UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

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

                For the fiscal year ended December 31, 2003

                                       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: 0-26430

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

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

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

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

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

                                      NONE

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

                                  COMMON STOCK

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  Registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [_]

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

         As of June 30,  2003,  the  aggregate  market value of the Common Stock
held by  non-affiliates  of the Registrant was  approximately  $16,804,979 based
upon the closing price of the Common Stock on that date.

         Number of shares of Common Stock of the  Registrant  outstanding  as of
March 26, 2004: 28,814,763.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the  Registrant's  definitive  Proxy  Statement to be filed
with the  Securities  and  Exchange  Commission  pursuant to  Regulation  14A in
connection  with the 2004 Annual Meeting of  Shareholders  are  incorporated  by
reference into Part III of this Report.


<PAGE>


                                     PART I

         CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

         This  2003  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,  China's entry into World Trade  Organization,  or
"WTO",  global  manufacturing  costs  and  restrictions,  and  other  risks  and
uncertainties that may be detailed herein. See "Item 7. Management's  Discussion
and Analysis of Financial Condition and Results of Operations--Factors  That May
Affect Future Results."

ITEM 1.  BUSINESS

OVERVIEW

         Tarrant Apparel Group is a leading provider of casual apparel,  serving
mass merchandisers,  department stores, branded wholesalers and specialty chains
located primarily in the United States by designing, merchandising,  contracting
for the  manufacture of,  manufacturing  directly and selling casual apparel for
women, men and children.  Our major customers include specialty retailers,  such
as Express, a division of The Limited, as well as Lane Bryant,  Lerner New York,
J.C.  Penney,   K-Mart,   Kohl's,   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 2001, our net sales decreased by 16.4% to $330 million. In 2002, our
net sales increased by 5.2% to $347 million. In 2003, our net sales decreased by
7.8% to $320  million.  In 2001  and  2002,  we  experienced  a net loss of $2.9
million and $1.2 million,  respectively,  before cumulative effect of accounting
change due to our adoption of SFAS No. 142,  and $2.9 million and $6.1  million,
respectively,  after the  cumulative  effect of accounting  change.  In 2003, we
experienced a net loss of $35.9 million.  See "Item 7.  Management's  Discussion
and  Analysis  of  Financial  Condition  and Results of  Operations--Results  of
Operations."

         During  2003,  we launched  our  private  brands  initiative,  where we
acquire  ownership  of or  exclusively  license  rights to a brand name and sell
apparel products under this brand to a single retail company within a geographic
region.  In the second  quarter of 2003,  we acquired an equity  interest in the
owner of the  trademark  "American  Rag CIE," and the  operator of American  Rag
retail stores, and our subsidiary,  Private Brands,  Inc., acquired a license to
certain  exclusive rights to this trademark.  Private Brands then 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  designs and  manufactures  a full  collection  of American  Rag
apparel  exclusively for sale in Federated stores across the country.  Beginning
in August 2003,  the American Rag collection is available in  approximately  100
select Macy's, the Bon Marche, Burdines, Goldsmith's, Lazarus and


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<PAGE>


Rich's-Macy's  locations.  During 2003, we also began selling products under our
own brand "No Jeans" exclusively to Wet Seal.

         Commencing  September 1, 2003, we ceased directly  operating nearly all
of our  equipment  and fixed  assets in Mexico by leasing  and  outsourcing  the
management of a substantial  majority of our Mexican operations to affiliates of
Mr. Kamel Nacif, one of our shareholders. See "-- 2003 Restructuring."

         In October 2003, we sold an aggregate of 881,732 shares of the Series A
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 accounts  payable 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.

2003 RESTRUCTURING

         At inception,  we relied on independent contract  manufacturers located
primarily in the Far East to produce the  merchandise  we sold to our customers.
Commencing  in the third  quarter  of 1997,  and taking  advantage  of the North
American Free Trade Agreement,  or "NAFTA", we substantially expanded our use of
independent cutting,  sewing and finishing contractors in Mexico,  primarily for
basic  garments.  Commencing in 1999,  and  concluding in December 2002 with the
purchase  of a denim and twill  manufacturing  plant in  Tlaxacala,  Mexico,  we
engaged in an ambitious program to develop a vertically integrated manufacturing
operation in Mexico while maintaining our sourcing operation in the Far East. We
believed   that  the  dual   strategy  of   maintaining   independent   contract
manufacturers in the Far East and operating  manufacturing  facilities in Mexico
controlled  by us could  best serve the  different  needs of our  customers  and
enable us to capitalize on advantages offered by both markets.  We believed this
diversified  approach would help to mitigate the risks of doing business outside
of  North  America,  such  as  transportation  delays,  economic  and  political
instability,  currency  fluctuations,  restrictions on the transfer of funds and
the imposition of tariffs, export duties, quota, and other trade restrictions.

