<PAGE>
 
                                                                   EXHIBIT 10.60


                                  ALL SECTIONS MARKED WITH TWO ASTERISKS ("* *")
                                      REFLECT PORTIONS WHICH HAVE BEEN REDACTED.
                                THE UNREDACTED EXHIBIT HAS BEEN FILED SEPARATELY
                                  WITH THE SECURITIES AND EXCHANGE COMMISSION AS
                                    PART OF A REQUEST FOR CONFIDENTIAL TREATMENT


                                 BY AND BETWEEN


                   MARSHALL GOBUTY INTERNATIONAL U.S.A., INC.

                                   ("SELLER")

                                      AND

                             TARRANT APPAREL GROUP

                                   ("BUYER")


                         DATED AS OF FEBRUARY 18, 1998
<PAGE>
 
                         EXHIBIT INDEX
                         -------------
<TABLE> 
<S>                 <C> 
EXHIBIT 1.1(a)      LIST OF ORDERS

EXHIBIT 1.1(b)-1    LIST OF TRANSFERRED FURNITURE, FIXTURES AND EQUIPMENT

EXHIBIT 1.1(b)-2    LIST OF RETAINED FURNITURE, FIXTURES AND EQUIPMENT

EXHIBIT 1.1(c)      LIST OF INVENTORY

EXHIBIT 1.1(d)-1    CULVER CITY LEASE

EXHIBIT 1.1(d)-2    HONG KONG LEASE

EXHIBIT 1.4-1       FORM OF PROMISSORY NOTE 1

EXHIBIT 1.4-2       FORM OF NOTE 1 LETTER OF CREDIT

EXHIBIT 1.4-3       FORM OF PROMISSORY NOTE 2

EXHIBIT 1.4-4       FORM OF NOTE 2 LETTER OF CREDIT

EXHIBIT 1.7         PURCHASE PRICE ALLOCATION

EXHIBIT 1.8         DISPUTE RESOLUTION PROCEDURES

EXHIBIT 3.8         DETERMINATION OF GROSS MARGIN

EXHIBIT 7.4(b)-1    FORM OF GOBUTY EMPLOYMENT AGREEMENT

EXHIBIT 7.4(b)-2    FORM OF NONCOMPETITION AGREEMENT

EXHIBIT 7.4(b)-3    TERMS OF SENIOR EMPLOYEES EMPLOYMENT

EXHIBIT 7.4(b)-4    FORM OF SENIOR EMPLOYEES EMPLOYMENT AGREEMENT
</TABLE> 

                                      -2-
<PAGE>
 
                                   SCHEDULES
<TABLE> 
<S>                 <C> 
SCHEDULE 3.1        TITLE TO ASSETS

SCHEDULE 3.5        LITIGATION
</TABLE> 


                    ALL SCHEDULES AND EXHIBITS HAVE BEEN OMITTED.  ANY OMITTED
                    SCHEDULE OR EXHIBIT WILL BE FURNISHED SUPPLEMENTALLY TO THE
                    SECURITIES AND EXCHANGE COMMISSION UPON REQUEST.

                                      -3-
<PAGE>
 
                            ASSET PURCHASE AGREEMENT
                            ------------------------


          THIS ASSET PURCHASE AGREEMENT (this "Agreement") is entered into as of
February 18, 1998 by and between TARRANT APPAREL GROUP, a California corporation
("Buyer"), and MARSHALL GOBUTY INTERNATIONAL U.S.A., INC., a California
corporation ("Seller").


                                    RECITALS
                                    --------

          A.   Seller owns certain assets which it uses in the conduct of its
business.

          B.   Seller desires to sell, and Buyer desires to purchase, such
assets and, in connection therewith, Buyer shall assume certain obligations and
liabilities related to such assets, in accordance with the terms and conditions
set forth in this Agreement.

          C.   Upon consummation of the transactions contemplated hereby, Buyer
shall establish the New Division (as hereinafter defined).

                                   AGREEMENT
                                   ---------

          NOW THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties hereby agree as
follows:


                                   ARTICLE 1
                                   ---------

                          SALE AND PURCHASE OF ASSETS
                          ---------------------------

          1.1  Sale and Purchase of Assets.  Subject to the terms and conditions
               ---------------------------                                      
set forth in this Agreement, on the Closing Date (as hereinafter defined),
Seller hereby agrees to sell, convey, transfer, assign and deliver to Buyer, and
Buyer hereby agrees to purchase from Seller, the following:

          (i) all of Seller's rights under orders pending at the close of
business on the day before the Closing Date or arising thereafter ("Orders")
including, but not 

                                      -4-
<PAGE>
 
limited to, those forth on Exhibit 1.1(a) hereto (which exhibit shall be 
                           --------------              
updated through the Closing Date to reflect new orders that have been shipped 
and a revised Exhibit 1.1(a) shall be delivered by Seller at the Closing which
              --------------                                
shall show all Orders pending at the time of Closing (the "Closing Date Orders
Schedule"));

          (ii) all of Seller's furniture, fixtures, equipment, computers and
other personal property used in connection with the business of Seller
including, but not limited to, those set forth on Exhibit 1.1(b)-1 hereto,
                                                  ----------------        
except with respect to leasehold improvements to the extent limited by the
provisions of the Culver City Lease and the Hong Kong Lease, each as hereinafter
defined ("FFE"), but excluding FFE set forth on Exhibit 1.1(b)-2 which shall be
                                                ----------------               
retained by Seller following the Closing;

          (iii) any inventory for Orders that is on hand at time of Closing as
described on Exhibit 1.1(c) hereto, including work in process (the "Inventory"),
             --------------                                                     
which schedule shall be delivered by Seller to Buyer no later than three (3)
business days immediately preceding the Closing Date;

          (iv)  all of Seller's rights under the Vendor Orders (as hereinafter
defined);

          (v) the security deposit (the "Culver City Security Deposit") held
under the lease attached as Exhibit 1.1(d)-1  hereto (the "Culver City Lease")
                            ----------------                                  
in the amount of U.S.$9,699.50, and subject to Section 5.5 below, the security
deposit (the "Hong Kong Security Deposit" and together with the Culver City
Security Deposit, the "Security Deposits") held under the lease attached as
                                                                           
Exhibit 1.1(d)-2  hereto (the "Hong Kong Lease" and together with the Culver
----------------                                                            
City Lease, the "Leases") in the amount of HK$132,900; and

          (vi) Seller's books and records directly related to the Orders, the
FFE, the Inventory, the Vendor Orders and the Security Deposits.

The assets set forth in the preceding subparagraphs (i) through (vi) are
referred to collectively hereinafter as the "Assets."

          1.2  Excluded Assets.  Notwithstanding anything contained herein to
               ---------------                                               
the contrary, the Assets shall not include any other assets of Seller
(including, but not limited to, the "NFL" license (the "License"), orders or
inventory related thereto or other assets directly related thereto) (the
"Excluded Assets").  The Excluded Assets are specifically excluded from the
Assets and shall be retained by Seller.

