-Q
            for the quarter ending June 30, 2005.

(26)        Filed as an exhibit to the Company's  Quarterly  Report on Form 10-Q
            for the quarter ending September 30, 2005.


                                      EX-6