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

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

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

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


                                       3
<PAGE>


         Our  withdrawal  from our owned and  operated  facilities  in Mexico on
September 1, 2003, has reduced our working capital requirements,  eliminated the
need to accept low or negative  margin orders to fill production  capacity,  and
permitted us to source production in the best locations  world-wide.  We believe
that our strong design,  merchandising and sourcing capabilities are competitive
advantages  that will  enable us to  overcome  the desire by some  retailers  to
purchase  merchandise  directly  from the  manufacturer.  Due to our  change  of
strategy in Mexico, at June 30, 2003, we wrote off  approximately  $19.5 million
in goodwill associated with certain assets we acquired in Mexico, and wrote down
$11 million of inventory in Mexico in anticipation of its liquidation at reduced
prices. See Note 7 of the "Notes to Consolidated Financial Statements."

BUSINESS STRATEGY

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

         o        There is a decline  in the  dominance  of the  casual  apparel
                  trend and the emergence of more upscale  looks,  which has put
                  pressure on the moderately priced casual apparel segment.

         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 more upscaled market segment due to
the following:

         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 team and
our  two  sample   rooms  in  Los  Angeles  and  China  have  made   significant
contributions to customers in developing new fabrics, washes and finishes.

         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.


                                       4
<PAGE>


         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.

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,  denim and non-denim,  including twill, woven
tops and bottoms,  and in 1998, we commenced  the sales of men's and  children's
apparel.  Our women's  apparel  products  currently  include jeans wear,  casual
pants,  t-shirts,  shorts,  blouses,  shirts,  knits and  sweaters,  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 $3.0
to over $50.0 per garment.

         Over the past three years,  approximately 72% of net sales were derived
from the sales of pants and jeans,  approximately 7% from the sale of shorts and
approximately 5% from the sale of shirts.  The balance of net sales consisted of
sales of skirts, 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 any growth in sales is expected to
come from existing customers.

         The  following  table shows the  percentage  of our net sales in fiscal
years 2001, 2002 and 2003  attributable to each customer that accounted for more
than 5% of net sales.

                                                     PERCENTAGE OF NET SALES
                                               ---------------------------------
         CUSTOMER                               2001          2002         2003
------------------------------------           ------        ------       ------
The Limited (1) ....................            14.3          12.7          15.3
Lane Bryant ........................            20.5          17.6          12.1
Lerner New York (2) ................             8.5           9.9           8.3
Wal-Mart ...........................            12.2           9.7           8.7
Tommy Hilfiger .....................             7.8          17.4           6.7
Kohl's .............................             1.7           5.1           6.6
Mervyn's ...........................             7.9           7.3           5.9

----------

(1)  Includes Express and Limited stores.
(2)  Sold by Limited Brands Inc. in November 2002.

         In the same  periods,  virtually all of our sales were of private label
apparel and several  major  international  brands.  We  currently  serve over 25
customers, which, in addition to those identified above, include, Wet Seal, J.C.
Penney,  K-Mart, and Seven Licensing Company,  LLC. During 2003, we launched our
private brands initiative,  where we acquire ownership of or exclusively license
rights to a brand name and sell  apparel  products  under this brand to a single
retail  company  within  a  geographic   region.  We  sell  products  under  our
company-owned  brand "No Jeans"  exclusively to Wet Seal, and our licensed brand
"American Rag Cie" to Federated  stores.  Additionally,  we manufacture  branded
merchandise for several major designers.


                                       5
<PAGE>


         We do not  have  long-term  contracts  with any of our  customers  and,
therefore,  there can be no assurance  that any customer  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
7.  Management's  Discussion and Analysis of Financial  Condition and Results of
Operations--Factors That May Affect Future Results."

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  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.  During  2000,  we opened  an office in  Bentonville,
Arkansas to support this approach and better service the needs of Wal-Mart.

         As part of our merchandising  strategy, we produce, at our own expense,
four  collections a year in order to offer new designs and fabrics for customers
that rely on us for fashion  direction.  We produce samples at our facilities in
Guangdong  Province,  China and in Los Angeles,  California.  The  facilities in
China and Los Angeles currently furnish the majority of our sample requirements.

         From time to time and at scheduled seasonal meetings,  we present these
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 such as divisions  of The Limited,  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


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<PAGE>


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,  Peru,  Thailand,  Egypt and Mexico.
Before we ceased  manufacturing  in Mexico on September 1, 2003, we sourced more
than 50% of our merchandise  annually from our factories in Mexico. Our sourcing
strategy is based on a strong presence in Hong Kong and China,  and expansion of
our  Indonesia  and India  manufacturing  network  in the Far East.  We are also
expanding our Western Hemisphere  production in Peru and other Central and South
American  countries,  and continue to source production in Mexico. 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:

                                                     2001     2002       2003
                                                    -----     -----     -----
     INTERNATIONAL SOURCING:
          Hong Kong and China ...............       29.3%     25.3%     28.6%
          Other (1) .........................        9.5%     13.3%     24.4%
     DOMESTIC SOURCING:
          United States .....................        9.3%      6.1%      4.4%
          Mexico and Central America ........       51.9%     55.3%     42.6%

     ----------
     (1)  In 2003,  such  countries  consisted of Thailand,  Egypt,  Bangladesh,
          Macau, Mongolia, Nepal, the Philippines and Vietnam.