                                      -5-
<PAGE>
 
          1.3  Assumption of Liabilities.
               ------------------------- 

          (a) Assumed Liabilities.  Upon the terms and subject to the conditions
              -------------------                                               
contained herein, at the Closing Date, Buyer shall assume all of the following
obligations of Seller (other than obligations which are then payable or as to
which Seller is then in default on the Closing Date): (i) the obligations of
Seller to perform the Orders, (ii) the obligations of Seller under orders
submitted by Seller to third parties in order to fulfill Seller's obligations
under the Orders (the "Vendor Orders")), and (iii) the obligations of Seller
under the Culver City Lease  and, subject to Section 5.5 below, the obligations
of MGI (HK) Limited (the "Hong Kong Lessee") under the Hong Kong Lease
(collectively, the "Assumed Liabilities"). Except as otherwise expressly
provided in this Section 1.3(a), Buyer shall acquire the Assets free and clear
of all liens, claims, charges, encumbrances, liabilities, obligations and debts,
known or unknown, absolute, contingent, accrued or otherwise, including, but not
limited to:

                    (A)  any liability, responsibility or obligation with
respect to the employment prior to the Closing Date or termination of employment
by Seller of its employees;

                    (B)  except as provided in Section 1.9 below, liabilities
for taxes of any kind, whether federal, state, local or foreign, including, but
not limited to, interest, additions to tax or penalties applicable thereto with
respect to the operation of Seller's business or the transactions contemplated
hereby;

                    (C)  any liability for claims with respect to accidents or
occurrences with respect to the operation of Seller's business or any product
liability claims or injuries, property damage or other losses arising with
respect to products sold or services provided by Seller with respect thereto;

                    (D)  any liabilities for any chargebacks or returns by any
customer of Seller for products sold by Seller;

                    (E)  any liability for any default in the performance of or
breach of any contract, agreement or commitment of Seller prior to the Closing
Date; and

                                      -6-
<PAGE>
 
                    (F)   any and all liability arising out of or in connection
with any litigation, including but not limited to the litigation disclosed in
Schedule 3.5 hereto.
------------  


          (b) Copies of Orders, Vendor Orders, Invoices for Inventory.  At least
              -------------------------------------------------------           
three (3) business days prior to the Closing, Seller will provide Buyer with
copies of the Orders (the "Orders Copies"), the Vendor Orders ("Vendor Orders
Copies") and invoices (the "Inventory Copies") documenting the Inventory Amount
(the "Inventory Copies").

          (c) Factory Rating. Upon the execution of this Agreement, Seller shall
              --------------                                                    
provide Buyer with copies which are in Seller's possession of the factory
ratings (the "Factory Ratings Copies") of J.C. Penney Company, Inc. ("JCP") for
each of the Factories (as hereinafter defined) as to which the Factory Ratings
Copies relate.

          1.4    Purchase Price and Other Payments at Closing.
                 -------------------------------------------- 

                 (a) Assets and Assumed Liabilities.  The purchase price
                     ------------------------------                     
("Purchase Price") for the Assets shall be:

          (i) U.S.$1,000,000 payable as follows: (A) $500,000 in cash (by wire
          transfer) to Seller at the Closing, (B) a promissory note
          substantially in the form of Exhibit 1.4-1 hereto delivered at the
                                       -------------                        
          Closing in the principal amount of $300,000 bearing interest at a per
          annum rate of seven percent (7%), with principal and accrued interest
          due on or before July 31, 1998 ("Note 1"), secured by an irrevocable
          letter of credit in favor of Seller (the "Note 1 Letter of Credit"),
          payable upon presentment, from an institution and in a form
          satisfactory to Seller and containing the draw provisions set forth on
          Exhibit 1.4-2 hereto, and (C) a promissory note substantially in the
          -------------                                                       
          form of Exhibit 1.4-3 hereto delivered at the Closing in the principal
                  -------------                                                 
          amount of $200,000 bearing interest at a per annum rate of seven
          percent (7%), with principal and accrued interest due on or before
          July 31, 1998 ("Note 2"), secured by an irrevocable letter of credit
          in favor of Seller (the "Note 2 Letter of Credit"), payable upon
          presentment, from an institution and in a form satisfactory to Seller
          and containing the draw provisions set forth on Exhibit 1.4-4 hereto;
                                                          -------------        

          (ii) an amount (the "Inventory Amount") equal to Seller's cost of the
          Inventory payable in cash (by wire transfer) at the Closing; and

                                      -7-
<PAGE>
 
          (iii) the assumption of the Assumed Liabilities.

          (b) Offset Right.  Note 1 shall be subject to a right of offset solely
              ------------                                                      
for (i) the breach by Seller of any of its representations and warranties
hereunder, and (ii) any liability incurred by Buyer as a result of chargebacks
or returns with respect to goods shipped by Seller prior to the Closing.

          (c) Culver City Security Deposit.  At Closing, Buyer shall reimburse
              ----------------------------                                    
Seller (by wire transfer) for the amount of the Culver City Security Deposit.

          (d) Escrow.  In the event that the terms of the Note 1 Letter of
              ------                                                      
Credit and/or Note 2 Letter of Credit as set forth herein are not acceptable to
the institution requested to deliver the same or such institution imposes
conditions which are not consistent with the effect intended therefor as set
forth in this Agreement (including, without limitation, Exhibit 1.4-2 and/or
                                                        -------------       
Exhibit 1.4-4), the parties hereby agree to enter into an escrow agreement
--------------                                                            
containing the terms and conditions set forth herein and establish an escrow for
the purpose of administering the rights and obligations of the parties as
provided herein.
 
          1.5  [Intentionally Omitted]
               -----------------------

          1.6  Payment of Purchase Price and Culver City Security Deposit.  At
               ----------------------------------------------------------     
the Closing, Buyer shall pay the Purchase Price (including the Inventory Amount)
and the Culver City Security Deposit to Seller in U.S. dollars by wire transfer
of immediately available funds to an account or accounts designated by Seller.

          1.7  Allocation of Purchase Price. The Purchase Price shall be
               ----------------------------                             
allocated among the Assets as set forth on Exhibit 1.7 hereto.  Seller and Buyer
                                           -----------                          
shall so allocate the Purchase Price on all tax returns filed by them and shall
not take any position on any tax return inconsistent with such allocation.

          1.8  Pro-Ration and Transfer of Utilities.
               ------------------------------------ 

          (a) Apportionment.  The following items (the "Utilities") shall be
              -------------                                                 
apportioned between the parties as of the Closing Date so that all obligations
occurring before such date shall be obligations of Seller and all obligations
occurring after such date shall be obligations of Buyer: rent, service charges
for telephones, water, sewage, gas, utilities, electricity, oil and similar
services provided by third parties.  Within thirty (30) days following the
Closing Date, Seller shall provide to Buyer a statement showing in reasonable
detail such apportionment (the "Statement"). 

                                      -8-
<PAGE>
 
Within ten (10) days following receipt thereof, Buyer shall provide written
notice to Seller stating whether Buyer agrees or disagrees with such
apportionment. In the event Buyer agrees with such apportionment, Buyer shall
promptly pay the amount shown as due on the Statement. In the event the parties
cannot agree upon such apportionment, the parties shall use the average of the
two amounts proposed by the parties and payment by Buyer shall promptly be made
and such disagreement shall be resolved pursuant to the dispute resolution
provisions set forth on Exhibit 1.8 hereto.
                        -----------        
              (b) Use of Hong Kong Facilities; Payment of Utilities. Following 
                  -------------------------------------------------          
the Closing Date and prior to the effective date of the assumption by Buyer of
the Hong Kong Lease (the "Assumption Date"), Seller shall use its reasonable
efforts to make the facilities covered by the Hong Kong Lease available to Buyer
and Buyer shall be responsible for payment of all costs related thereto,
including, but not limited to, rent, utilities and insurance. In the event the
Hong Kong Lease is not assigned to Buyer, Buyer's obligations to make such
payments shall cease as of the effective time that Buyer no longer occupies such
facilities. Following the Assumption Date, Buyer shall cause the Utilities to be
transferred into the name of Buyer.