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.  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


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<PAGE>


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  six  million  yards of  fabric
annually  manufactured  at the  facilities  in Mexico  which we have leased to a
related third party,  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 believe that we have the ability, through our production network, to
operate on production schedules with lead times as short as 30 days.  Typically,
our specialty  retail  customers  attempt to respond quickly to changing fashion
trends and are  increasingly  less willing to assume the risk that goods ordered
on long lead times  will be out of  fashion  when  delivered.  These  retailers,
including divisions of The Limited, frequently require production schedules with
lead times  ranging from 30 to 120 days.  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  production  schedules  with a
wide range of lead times 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  (both owned and third party  contractors) 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  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.

INTERNATIONAL SOURCING

         We conduct and monitor our sourcing  operations from our  international
offices. At December 31, 2003, we had offices in Hong Kong, Thailand and Mexico.
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


                                       8
<PAGE>


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 or China,
such as in  India,  Peru,  Thailand  and  Central  America,  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. 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


                                       9
<PAGE>


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, 2004, we had unfilled  customer orders of approximately
$67 million as compared to  approximately  $135 million as of February 26, 2003.
We believe that all of our backlog of orders as of March 22, 2004 will be filled
before  the end of the third  quarter  of fiscal  2004.  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 our revenues
are from the sales of apparel.  We are organized into three geographic  regions:
the United States, Asia and Mexico. We evaluate performance of each region based
on  profit  or loss from  operations  before  income  taxes  not  including  the
cumulative effect of change in accounting principles.  For information regarding
the revenues and assets associated with our geographic  regions,  see Note 15 of
the "Notes to Consolidated Financial Statements."

IMPORT RESTRICTIONS

QUOTAS

         We  imported   approximately   96%  of  our  products   sold  in  2003.
Approximately 37% 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.  We have been able to
avail ourselves of such  preferential duty treatment for many of the products we
import from Mexico.  While quotas have expired on non-qualifying  Mexican origin
apparel at the end of 2003, most of such merchandise remains subject to duty.

         A majority of the balance of the merchandise imported by us in 2003 was
manufactured in various countries (e.g.,  China) with which the U.S. has entered
into bilateral trade agreements.  These agreements  impose,  among other things,
certain quantitative restraints (i.e., quotas) on textile and apparel in various
categories  that can be  imported  into  the U.S.  from  that  country  during a
particular  quota  year.   Accordingly,   our  operations  are  subject  to  the
restrictions imposed by these trade agreements.

         As of 2005,  quota on apparel from all WTO countries,  including China,
will be eliminated. As China is now a member of the WTO, its exports of textiles
and apparel to the U.S.  will be covered by the WTO  Agreement  on Textiles  and
Clothing,  see  "Item 7.  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of  Operations."  However,  various  statutory  mechanisms
exist which could be invoked by the United States in order to impose "safeguard"
measures  (i.e.,  additional  duties or quotas)  upon  imports of products  from
China. These measures arise out of the accession agreement that allowed China to
join  the WTO.  For  example,  the  China  textile  "safeguard"  authorizes  the
imposition of quotas in response to a textile or apparel  product of China being
imported  into the  United  States in such  increased  quantities  or under such
conditions as to cause or threaten to cause market disruption.


                                       10
<PAGE>


         In 2003,  approximately  22% of the product  imported by us was of Hong
Kong  origin,  for which  Hong Kong  quota was  utilized  upon  import.  Certain
non-origin   conferring   production  operations  were  performed  in  China  in
connection  with a large  portion of our imported  products of Hong Kong origin,
under the so-called Outward Processing Arrangement ("OPA").

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 61% of the appraised  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  by  (or   benefited  by)  future  trade   agreements   and
restrictions,  changes in U.S.  trade  policy,  significant  decreases in import
quotas,  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. For
example, The Limited's wholly owned subsidiary, Mast Industries,  Inc., competes
with us and other private label apparel  suppliers for orders from  divisions of
The  Limited.  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.

EMPLOYEES

         At December 31, 2003, we had approximately  150 full-time  employees in
the  United  States,  900 in Mexico,  140 in Hong  Kong,  110 in China and 10 in
Thailand.

ITEM 2.  PROPERTIES

         We currently conduct our operations from 15 facilities, 10 of which are
leased. Our executive offices are located at 3151 East Washington Boulevard, Los
Angeles,  California  90023.  We  lease  this  facility  for an  annual  rent of
approximately $650,000 from a California corporation, which is owned by Mr. Guez
and Mr. Kay. The lease for this facility, under which we are responsible for the
payment of taxes,  utilities and  insurance,  terminated in December  2003.  The
lease is currently on a month-to-month  basis pending to our planned  relocation
to new  premises.  We also  sublease  an office at 9000  Sunset  Boulevard,  Los
Angeles  at a base rent of  $374,000  per year.  Furthermore,  we lease  146,000
square feet of warehouse  space in South Gate,  California for an annual rent of
$399,630 from an unrelated third


                                       11
<PAGE>


party.  The lease for this facility  terminates  in March 2004. In  Bentonville,
Arkansas,  we opened an  administrative  office  during 2000 to handle  business
related to Wal-Mart.  This facility is leased until 2004 for approximately 2,000
square feet at an annual rent of  approximately  $32,000.  In Columbus,  Ohio we
opened an  administrative  office during 1999 to handle business  related to The
Limited. This facility is leased until 2004, for approximately 6,000 square feet
at an annual rental of  approximately  $74,000.  We lease  approximately  36,000
square  feet of  warehouse  and office  space in Hong Kong for an annual rent of
$674,000 from a Hong Kong corporation that is owned by Mr. Guez and Mr. Kay. The
base rent is subject  to  increase  every two years in  accordance  with  market
rates.  The lease for this  facility,  under  which we are  responsible  for the
payment of taxes,  utilities  and  insurance,  expires  in June  2004.  We lease
approximately  50,000  square  feet,  which we use to operate our  sample-making
facility in Guangdong Province, China. The lease for this facility terminates in
June 2004 and the annual rent is $60,000. We also lease office space in Bangkok,
Thailand to house the small staff we maintain  there.  We own two  facilities in
Ruleville,  Mississippi  with an aggregate of 70,000  square feet. We also lease
one  location in New York City for  showroom  and sales  operations.  The square
footage of this  location  is  approximately  9,000 with an annual  base rent of
approximately  $350,000.  This lease expires in 2010. Subsequent to December 31,
2003,  we  exchanged  this lease with a tenant in the same  building for a 4,000
square foot office with an annual base rental of approximately $146,000 for 2004
and $150,000 for 2005 to 2007, which lease will expire in 2007. We are currently
renting one storage facility at Tehuacan,  Mexico at a monthly rental of $3,500.
No long-term contract has been signed for this lease. See Note 10 and Note 14 in
the  relevant  section  of  "Notes to  Consolidated  Financial  Statements"  for
additional information with respect to these facilities.

         On April 18,  1999,  we  acquired a 250,000  square  foot denim mill in
Puebla,  Mexico with an annual  capacity of  approximately  18 million meters of
denim.  On March 29, 2001, we completed the  acquisition of a sewing facility in
Ajalpan,  Mexico.  This  facility  contains  98,702 square feet. On December 31,
2002, we completed the acquisition of a twill mill facility, which has 1,700,000
square feet, and a capacity of 18 million  meters of denim or twill.  Commencing
on September 1, 2003, we leased a substantial  majority of these  premises to an
affiliate of Mr. Kamel Nacif, one of our  shareholders,  for an annual rental of
$11 million.  We have agreed to purchase  annually,  six million yards of fabric
manufactured at the facilities  leased or operated by Mr. Nacif's  affiliates at
market prices to be negotiated.

         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

PATRICK BENSIMON

         Subsequent to December 31, 2003,  we reached a settlement  with Patrick
Bensimon  relating to claims Mr.  Bensimon made against Jane Doe  International,
LLC  relating  to  his  employment   agreement  with  this  company.   Jane  Doe
International,  LLC, which was beneficially owned 51% by us and 49% by Needletex
Inc.,  was formed for the purpose of acquiring  assets from  Needletex,  Inc., a
company  owned by Mr.  Bensimon,  pursuant  to the  terms  of an Asset  Purchase
Agreement.  On January 21, 2003, Mr. Bensimon  obtained an arbitration  award of
$1,425,655 for salary and bonus plus interest accrued thereon and legal fees and
costs to be  determined.  On April 7, 2003,  the panel  issued a final  award in
favor of Mr.  Bensimon  confirming  the prior  interim  award and  awarding  Mr.
Bensimon costs and attorneys fees in the amount of $489,640.  On April 28, 2003,
Mr. Bensimon sought a court order confirming the final award. We asked the court
to vacate or modify the final award.

         In January 2004, we settled the employment  issue with Mr. 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 Jane Doe International,  LLC. An additional expense of approximately $379,000
was made in the fourth quarter of 2003 to cover the forgiveness of debts.


                                       12
<PAGE>


         At the outset of the dispute,  we tendered the claim by Mr. Bensimon to
our insurance carrier, which accepted the tender with a reservation of rights as
to whether coverage existed for the claim.  After the interim  arbitration award
was made, the insurance  carrier denied  coverage.  After the final award by the
arbitration panel, we made demand on the insurance carrier, which was denied. We
then  commenced  suit against the  insurance  carrier in the Los Angeles  County
Superior Court for breach of contract and related claims. Subsequent to December
31, 2003, the carrier has settled the case with a cash payment of $330,000.

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

         On December 4, 2003, we held a Special Meeting of Shareholders.  At the
Special Meeting,  there were 18,597,443  shares entitled to vote, and 14,012,698
shares  (75%)  were  represented  at the  meeting  in person  or by  proxy.  The
following  summarizes  the vote  results  for  those  matters  submitted  to our
shareholders for action at the Special Meeting:

         1.       Proposal to approve the issuance of 8,817,320 shares of common
stock issuable upon conversion of the outstanding shares of Series A Convertible
Preferred Stock.

            FOR          AGAINST           ABSTAIN          BROKER NON-VOTES

         10,076,862       56,393            20,716             3,858,727

         2.       Proposal  to approve an amendment to the Tarrant's Articles of
Incorporation  to increase the authorized  number of shares of common stock from
35,000,000 to 100,000,000.