          1.9  Sales Taxes.  All sales taxes which may be payable as a result of
               -----------                                                      
the transactions contemplated hereby shall be paid by Buyer.


                                   ARTICLE 2
                                   ---------

                                    CLOSING
                                    -------

          2.1  Closing Date.  The closing of the transactions provided for
               ------------                                               
herein shall take place at the offices of Manatt, Phelps & Phillips LLP, 11355
W. Olympic Boulevard, Los Angeles, California , at 10:00 a.m. on February 23,
1998, or at such other place, time or date as to which the parties may mutually
agree in writing, such date being referred to herein as the "Closing Date" or
the "Closing"; provided, however, that the Closing shall not occur until after
each of the conditions set forth in Articles 7 and 8 hereto have been materially
satisfied or waived by the relevant party.

          2.2  Transfer of Possession.  On the Closing Date, Seller, through its
               ----------------------                                           
officers, agents and employees, will put Buyer into full possession of the
Assets.

          2.3  Instruments of Transfer and Assumption.
               -------------------------------------- 

                                      -9-
<PAGE>
 
          (a)  At the Closing or the Assumption Date (as hereinafter defined),
as applicable, Seller will (and Seller shall cause the Hong Kong Lessee, as
applicable, to) execute and deliver to Buyer:

              (i)  on the Closing Date, a Bill of Sale in form and substance
satisfactory to the parties (the "Bill of Sale");

              (ii)  on the Closing Date, an Assignment of Lease (the "Assignment
of Lease") in form and substance satisfactory to the parties with respect to the
Culver City Lease;

              (iii)  on the Assumption Date, an Assignment of Lease in form and
substance satisfactory to the parties with respect to the Hong Kong Lease; and

              (iv)  an Assumption of Liabilities Agreement in form and substance
satisfactory to the parties evidencing Buyer's assumption of the Assumed
Liabilities (the "Assumption of Liabilities Agreement").

          (b) From time to time after the Closing, Seller shall execute and
provide (and shall cause the Hong Kong Lessee to execute and provide) such other
endorsements, assignments, assumptions and other instruments of transfer in form
and substance reasonably satisfactory to Buyer, in each case, with such other
appropriate instruments of title and consents of third parties, reasonably
necessary to effectively transfer the Assets and the Assumed Liabilities.

     2.4  Other Matters.  On the Closing Date, each of the Ancillary
          -------------                                             
Agreements (as hereinafter defined) shall be executed and delivered by the
parties thereto, and Buyer and Seller shall deliver the certificates and other
matters described in Articles 7 and 8.


                                   ARTICLE 3
                                   ---------

                    REPRESENTATIONS AND WARRANTIES OF SELLER
                    ----------------------------------------

          Seller hereby represents and warrants to Buyer as set forth in this
Article 3.  All representations and warranties made by Seller with respect to
the transactions contemplated hereby shall be limited exclusively to the
representations and warranties set forth in this Article 3 and no other
representations and warranties of Seller or its 

                                      -10-
<PAGE>
 
shareholders, officers, directors and agents shall be deemed to be made or to
have been made in connection therewith.

          3.1  Ownership of Assets; Inventory.  Except as set forth on Schedule
               ------------------------------                          --------
3.1 hereto, Seller has valid title to the Assets, including work-in-progress
---                                                                         
inventory, if any, free and clear of any liens, encumbrances, claims and demands
whatsoever.  The Orders constitute valid and binding orders received by Seller
in the ordinary course of its business.  The Inventory is merchantable and fit
for the purpose for which it was manufactured and subject to open orders which
can be timely consummated.

          3.2  Authorization of Transaction.  Seller has full power and
               ----------------------------                            
authority to execute and deliver this Agreement and each Ancillary Agreement to
which it is a party and to perform its obligations hereunder and thereunder.
This Agreement and each Ancillary Agreement to which it is a party constitute
the valid and legally binding obligations of Seller, enforceable against Seller
in accordance with its respective terms and conditions.  Except with respect to
the Orders, the Leases and the liens set forth on Schedule 3.1 hereto (the
                                                  ------------            
"Liens"), Seller need not give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any third party, including without
limitation, any government or governmental agency in order to consummate the
transactions contemplated by this Agreement or any Ancillary Agreement.

          3.3  No Conflicts with Agreements and Laws.  Except as provided in
               -------------------------------------                        
credit agreements pursuant to which the Liens were created, neither the
execution and the delivery of this Agreement or any Ancillary Agreement, nor the
consummation of the transactions contemplated hereby or thereby, will conflict
with, result in a breach of or constitute a default under any material agreement
or any statute, order, judgment, writ, injunction, decree, rule or regulation to
which Seller is a party or by which it is bound or to which any of its assets is
subject.

          3.4  Leases.  The Leases are valid and in full force and effect and,
               ------                                                         
to Seller's knowledge, no party to the Leases is in breach or default, and no
event has occurred which, with notice or lapse of time, would constitute a
breach or default or permit termination, modification, or acceleration
thereunder.

          3.5. Litigation.  Schedule 3.5 hereto sets forth each instance in
               ----------   ------------                                   
which Seller (i) is subject to any outstanding injunction, judgment, order,
decree, ruling, or charge or (ii) is a party or, to the knowledge of Seller, is
threatened to be made a party to any action, suit, proceeding, hearing, or
investigation of, in, or before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator.

                                      -11-
<PAGE>
 
          3.6  Legal Compliance.   To Seller's knowledge, Seller has complied
               -----------------                                             
with all applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies thereof),
except where the failure to comply would not have a material adverse effect on
the Assets, and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced against any of
them alleging any failure so to comply.

          3.7  Copies.  The Orders Copies, the Vendor Orders Copies and the
               ------                                                      
Inventory Copies will be, when delivered pursuant to Section 1.3(a) above, true
and correct in all material respects.   The Factory Ratings Copies are in the
form as provided to Seller by JCP.

          3.8  Amount of Orders.  Seller represents that it has received orders
               ----------------                                                
to be shipped after the date of Closing but prior to December 31, 1998
aggregating at least [* *] at average gross margins aggregating at least [* *]
(it being understood that all determinations of average gross margins shall be
made in a manner consistent with Exhibit 3.8  hereto).    The foregoing shall
                                 ------------                                
not be deemed to constitute a guarantee in any way that the amounts set forth in
the preceding sentence shall in fact be achieved after the Closing, and Seller
shall have no liability hereunder, and Buyer expressly waives any claim against
Buyer, if such amounts ultimately are not achieved.


                                   ARTICLE 4
                                   ---------

                    REPRESENTATIONS AND WARRANTIES OF BUYER
                    ---------------------------------------

          Buyer hereby represents and warrants to Seller as set forth in this
Article 4.  All representations and warranties made by Buyer with respect to the
transactions contemplated hereby shall be limited exclusively to the
representations and warranties set forth in this Article 4, and no other
representations and warranties of Buyer or its shareholders, officers, directors
and agents shall be deemed to be made or to have been made in connection
therewith.