            FOR          AGAINST           ABSTAIN          BROKER NON-VOTES

         13,554,357      245,925            20,816              191,600

         3.       Proposal  to approve the grant of options to purchase  400,000
shares of common stock to Barry Aved, our President.

            FOR          AGAINST           ABSTAIN          BROKER NON-VOTES

         8,285,152       119,803            25,016             5,582,727


                                       13
<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 began  trading on The NASDAQ Stock  Market's  National
Market under the symbol "TAGS" on July 24, 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
                                                             ----          ----
2002
----
First Quarter...................................             4.65          5.49
Second Quarter..................................             4.95          6.49
Third Quarter...................................             4.79          6.45
Fourth Quarter..................................             3.99          5.00

2003
----
First Quarter...................................             3.61          4.29
Second Quarter..................................             2.83          4.03
Third Quarter...................................             2.72          4.10
Fourth Quarter..................................             3.40          4.70

         On March 26, 2004,  the last reported sale price of our common stock as
reported by NASDAQ was $1.73.  As of March 26, 2004, we had 36  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  agreement  prohibits the payment of dividends  during the
term of the agreement.


                                       14
<PAGE>


EQUITY COMPENSATION PLAN INFORMATION

         The following table sets forth certain information regarding our equity
compensation plans as of December 31, 2003.

<TABLE>
<CAPTION>
                         NUMBER OF SECURITIES TO   WEIGHTED-AVERAGE EXERCISE       NUMBER OF SECURITIES
                         BE ISSUED UPON EXERCISE      PRICE OF OUTSTANDING        REMAINING AVAILABLE FOR
                         OF OUTSTANDING OPTIONS,     OPTIONS, WARRANTS AND     FUTURE ISSUANCE UNDER EQUITY
                           WARRANTS AND RIGHTS               RIGHTS                 COMPENSATION PLANS
                         -----------------------   -------------------------   ----------------------------
<S>                             <C>                          <C>                         <C>
Equity compensation
plans approved by
security holders .....          8,926,087                    $7.13                       2,573,913
Equity compensation
plans not approved by
security holders .....            881,732                    $4.65                          --
                         -----------------------   -------------------------   ----------------------------
Total                           9,807,819                    $6.91                       2,573,913
</TABLE>

MATERIAL FEATURES OF INDIVIDUAL EQUITY  COMPENSATION  PLANS NOT APPROVED BY
SHAREHOLDERS

         Sanders Morris Harris Inc. acted as placement  agent in connection with
our  October  2003  private   placement   financing   transaction.   As  partial
consideration for their services as placement agent, we issued to Sanders Morris
Harris a warrant to purchase  881,732  shares of our common stock at an exercise
price of $4.65 per share.  The warrant has a term of 5 years.  The warrant vests
and becomes  exercisable in full on April 17, 2004. See Note 12 to the "Notes to
Consolidated Financial Statements."

RECENT SALE OF UNREGISTERED SECURITIES

         In  October  2003,  we  issued  and sold  881,732  shares  of  Series A
Convertible  Preferred  Stock (the  "Series A Shares"),  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.  The Series A Shares were  converted  into an  aggregate  of 8,817,320
shares of common stock following  approval of the conversion by our shareholders
at a special  meeting held on December 4, 2003 in  accordance  with the original
conversion terms. Each of the investors  represented to us that the investor was
an  "accredited  investor"  within the meaning of Rule 501 of Regulation D under
the  Securities Act of 1933, and that the investor was purchasing the securities
for investment and not in connection with a distribution  thereof.  The issuance
and sale of the Series A Shares was exempt from the  registration and prospectus
delivery  requirements  of the  Securities  Act  pursuant to Section 4(2) of the
Securities  Act and  Regulation D promulgated  thereunder  as a transaction  not
involving  any public  offering.  The issuance and sale of the common stock upon
conversion  of the  Series  A  Shares  was  exempt  from  the  registration  and
prospectus  delivery  requirements  of the  Securities  Act  pursuant to Section
3(a)(9) of the Securities Act.

         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.  Each of these investors  represented to
us that the investor was an "accredited investor" within the meaning of Rule 501
of  Regulation  D under the  Securities  Act of 1933,  and that the investor was
purchasing  the  securities  for  investment  and  not  in  connection   with  a
distribution  thereof. The issuance and sale of the common stock was exempt from
the  registration  and prospectus  delivery  requirements  of the Securities Act
pursuant to Section 4(2) of the  Securities  Act and  Regulation  D  promulgated
thereunder as a transaction  not involving any public  offering.  See Note 12 to
the "Notes to Consolidated Financial Statements."


                                       15
<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.