ALL SECTIONS MARKED WITH TWO ASTERISKS ("* *") REFLECT PORTIONS WHICH HAVE BEEN
REDACTED. THE UNREDACTED EXHIBIT HAS BEEN FILED SEPERATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT

                                      -12-
<PAGE>
 
          4.1  Authorization of Transaction.  Buyer has full power and authority
               ----------------------------                                     
to execute and deliver this Agreement and each Ancillary Agreement to which it
is a party and to perform its obligations hereunder and thereunder.  This
Agreement and each Ancillary Agreement to which it is a party constitute the
valid and legally binding obligations of Buyer, enforceable against Buyer in
accordance with their respective terms and conditions.  Buyer need not give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any third party, including without limitation, any government or
governmental agency in order to consummate the transactions contemplated by this
Agreement or any Ancillary Agreement.

          4.2. No Conflicts with Agreements and Laws.  Neither the execution and
               -------------------------------------                            
the delivery of this Agreement or any Ancillary Agreement, nor the consummation
of the transactions contemplated hereby or thereby, will conflict with, result
in a breach of or constitute a default under any material agreement or any
statute, order, judgment, writ, injunction, decree, rule or regulation to which
Buyer is a party or by which it is bound or to which any of its assets is
subject.


                                   ARTICLE 5
                                   ---------

                       COVENANTS AND AGREEMENTS OF SELLER
                       ----------------------------------

          5.1  Conduct of Business.  During the period from the date hereof
               -------------------                                         
until the Closing, Seller shall use commercially reasonable efforts to conduct
the business of Seller only in the ordinary course consistent with past practice
except as contemplated by this Agreement.

          5.2    Conditions.  Seller agrees that from the date hereof to the
                 ----------                                                 
Closing Date it will use commercially reasonable efforts:

                 (a) To satisfy the conditions precedent to consummation of the
transactions contemplated by this Agreement to the extent they are to be
performed by it, its agents or representatives.

                 (b) To cooperate with Buyer to obtain any consents required to
be obtained by Buyer pursuant to this Agreement.

                 (c) To obtain the consents required to be obtained by Seller
pursuant to this Agreement.

                                      -13-
<PAGE>
 
                 (d) To fulfill all pending orders in the ordinary course of
business consistent with past practice.

          5.3    Corporate Examinations and Investigations.
                 ----------------------------------------- 

                 (a) General.  Buyer and its authorized representatives shall be
                     -------                                                    
permitted to conduct a business review of Seller, its business, assets and
prospects, subject to Seller's cooperation as set forth below and the provisions
of the Confidentiality Agreement dated February 5, 1998 as amended from time to
time (as amended, the "Confidentiality Agreement").  Subject to the
Confidentiality Agreement, Seller shall cooperate with Buyer's due diligence
review and shall afford Buyer and its representatives reasonable access to the
books, records, employees, agents and properties of Seller to enable Buyer to
make such investigations, audits or appraisals as it deems necessary or
advisable in connection with the transactions contemplated hereby.  As part of
its due diligence investigation, Buyer shall be permitted to contact JCP and
Goody's Family Clothing, Inc. ("Goody's") prior to Closing, subject to Seller's
prior reasonable approval as to the timing and manner of such contacts.

                 (b) Factories.   Following the execution of the Agreement and 
                     --------- 
as a condition to Closing, Seller will provide Buyer with a list of the
factories used by Seller (the "Factories"). In the event the transactions
contemplated hereby are not consummated for any reason whatsoever, for a period
of two years after the date hereof, Buyer agrees (i) to keep confidential and
not to disclose to any party without Seller's prior written consent, which may
be withheld in its sole and absolute discretion, the identity of the Factories,
(ii) not to enter into any business relationships with the Factories or
otherwise use the Factories for the benefit of the Buyer, and (iii) not to,
directly or indirectly, solicit any contractual counterparty (which shall not be
deemed to include a customer or client) of Seller (other than a Factory with
which Buyer has had business relationships prior to the date hereof).

          5.4    Further Assurances.  Seller shall execute such documents and
                 ------------------                                          
other papers and take such further actions as may be reasonably required or
desirable to carry out the provisions hereof and the transactions contemplated
hereby (including, without limitation, the establishment of new vendor
identification numbers and the transfer of the Orders to Buyer).  Seller shall
use its best efforts to fulfill or obtain the fulfillment of the conditions to
the Closing as promptly as practicable.

          5.5    Assignment of Leases.
                 -------------------- 

                                      -14-
<PAGE>
 
                 (a)  Culver City Lease.  Seller shall use commercially 
                      ----------------- 
reasonable efforts prior to the Closing to obtain the consent from the landlord
under the Culver City Lease and assurance from such landlord confirming there
are no existing defaults under the Culver City Lease. If such consent is
obtained, Seller shall assign the Culver City Lease to Buyer.

                (b)  Hong Kong Lease.  The parties acknowledge and agree that 
                     ---------------
prior to the Closing no action shall be taken with respect to the Hong Kong
Lease. Immediately following the Closing, Seller shall use reasonable commercial
efforts (and shall cause the Hong Kong Lessee to use commercially reasonable
efforts) to obtain the consent of the landlord to the assumption by Buyer of the
Hong Kong Lease and assurance from such landlord confirming there are no
existing defaults under the Hong Kong Lease. If such consent is obtained, Seller
shall (and shall cause the Hong Kong Lessee to) assign the Hong Kong Lease to
Buyer. In the event the landlord under the Hong Kong Lease does not provide such
consent and the Hong Kong Lease is not assumed by Buyer, Seller and Buyer shall
cooperate to effect an orderly transition of employees to other facilities.

          5.6  Orderly Transition.  Following Closing, Seller shall cooperate
               ------------------                                            
with Buyer to effect an orderly transition of employees to other facilities and
as otherwise Buyer may deem to be necessary or desirable.

          5.7  Return of Buyer Funds.  In the event following the Closing any
               ---------------------                                         
funds intended for the benefit of Buyer are paid to or received by Seller,
Seller shall promptly pay or forward such funds to Buyer within five (5) days of
receipt thereof.

                                   ARTICLE 6
                                   ---------

                       COVENANTS AND AGREEMENTS OF BUYER
                       ---------------------------------

          6.1  Conditions.  Buyer agrees that from the date hereof to the
               ----------                                                
Closing Date, it will use commercially reasonable efforts:

               (a) To satisfy the conditions precedent to consummation of the
transactions contemplated by this Agreement to the extent they are to be
performed by it, its agents or representatives.

               (b) To cooperate with Seller to obtain any consents required to
be obtained by Seller pursuant to this Agreement.

                                      -15-
<PAGE>
 
               (c) To obtain the consents required to be obtained by Buyer
pursuant to this Agreement.

          6.2  Further Assurances.  Buyer shall execute such documents and
               ------------------                                         
other papers and take such further actions as may be reasonably required or
desirable to carry out the provisions hereof and the transactions contemplated
hereby.  Buyer shall use its best efforts to fulfill or obtain the fulfillment
of the conditions to the Closing as promptly as practicable.

          6.3  Records.  After the Closing, the New Division shall maintain,
               -------                                                      
and Buyer shall cause the New Division to maintain, all books and records in an
orderly and businesslike fashion and shall permit Seller to have reasonable
access at Seller's expense to such books, records and data of which Seller has
no copy in connection with the preparation of Seller's financial reports, tax
returns, tax audits, the defense or prosecution of litigation (including
arbitration), or any other reasonable need of Seller to consult such records and
data in order to satisfy their obligations herein.  Such information shall be
deemed to be Buyer's Confidential Information (as defined in the Confidentiality
Agreement) and Seller shall be deemed to be a Receiving Party (as defined in the
Confidentiality Agreement) and bound by the obligations applicable to a
Receiving Party with respect thereto.

          6.4  [Intentionally Omitted]

          6.5  Orderly Transition.  Following Closing, the Buyer shall cooperate
               ------------------                                               
with Seller to effect an orderly transition of employees to other facilities and
as otherwise Buyer may deem to be necessary or desirable.  In addition, for a
twelve-month period after the Closing, Buyer shall make office space available
to a personal employee of Marshall Gobuty ("Gobuty"), free of charge to Gobuty,
at the same location as Gobuty's office provided by Buyer is located.

          6.6  Releases.  Prior to the Closing, Buyer shall use commercially
               --------                                                     
reasonable efforts to assist Seller to obtain a release of liability (the
"Culver City Release") from the landlord under the Culver City Lease (if the
Culver City Lease is assumed by Buyer), provided that the foregoing shall not be
deemed to be a condition for Buyer assuming the Culver City Lease.  Following
the Closing, Buyer shall use commercially reasonable efforts to assist Seller
and the Hong Kong Lessee to obtain a release of liability (the "Hong Kong
Release") from the landlord under the Hong Kong Lease (if the Hong Kong Lease is
assumed by Buyer), provided that the foregoing shall not be deemed to be a
condition for Buyer assuming the Hong Kong Lease.

                                      -16-
<PAGE>
 
          6.7  Security Deposits.   On the Closing Date, Buyer shall reimburse
               -----------------                                              
Seller (by wire transfer) for the amount of the Culver City Security Deposit and
on the Assumption Date, Buyer shall reimburse Seller (by wire transfer) for the
amount of the Hong Kong Security Deposit.

          6.8  Pre-Closing Profits.  Buyer agrees that all profits earned by
               -------------------                                          
Seller with respect to sales consummated by Seller prior to the Closing
(including, but not limited to, sales with respect to the License) are for the
benefit of Seller and shall be retained by Seller following the Closing.

          6.9  New Division.  Upon consummation of the transactions contemplated
               ------------                                                     
hereby, Buyer and its affiliates shall establish the New Division for the
purpose of conducting business with JCP and Goody's and their respective
affiliates, successors and assigns and all such business shall be engaged in by
Buyer, its affiliates and successors, through the New Division at least through
December 31, 1999. Despite the foregoing, all such business shall be deemed to
be conducted by the New Division thereafter.

          6.10 Employee Matters.  Upon Closing, Seller shall terminate all
               ----------------                                           
Seller's employees and pay to them all accrued but unpaid wages, including
vacation pay, and Buyer will offer to hire all Seller's employees on terms and
conditions similar to their current employment.  If at any time within three
years following the Closing Buyer terminates any employee that accepts
employment (other than Gobuty or the Senior Employees (as hereinafter defined))
for any reason other than "cause" as defined in the Gobuty Employment Agreement
or the Senior Employee Employment Agreements (as applicable to the subject
employee, "Cause"), such employee shall receive a lump sum payment equal to [*
*] salary then applicable to such employee for each full year of service with
Seller or its predecessor, MGI (HK) Limited, prior to the Closing and with Buyer
following the Closing with a minimum payment of [* *] salary.  If at any time
within three years following the Closing the employment of any such employee is
terminated for any reason (except if such termination by Buyer is without
Cause), such employee shall forego his or her rights to receive the severance
benefits applicable to such employee as described above.

          6.11 Return of Seller Funds.  In the event following the Closing any
               ----------------------                                         
funds intended for the benefit of Seller are paid to or received by Buyer, Buyer
shall promptly pay or forward such funds to Seller within five (5) days of
receipt thereof.
 
ALL SECTIONS MARKED WITH TWO ASTERISKS ("* *") REFLECT PORTIONS WHICH HAVE BEEN
REDACTED. THE UNREDACTED EXHIBIT HAS BEEN FILED SEPERATELY WITH THE SECURITIES
AND EXCHANGE COMISSION AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT

                                      -17-
<PAGE>
 
                                   ARTICLE 7
                                   ---------

                    CONDITIONS TO THE OBLIGATIONS OF SELLER
                    ---------------------------------------

          The obligation of Seller to enter into and complete the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, any one or more of which may be waived by it, to the extent
permitted by law.

          7.1  Representations and Warranties True.  The representations and
               -----------------------------------                          
warranties of Buyer contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date as though made at and as of that
date, except changes that occur as a result of the passage of time.

          7.2  Compliance with Covenants.  Buyer shall in all material respects
               -------------------------                                       
have performed and complied with all terms, agreements, covenants and conditions
of this Agreement to be performed or complied with by it on or prior to the
Closing Date.

          7.3    Absence of Litigation.  No action, suit, or proceeding shall be
                 ---------------------                                          
pending or threatened before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling,
or charge would prevent consummation of any of the transactions contemplated by
this Agreement or cause any of the transactions contemplated by this Agreement
to be rescinded following consummation.

          7.4  Payment of Purchase Price and Culver City Security Deposit,
               -----------------------------------------------------------
Execution and Delivery of Ancillary Agreements.  Buyer shall have:
----------------------------------------------                    

          (a) made payment of the Purchase Price and the Culver City Security
Deposit as provided herein,

          (b) executed and delivered to each applicable counterparty (i) an
Employment Agreement between Buyer and Gobuty substantially in the form of
                                                                          
Exhibit 7.4(b)-1 hereto (the "Gobuty Employment Agreement"), (i) the
----------------                                                    
Noncompetition Agreement substantially in the form of Exhibit 7.4(b)-2 hereto
                                                      ---------------        
(the "Noncompetition Agreement"), (iii) an Employment Agreement between Buyer
and each employee set forth on Exhibit 7.4(b)-3 hereto (the "Senior Employees")
                               ----------------                                
substantially in the form of Exhibit 7.4(b)-4 hereto (the "Senior Employee
                             ----------------                             
Employment Agreements") and containing the terms set forth for each such
employee on Schedule 7.4(b)-3, (iv)  Note 1 (together with the Note 1 Letter of
            -----------------                                                  
Credit), (v) Note 

                                      -18-
<PAGE>
 
2 (together with the Note 2 Letter of Credit), (vi) the Bill of Sale, (vii) the
Assumption of Liabilities Agreement, and (viii) the Assignment of Lease with
respect to the Culver City Lease. The agreements and documents referred to in
this Section 7.4 are referred to collectively herein as the "Ancillary
Agreements."

          (c) provided evidence that Gobuty shall be covered under Buyer's
insurance policy covering its directors and officers.

          7.5  No Public Announcement. There shall have occurred no public
               ----------------------                                     
announcement or other disclosure by a party of the transactions contemplated
hereby (other than as contemplated by this Agreement or to Buyer's professional
advisors who are bound by a duty of confidentiality with respect thereto)
without the prior written consent of the other party provided that this
condition shall be deemed satisfied if such announcement or other disclosure is
required to be made by Buyer under applicable securities laws except as a result
of a breach of any provision of the Confidentiality Agreement by Buyer or
Buyer's Representatives (as defined in the Confidentiality Agreement); provided
                                                                       --------
that solely for purposes of this Agreement, in determining whether there has
been a breach of the Confidentiality Agreement under Section 6 thereof, any
press release or announcement by Buyer with respect to the Transaction (as
defined in the Confidentiality Agreement) shall be deemed a breach of Section 6
unless (i) Seller has provided its prior written consent thereto, or (ii) such
press release or announcement was required as set forth in said Section 6 as a
result of actions taken by any parties other than Buyer or Buyer's
representatives.