                                          Year Ended December 31,
                              ------------------------------------------------
                                1999      2000      2001      2002      2003
                              --------  --------  --------  --------  --------
                                    (In thousands, except per share data)
Income Statement Data:
Net sales...................  $395,341  $395,169  $330,253  $347,391  $320,423
Cost of sales...............   329,131   332,333   277,525   302,082   288,445
                              --------  --------  --------  --------  --------
  Gross profit..............    66,210    62,836    52,728    45,309    31,978
Selling and distribution
 expenses...................    13,692    17,580    14,345    10,757    11,329
General and administrative
 expenses...................    25,259    40,327    33,136    30,082    31,767
Amortization of
 intangibles(1)(3)..........     2,312     2,840     3,317        --        --
Impairment of assets........        --        --        --        --    22,277
                              --------  --------  --------  --------  --------
  Income from operations....    24,947     2,089     1,930     4,470   (33,395)
Interest expense............    (5,771)   (9,850)   (7,808)   (5,444)   (5,603)
Interest income.............       396     1,295     3,256     4,748       425
Minority interest...........        --     1,313      (412)   (4,581)    3,461
Other income(2).............       920     1,350     1,853     2,648     4,784
Other expense(2)............      (172)     (193)     (856)   (2,004)   (1,425)
                              --------  --------  --------  --------  --------
Income before provision for
 income taxes and cumulative
 effect of accounting change    20,320    (3,996)   (2,037)     (163)  (31,753)
Provision for income taxes..    (7,439)    1,478       852     1,051     4,132
                              --------  --------  --------  --------  --------
Income (loss) before
 cumulative effect of
 accounting change..........  $ 12,881  $ (2,518) $ (2,889) $ (1,214) $(35,885)
Cumulative effect of
 accounting change(3).......        --        --        --    (4,871)       --
                              --------  --------  --------  --------  --------
Net income (loss)...........  $ 12,881  $ (2,518) $ (2,889) $ (6,085) $(35,885)
                              ========  ========  ========  ========  ========

Net income (loss) per share -
Basic:
 Before cumulative effect of
  accounting change.........  $   0.85  $  (0.16) $  (0.18) $  (0.08) $  (1.97)
 Cumulative effect of
  accounting change.........       --        --        --      (0.30)      --
                              --------  --------  --------  --------  --------
 After cumulative effect of
  accounting change.........  $   0.85  $  (0.16) $  (0.18) $  (0.38) $  (1.97)

Net income (loss) per share -
Diluted:
 Before cumulative effect of
  accounting change.........  $   0.79  $  (0.16) $  (0.18) $  (0.08) $  (1.97)
 Cumulative effect of
  accounting change.........       --        --        --      (0.30)      --
                              --------  --------  --------  --------  --------
 After cumulative effect of
  accounting change.........  $   0.79  $  (0.16) $  (0.18) $  (0.38) $  (1.97)

Weighted average shares
 outstanding (000)
 Basic......................    15,200    15,815    15,825    15,834    18,215
 Diluted....................    16,314    15,815    15,825    15,834    18,215



                                              As of December 31,
                              ------------------------------------------------
                                1999      2000      2001      2002     2003
                              --------  --------  --------  --------  --------
                                                 (In thousands)
Balance Sheet Data:
Working capital.............  $ 25,196  $ 27,957  $ 25,109  $ 11,731 $(18,018)
Total assets................   295,042   308,092   288,467   316,444  253,105
Bank borrowings and
 long-term obligations......    99,072   114,439   111,336   106,937   68,587
Shareholders' equity........   139,403   130,489   125,164   121,161  107,709

----------
(1)  See "Item 1. Business--Acquisitions."
(2)  Major  components of Other income  (expense) (as presented  above)  include
     rental and lease income, and foreign currency gains or losses. See "Item 7.
     Management's  Discussion and Analysis of Financial Condition and Results of
     Operations".
(3)  Effective  January 1, 2002,  we adopted  Statement of Financial  Accounting
     Standards No. 142,  "Goodwill and Other  Intangible  Assets."  According to
     this statement,  goodwill and other intangible assets with indefinite lives
     are no longer subject to amortization,  but rather an annual  assessment of
     impairment applied on a  fair-value-based  test. We adopted SFAS No. 142 in
     fiscal 2002 and performed our first annual assessment of impairment,  which
     resulted in an impairment loss of $4.9 million.


                                       16
<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,  2001,  2002 and 2003.
Except for historical  information,  the matters  discussed in this Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations  are
forward looking  statements that involve risks and  uncertainties  and are based
upon  judgments  concerning  various  factors that are beyond our  control.  See
"Cautionary Statement Regarding Forward-Looking Statements."

OVERVIEW

         Tarrant Apparel Group is a leading provider of casual apparel,  serving
mass merchandisers,  department stores, branded wholesalers and specialty chains
located primarily in the United States by designing, merchandising,  contracting
for the  manufacture of,  manufacturing  directly and selling casual apparel for
women, men and children.