          7.6  Consents and Approvals.    All waivers, licenses, agreements,
               ----------------------                                       
permits, consents, approvals or authorizations of third parties or governmental
agencies or any modifications or amendments to existing agreements with third
parties required to be obtained by Seller or Buyer (other than with respect to
the Orders and the Leases) shall have been obtained and shall be in full force
and effect and without conditions or limitations which unreasonably restrict the
ability of the parties hereto to carry out the transactions contemplated hereby,
and Buyer shall have been furnished with appropriate evidence, reasonably
satisfactory to it and its counsel, of the granting of same.  With respect to
the Orders, Buyer shall have been furnished with the consents of JCP and Goody's
to the transfer of the Orders.

          7.7  Release of Liens.  The Liens shall have been released.
               ----------------                                      

                                      -19-
<PAGE>
 
                                   ARTICLE 8
                                   ---------

                     CONDITIONS TO THE OBLIGATIONS OF BUYER
                     --------------------------------------

          The obligation of Buyer to enter into and complete the Closing is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, any one or more of which may be waived by it, to the extent
permitted by law.

          8.1  Representations and Covenants.  The representations and
               -----------------------------                          
warranties of Seller contained in this Agreement shall be true and correct in
all material respects on and as of the Closing Date as though made at and as of
that date, except changes that occur as a result of the passage of time.

          8.2  Compliance with Covenants.  Seller shall in all material respects
               -------------------------                                        
have performed and complied with all terms, agreements, covenants and conditions
of this Agreement to be performed or complied with by it on or prior to the
Closing Date.

          8.3  Absence of Litigation.  No action, suit, or proceeding shall be
               ---------------------                                          
pending or threatened before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling,
or charge would prevent consummation of any of the transactions contemplated by
this Agreement or cause any of the transactions contemplated by this Agreement
to be rescinded following consummation.

          8.4  Consents and Approvals.    All waivers, licenses, agreements,
               ----------------------                                       
permits, consents, approvals or authorizations of third parties or governmental
agencies or any modifications or amendments to existing agreements with third
parties required to be obtained by Seller or Buyer (other than with respect to
the Orders and the Leases) shall have been obtained and shall be in full force
and effect and without conditions or limitations which unreasonably restrict the
ability of the parties hereto to carry out the transactions contemplated hereby,
and Buyer shall have been furnished with appropriate evidence, reasonably
satisfactory to it and its counsel, of the granting of same.  With respect to
the Orders, Buyer shall have been furnished with the consents of JCP and Goody's
to the transfer of the Orders.

          8.5  Due Diligence Review.  Buyer shall have conducted its due
               --------------------                                     
diligence review pursuant to Section 5.3(a) above and shall be reasonably
satisfied (i) with respect to its review of the Orders, the Factories and the
relationships with JCP 

                                      -20-
<PAGE>
 
and Goody's, and (ii) that there has been no breach of the representations and
warranties or the pre-closing covenants of Seller made pursuant to this
Agreement.

          8.6  Execution and Delivery of Ancillary Agreements.  Seller and the
               ----------------------------------------------                 
other parties to the Ancillary Agreements shall have executed and delivered to
Buyer this Agreement and each Ancillary Agreement to which it is a party, and
Seller shall deliver the Closing Date Orders Schedule, the Orders Copies, the
Vendor Orders Copies and the Inventory Copies.

          8.8  Gobuty Medical Examination.  At least three (3) business days
               --------------------------                                   
prior to Closing, Buyer shall have received the results of a medical examination
of Gobuty (the "Medical Examination"), which results shall reasonably
demonstrate to Buyer that Gobuty will be capable of performing the duties under
the Gobuty Employment Agreement.

          8.9  Release of Liens.  The Liens shall have been released and
               ----------------                                         
evidence thereof provided to Buyer, which shall be satisfactory to Buyer in all
material respects.
 

                                   ARTICLE 9
                                   ---------

                   SURVIVAL OF REPRESENTATIONS AND WARRANTIES
                   ------------------------------------------

          9.1  All of the representations and warranties of the parties hereto
shall expire one (1) year after the Closing Date and shall thereafter be of no
force and effect.  Subject to the preceding sentence, all representations,
warranties, covenants and agreements of the parties hereto shall survive the
Closing Date notwithstanding any investigations made by or on behalf of the
parties.

                                  ARTICLE 10
                                  ----------

                                INDEMNIFICATION
                                ---------------

          10.1 Indemnification of Buyer.  Subject to the limitations set forth
               ------------------------                                       
herein, Seller shall indemnify and hold Buyer harmless from, against, for and in
respect of any and all damages, losses, settlement payments, obligations,
liabilities, claims, costs and expenses (collectively, "Costs") incurred or paid
by Buyer arising out of (i) the breach of any representation, warranty or
covenant of Seller in this Agreement, (ii) any liability relating to the
business of Seller or the transactions 

                                      -21-
<PAGE>
 
contemplated hereby other than an Assumed Liability, or (iii) any liability
incurred by Buyer as a result of chargebacks or returns with respect to goods
shipped by Seller prior to the Closing.

Notwithstanding the foregoing:

               (a) no indemnification shall be made with respect to any matter
to the extent that insurance proceeds have been collected by Buyer with respect
to such matter; and

               (b) the aggregate amount of actual amounts paid by Seller for
breach of any representation, warranty or covenant of Seller in this Agreement
shall not exceed the Purchase Price (but only to the extent actually paid).

          10.2 Indemnification of Seller.  Subject to the limitations
               -------------------------                             
hereinafter set forth, Buyer shall indemnify and hold Seller (and, with respect
to clause (iii) below, the Hong Kong Lessee)  harmless from, against, for and in
respect of any and all Costs paid by Seller arising out of (i) the breach of any
representation, warranty or covenant of Buyer in this Agreement, (ii) if the
Culver City Release is not obtained, for any liability arising under the Culver
City Lease following the Closing, (iii) if the Hong Kong Lease is assumed by
Buyer following the Closing and the Hong Kong Release is not obtained, for any
liability arising under the Hong Kong Lease following the Closing, (iv) the
Assumed Liabilities, or (v) the operation of the New Division following the
Closing.

          10.3 Rules Regarding Indemnification.
               ------------------------------- 

               (a) The obligations and liabilities of each indemnifying party
hereunder shall be subject to the following terms and conditions:

               (i) The indemnified party shall give prompt written notice to the
indemnifying party of any claim which might give rise to a claim by the
indemnified party against the indemnifying party based on the indemnity
agreements contained in Sections 10.1 and 10.2 hereof, stating the nature and
basis of said claims and the amounts thereof, to the extent known.

               (ii) In the event any action, suit or proceeding is brought
against the indemnified party, with respect to which the indemnifying party may
have liability under the indemnity agreements contained in Sections 10.1 and
10.2 hereof, the action, suit or proceeding shall, upon the written
acknowledgment by the 

                                      -22-
<PAGE>
 
indemnifying party that it is obligated to indemnify under such indemnity
agreement, be defended (including all proceedings on appeal or for review) by
the indemnifying party; provided, however, that if the indemnifying party does
                        -----------------             
not promptly undertake such defense, the indemnified party shall be entitled to
assume the defense thereof. The indemnified party shall have the right to employ
its own counsel in any such case, but the fees and expenses of such counsel
shall be at the indemnified party's own expense. In such cases, the indemnified
party shall make available to the indemnifying party and its attorneys and
accountants all books and records of the indemnified party relating to such
proceedings or litigation and the parties hereto agree to render to each other
such assistance as they may reasonably require of each other in order to ensure
the proper and adequate defense of any such action, suit or proceeding.

          (b) Neither the indemnified party nor the indemnifying party shall
make any settlement of any claims without the written consent of the other
party, which consent shall not be unreasonably withheld or delayed.   In
addition, if, within ten (10) days of receipt of notice of a proposed settlement
amount, the indemnified party notifies the indemnifying party that the terms of
such proposed settlement are unacceptable to the indemnified party then the
indemnified party shall undertake the defense of the litigation and the
liability of the indemnifying party shall be limited to the amount of the
proposed settlement.  Further, if for any reason the indemnified party
determines that it is in its best interests to handle the defense of a claim for
which it is entitled to indemnification from the indemnifying party, the
indemnified party and indemnifying party shall endeavor in good faith to reach
an agreement by which the indemnified party shall release the indemnifying party
in consideration for the payment by the indemnifying party to the indemnified
party of the estimated value of the claim.

          (c) Each party's sole and exclusive remedy against the other for any
breach of a representation, warranty, covenant or other obligation made in or
imposed by this Agreement with respect to such party shall be a claim for
indemnification subject to the limitations set forth in this Article 10.

          (d) With respect to any matter for which indemnification has been
provided hereunder the indemnified party hereby covenants and agrees to
cooperate with the indemnifying party to assign any of its rights under any
insurance policy in the indemnified party's name against a loss covered by such
policy.

     10.4 Tax Benefits.   In determining the amount of any claims of a party
          -------------                                                     
("Claims"), such amount shall be reduced by the amount of any tax benefit
effects (collectively, the "Tax Effects") accruing to such party related to the
                            -----------                                        
Claims or to the payments made pursuant to such Claims.  The Tax Effects shall
be determined by 

                                      -23-
<PAGE>
 
taking into account all facts and circumstances existing at the Closing Date
through the future date(s) to which such benefits run (to the extent of the
present value thereof, discounted at the applicable short term applicable
federal rate, as of the date of such indemnification). For purposes of
determining the time or times at which Tax Effects shall be taken into account
to reduce any indemnification claims hereunder, the parties agree that Tax
Effects shall reduce the amount of any indemnification claims under this Article
10 only if, as and when actually realized by a party. In the event a party has
paid for an indemnification claim which is later subject to reduction due to a
Tax Effect, the party which has received such payment shall promptly pay such
amount to the paying party at the time actually realized by the receiving party.


                                  ARTICLE 11
                                  ----------

                            TERMINATION OF AGREEMENT
                            ------------------------

     11.1 Termination.  This Agreement may be terminated prior to the
          -----------                                                
Closing by either party without liability therefor (except as expressly provided
in Section 12.7) as follows:

          (a) At the election of Seller or Buyer, if for any reason the Closing
has not occurred on or before February 23, 1998 (time being of the essence in
respect of the transactions contemplated by this Agreement);

          (b) At the election of Seller or Buyer, if any legal proceeding is
threatened or commenced by any governmental or regulatory body or person (other
than Seller or Buyer or any affiliate of Seller or Buyer) to restrain, modify or
prevent the carrying out of the transactions contemplated under this Agreement
and either Seller or Buyer, as the case may be, reasonably and in good faith
deems it impractical or inadvisable to proceed in view of such legal proceeding
or threat thereof;

          (c) At any time on or prior to the Closing Date, by written agreement
of Seller or Buyer;

          (d) By Seller, if there has been:  (i) a material misrepresentation on
the part of Buyer of Buyer's representations and warranties contained in this
Agreement; or (ii) a material breach by Buyer of any covenant or agreement of
Buyer contained in this Agreement; or

                                      -24-
<PAGE>
 
               (e)  By Buyer, if there has been: (i) a material
misrepresentation on the part of Seller of the representations and warranties of
Seller contained in this Agreement; or (ii) a material breach by Seller of any
covenant or agreement of Seller contained in this Agreement.

          11.2 Survival.   In the event this Agreement is terminated pursuant to
               --------                                                         
Section 11.1 and the transactions contemplated hereby are not consummated as
described above, this Agreement shall be of no further force and effect, except
for the provisions of this Section 11.2 and Sections 5.3(b), 12.3 and 12.7,
which shall survive in accordance with their own respective terms.


                                  ARTICLE 12
                                  ----------

                                 MISCELLANEOUS
                                 -------------

          12.1 Notices.  Any notice or other communication required or permitted
               -------                                                          
hereunder shall be in writing and shall be delivered personally or sent by
facsimile transmission and shall be deemed given when so delivered personally or
sent by facsimile transmission as follows:

               (i)  If to Seller to:

                    Marshall Gobuty International U.S.A., Inc.
                    6076 Bristol Parkway, Suite 106
                    Culver City, California 90230
                    Attention: President
                    Telecopier: (818) 501-5835

                                      -25-
<PAGE>
 
                    with a copy to:                       
                                                          
                    Sheppard, Mullin, Richter & Hampton LLP
                    333 South Hope Street, 48th Floor     
                    Los Angeles, California  90071        
                    Attention:  Lawrence M. Braun, Esquire
                    Telecopier:  (213) 620-1398           
                                                          
                    (ii) If to Buyer to:                  
                                                          
                    Tarrant Apparel Group                 
                    3151 East Washington Boulevard        
                    Los Angeles, California 90023         
                    Attention: Chief Financial Officer    
                    Telecopier: (213) 881-0368            
                                                          
                    with a copy to:                       
                                                          
                    Manatt, Phelps & Phillips LLP         
                    11355 W. Olympic Boulevard            
                    Los Angeles, California  90064-1614   
                    Attention: Peter M. Menard, Esquire   
                    Telecopier: (310) 312-4224             


          Any party may by notice given in accordance with this Section 12.1 to
the other parties designate another address or person for receipt of notices
hereunder.

         12.2  Entire Agreement.  This Agreement (including the Schedules
               ----------------                                          
hereto), the Ancillary Agreements and the Confidentiality Agreement contain the
entire agreement of the parties with respect to the purchase of the Assets and
related transactions, and supersede all prior agreements written or oral with
respect thereto.

         12.3  No Publicity; Employee Letters.  Notwithstanding anything to the
               ------------------------------                                  
contrary in the Confidentiality Agreement, the parties agree not to disclose the
terms of this Agreement without the other party's prior written consent, which
may be withheld in the sole and absolute discretion of such party, except for
such disclosure as counsel for Buyer shall deem to be required by SEC rules
and/or applicable securities laws; provided that any such disclosure to be made
                                   --------                                    
by Buyer shall be subject to prior review and reasonable approval of Seller
(including without limitation prior review of SEC 

                                      -26-
<PAGE>
 
filings and press releases regarding the transactions contemplated hereby).
Buyer and Seller agree that such disclosure requirements will include a public
filing of the Agreement and related description of the transactions contemplated
hereby in either a Form 8-K or Form 10-K and concurrent news release (subject to
prior review and consent in accordance with this Section 12.3). The parties
agree to jointly prepare a letter to be delivered to each of Seller's employees
with regard to the transactions contemplated hereby. Notwithstanding anything
herein to the contrary, with respect to any SEC filing or other required
disclosure under applicable securities laws, Buyer shall seek "confidential
treatment" from the SEC and other applicable securities authorities in respect
of any disclosure of gross margins of Seller hereunder (such as in Section 3.8
hereof and the employment agreements that are exhibits hereto) or otherwise and
the second and third sentences of Section 6.10 and shall immediately provide
copies to Seller of any filings or other correspondence relating to such
confidential treatment request.