         We  generate  revenues  from the  sale of  apparel  merchandise  to our
customers  that we  manufacture  or have  manufactured  by third party  contract
manufacturers  located  outside of the United States.  Revenues and net loss for
the years ended  December  31, 2001,  2002 and 2003 were as follows  (dollars in
thousands):

REVENUES AND NET LOSS:                         2001         2002         2003
                                            ---------    ---------    ---------

Net sales ...............................   $ 330,253    $ 347,391    $ 320,423
Net loss before cumulative effect of
   accounting change ....................   $  (2,889)   $  (1,214)   $ (35,885)
Net loss after cumulative effect of
   accounting change ....................   $  (2,889)   $  (6,085)   $ (35,885)


         Cash flows for the years ended December 31, 2001, 2002 and 2003 were as
follows (dollars in thousands):

CASH FLOWS:                                      2001        2002        2003
                                               --------    --------    --------

Net cash provided by operating activities ..   $ 30,051    $ 15,493    $  9,484
Net cash used in investing activities ......   $(15,445)   $ (5,670)   $ (1,053)
Net cash used in financing activities ......   $(15,916)   $ (8,435)   $ (6,295)


SIGNIFICANT DEVELOPMENTS IN 2003

RESTRUCTURING OF MEXICAN OPERATIONS

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


                                       17
<PAGE>


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

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

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

         Our  withdrawal  from our owned and  operated  facilities  in Mexico on
September 1, 2003, has reduced our working capital requirements,  eliminated the
need to accept low or negative  margin orders to fill production  capacity,  and
permitted us to source production in the best locations  world-wide.  We believe
that our strong design,  merchandising and sourcing capabilities are competitive
advantages  that will  enable us to  overcome  the desire by some  retailers  to
purchase  merchandise  directly  from the  manufacturer.  Due to our  change  of
strategy in Mexico, at June 30, 2003 we wrote off approximately $19.5 million in
goodwill  associated  with certain assets we acquired in Mexico,  and wrote down
$11 million of inventory in Mexico in anticipation of its liquidation at reduced
prices.  We will receive $11 million per annum from the lessor of our  equipment
and  facilities in Mexico over the 6-year term of the leases.  We have 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 7 and Note 14 of the  "Notes  to  Consolidated  Financial
Statements."

EQUITY FINANCINGS

         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  accounts  payable 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. 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
warrant is exercisable beginning April 17, 2004 through October 17, 2008 and has
a per share exercise price of $4.65.

         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,  the warrant
has an exercise price of $3.35 per share,  is fully vested and  exercisable  and
has a term of five years.

PRIVATE BRANDS INITIATIVE

         During  2003,  we launched  our  private  brands  initiative,  where we
acquire  ownership  of or  exclusively  license  rights to a brand name and sell
apparel products under this brand to a single retail company within a geographic
region.  In the second  quarter of 2003,  we acquired an equity  interest in the
owner of the  trademark  "American  Rag CIE," and the  operator of American  Rag
retail stores, and our subsidiary,  Private Brands,  Inc., acquired a license to
certain  exclusive rights to this trademark.  Private Brands then entered into a
multi-year exclusive distribution


                                       18
<PAGE>


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.  Beginning in August 2003, the
American Rag collection is available in approximately 100 select Macy's, the Bon
Marche, Burdines, Goldsmith's, Lazarus and Rich's-Macy's locations. During 2003,
we also began selling  products under our owned brand "No Jeans"  exclusively to
Wet Seal.

         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
also control the production of private brand  merchandise,  unlike private label
merchandise  where  the  brand  owner  controls  sourcing.   For  instance,   we
experienced a  significant  loss of business from Lane Bryant due to a change in
their management and the subsequent shift in their sourcing strategy.

         We believe that forming private brand 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 from
our  private  brand.   We  also  receive  higher  margins  for  private  branded
merchandise,  which  allows us to be more  profitable  on the same level of unit
sales.

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 by an aggregate of approximately  $14.5 million.
This  adjustment  would also result in  additional  state taxes and  interest of
approximately $12.6 million. 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  balance  sheet  included  in the  Consolidated  Financial
Statements  under  the  caption  "Income  Taxes."  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
balance sheet.

         While we do not anticipate any  requirement  to make  significant  cash
payments in the coming 12 to 18 months to the taxing  authorities,  we intend to
accumulate a contingency  cash reserve from  operations to meet a potential cash
outflow  upon the  ultimate  resolution  of these  matters.  Building  this cash
reserve will require us to set aside on a periodic  basis a significant  portion
of our cash from operations, which we do not intend on using for other purposes.

LABOR DIFFICULTIES IN MEXICO

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


                                       19
<PAGE>


groups.  As a  consequence,  we project a loss of  approximately  $75 million in
revenue from sales of Mexico-produced merchandise in 2004.

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.  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 other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for  making  judgments  about the  carrying  values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.

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

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

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

         As of December  31,  2003,  the balance in the  allowance  for returns,
discounts and bad debts  reserves was $4.2 million,  compared to $4.3 million at
December 31, 2002.

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.  Investory  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:


                                       20
<PAGE>


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

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

         o        a significant negative industry or economic trend.

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

         We utilized  the  discounted  cash flow  methodology  to estimate  fair
value. At December 31, 2003, we have a goodwill  balance of $8.6 million,  and a
net property and equipment balance of $135.6 million,  as compared to a goodwill
balance of $28.1  million and a net  property  and  equipment  balance of $160.0
million at December 31, 2002.  Our  goodwill  balance  reflects the write off of
$19.5 million of goodwill as discussed in "-- Significant Developments in 2003 -
Restructuring  of Mexican  Operations"  and Note 7 of the "Notes to Consolidated
Financial Statements."