         12.4  Bulk Sales.  The parties waive compliance with the procedures of
               ----------                                                      
the "Bulk Sales Act" or any similar law.  Seller hereby agrees that the
indemnity provisions of Section 10.1 (other than Section 10.1(b)) hereof shall
apply to any Costs of Buyer arising out of or resulting from the failure to
comply with such laws.

         12.5  Waivers and Amendments; Non-Contractual Remedies; Preservation of
               -----------------------------------------------------------------
Remedies.  This Agreement may be amended, superseded, canceled, renewed or
--------                                                                  
extended, and the terms hereof may be waived, only by a written instrument
signed by each of the parties or, in the case of a waiver, by the party waiving
compliance.  From time to time prior to the Closing Date, Seller shall promptly
supplement or amend any representations and warranties of Seller herein or in
the schedules hereto which would have been required to be set forth or described
in such representations, warranties and schedules which is necessary to correct
any information which has become inaccurate therein, provided, however, that any
                                                     -----------------          
such supplement or amendment shall not affect Buyer's right to terminate the
Agreement as a result thereof.  The failure of either party to insist, in any
one or more instances, upon performance of the terms or conditions of this
Agreement shall not be construed as a waiver or relinquishment of any right
granted hereunder or of the future performance of any such term or condition. No
waiver on the part of any party of any right, power or privilege, nor any single
or partial exercise of any such right, power or privilege, shall preclude any
further exercise thereof or the exercise of any other such right, power or
privilege.  The rights and remedies herein provided are cumulative and are not
exclusive of any rights or remedies that any party may otherwise have at law or
in equity.  The rights and remedies of any party based upon, arising out of or
otherwise in respect of any inaccuracy in or breach of any representation,
warranty, covenant or 

                                      -27-
<PAGE>
 
agreement contained in this Agreement shall in no way be limited by (i) the fact
that the act, omission, occurrence or other state of facts upon which any claim
of any such inaccuracy or breach is based may also be the subject matter of any
other representation, warranty, covenant or agreement contained in this
Agreement (or in any other agreement between the parties) as to which there is
no inaccuracy or breach, or (ii) any investigation or knowledge of the
inaccuracy or breach by either party.

         12.6  Governing Law; Submission to Jurisdiction.  This Agreement shall
               -----------------------------------------                       
be governed by and construed in accordance with the substantive and procedural
laws of the State of California applicable to agreements made and to be
performed entirely within such State.  Each of the parties submits to the
jurisdiction of any state or federal court sitting in Los Angeles, California,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court. Each party also agrees not to bring any action or
proceeding arising out of or relating to this Agreement in any other court. Each
of the parties waives any defense of inconvenient forum to the maintenance of
any action or proceeding so brought and waives any bond, surety, or other
security that might be required of any other party with respect thereto. Any
party may make service on any other party by sending or delivering a copy of the
process to the party to be served at the address and in the manner provided for
the giving of notices in Section 12.1 above.  Each party agrees that a final
judgment in any action or proceeding so brought shall be conclusive and may be
enforced by suit on the judgment or in any other manner provided by law or at
equity.

         12.7  Expenses.  Each party shall bear its own out-of-pocket expenses
               --------                                                       
incurred in connection herewith or pursuant to the negotiation and preparation
of the Agreement, including, without limitation, all legal, accounting,
investment banking, travel and other similar fees and expenses.  In the event
(i) the transactions contemplated hereby are not consummated on or prior to
February 23, 1998 as the result of the intentional failure by a party to use
commercially reasonable efforts to satisfy a condition to Closing which
condition is within the control of such party, or (ii) Buyer causes the
condition specified in Section 7.5 not to be satisfied as a result of the
actions of Buyer, or its directors, officers or agents, with respect to clause
(i) above, such party shall reimburse the other party, and with respect to
clause (ii) above, Buyer shall reimburse Seller, for its costs and expenses
(including attorneys' fees and costs); provided that so long as an event does
not occur with respect to clause (ii) above, Buyer shall not be required to pay
Seller's costs if Buyer reasonably determines not to consummate the transactions
contemplated hereby as a result of its due diligence investigation relating to
the Orders, the relationships with JCP or Goody's, the Factories or the Medical
Examination.  The provisions of this Section 12.7 shall be a 

                                      -28-
<PAGE>
 
party's sole and exclusive remedy with respect to the termination of this
Agreement prior to Closing.

         12.8  Binding Effect; Assignment.  This Agreement shall be binding upon
               --------------------------                                       
and inure to the benefit of the parties and their respective successors and
assigns and legal representatives.  Neither this Agreement, nor any right
hereunder, may be assigned by any party without the written consent of the other
party hereto.  Any non-permitted assignment or attempted assignment shall be
void.

         12.9  No Third Party Beneficiaries.  Nothing in this Agreement is
               ----------------------------                               
intended or shall be construed to give any person any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision contained
herein.

        12.10  Counterparts; Facsimiles.  This Agreement may be executed by the
               ------------------------                                        
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument.  Each counterpart may consist of a
number of copies hereof each signed by less than all, but together signed by all
of the parties hereto.  Delivery of an executed counterpart of the signature
page to this Agreement by facsimile shall be as effective as delivery of a
manually executed counterpart of this Agreement; provided, that any party so
delivering an executed counterpart by facsimile shall thereafter promptly
deliver a manually executed counterpart of this Agreement to the other party,
but failure to deliver such manually executed counterpart shall not affect the
validity, enforceability and binding effect of this Agreement.

        12.11  Schedules.  The Schedules are a part of this Agreement as if
               ---------                                                   
fully set forth herein.  All references herein to Articles, Sections, paragraphs
and Schedules shall be deemed references to such parts of this Agreement unless
otherwise specified.

        12.12  Headings.  The headings in this Agreement are for reference only
               --------                                                        
and shall not affect the interpretation of this Agreement.

        12.13    Severability.  Whenever possible, each provision of this
                 ------------                                            
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity without invalidating the remainder
of such provision or the remaining provisions of this Agreement.

                                      -29-
<PAGE>
 
        12.14  Time of Essence.  Time is of the essence for each and every
               ---------------                                            
provision of this Agreement.

        12.15  Attorneys' Fees.  If any legal action or other proceeding is
               ---------------                                             
brought for the enforcement of this Agreement, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement, the successful or prevailing party shall be entitled to recover
reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it may be entitled.

        12.16  Reference to U.S. Dollars.   All references in this Agreement
               --------------------------                                    
to amounts of money expressed in dollars are references to United States
dollars, unless express reference is made to currency of another country.
 

                                      -30-
<PAGE>
 
          IN WITNESS WHEREOF, Buyer and Seller have duly executed and delivered
this Agreement as of the date first above written.


                                          MARSHALL GOBUTY INTERNATIONAL U.S.A., 
                                          INC., a California corporation


                                          By   /s/ Marshall Gobuty
                                               ---------------------------------
                                               Marshall Gobuty, President


                                          TARRANT APPAREL GROUP,
                                          a California corporation

                                          By:    /s/ Mark B. Kristof
                                                 -------------------------------
 
                                          Title:    Vice President
                                                 -------------------------------