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 sheet.  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 9 of the  "Notes  to  Consolidated
Financial Statements" for a discussion of current tax matters.

DEBT COVENANTS

         Our debt agreements require the maintenance of certain financial ratios
and 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 a
majority of the debt agreements,  approximately  80% 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


                                       21
<PAGE>


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.

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:

                                                             Year Ended
                                                            December 31,
                                                      -----------------------
                                                       2001     2002     2003
                                                      -----    -----    -----
Net sales...........................................  100.0%   100.0%   100.0%
Cost of sales.......................................   84.0     87.0     90.0
                                                      -----    -----    -----
Gross profit........................................   16.0     13.0     10.0
Selling and distribution expenses...................    4.4      3.1      3.5
General and administration expenses.................   10.0      8.6      9.9
Amortization expense(1)(2)..........................    1.0       --       --
Impairment of assets................................     --       --      7.0
                                                      -----    -----    -----
Income (loss) from operations.......................    0.6      1.3    (10.4)
Interest expense....................................   (2.4)    (1.6)    (1.7)
Interest income.....................................    1.0      1.4      0.1
Minority interest...................................   (0.1)    (1.3)     1.0
Other income........................................    0.6      0.8      1.5
Other expense.......................................   (0.3)    (0.6)    (0.4)
                                                      -----    -----    -----
Loss before provision for income taxes
  and cumulative effect of accounting change........   (0.6)     0.0     (9.9)
Income taxes........................................   (0.3)    (0.3)    (1.3)
                                                      -----    -----    -----
Loss before cumulative effect of accounting
  change............................................   (0.9)    (0.3)   (11.2)
Cumulative effect of accounting change(2)...........     --     (1.4)      --
                                                      -----    -----    -----
Net loss............................................   (0.9)%   (1.7)%  (11.2)%
                                                      =====    =====    =====
----------
(1)  Reflects amortization of the excess of cost over fair value of assets.
(2)  Reflects the adoption of SFAS No. 142

COMPARISON OF 2003 TO 2002

         Net sales  decreased by $27.0 million,  or 7.8%, from $347.4 million in
2002  to  $320.4  million  in  2003.  The  decrease  in net  sales  was  largely
attributable  to a decrease in Mexican sourced sales from $186.9 million in 2002
to $139.1  million in 2003.  The decrease in net sales was offset by  additional
revenue of $20.5 million from our private brands.

         Gross profit (which  consists of net sales less product  costs,  direct
labor,   manufacturing  overhead,   duty,  quota,  freight  in,  brokerage,  and
warehousing) for 2003 was $32.0 million, or 10.0% of net sales,


                                       22
<PAGE>


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

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

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

         Impairment  of assets  expense was $22.3  million in 2003,  compared to
$4.9  million in 2002 being  classified  as a  cumulative  effect of  accounting
change in accordance with SFAS 142. This expense in 2003 is primarily due to our
decision to cease directly operating a substantial majority of our equipment and
fixed assets in Mexico  commencing in the third  quarter of 2003.  See Note 7 to
the "Notes to Consolidated Financial Statements."

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

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

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

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

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


                                       23
<PAGE>


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

COMPARISON OF 2002 TO 2001

         Net sales  increased by $17.1 million,  or 5.2%, from $330.3 million in
2001 to $347.4  million in 2002,  primarily due to the success of United Apparel
Venture, LLC. The increase in net sales was attributed to $34.6 million increase
in sales to Tommy Hilfiger,  one of the two customers of UAV, and $12 million to
Kohl's.  The increase in sales to these two customers was offset by decreases of
$6.4 million in sales to Charming group, $2.9 million to mass merchandisers, and
$6.5 million to outlets, and the rest among other less significant accounts.

         Gross profit (which  consists of net sales less product  costs,  direct
labor,   manufacturing  overhead,   duty,  quota,  freight  in,  brokerage,  and
warehousing) for 2002 was $45.3 million, or 13% of net sales,  compared to $52.7
million, or 16.0 % of net sales, for 2001, representing a decrease of 14.1%. The
decrease  of $7.4  million in gross  profit  occurred  primarily  because of the
increase  in quota  prices  from Hong Kong  imports  and  insufficient  capacity
utilization in Mexico in the first and fourth quarters.

         Selling and distribution  expenses decreased from $14.3 million in 2001
to $10.8  million in 2002 due to better  control of overhead  and  reduction  in
distribution  costs. As a percentage of sales, these variable expenses decreased
from 4.4% in 2001 to 3.1% in 2002. General and administrative expenses decreased
from $33.1  million in 2001 to $30.1  million in 2002.  As a  percentage  of net
sales these expenses  decreased from 10.0% in 2001 to 8.6% in 2002.  Included in
these  expenses for 2002 was a charge of $1.3 million for a litigation  reserve.
See "Item 3. Legal  Proceeding." The charge for the change in the allowances for
returns and discounts for 2002 was $867,000,  or 0.2% of sales, compared to such
charge of $2.7  million,  or 0.8% of sales,  during 2001.  The higher  allowance
expenses in 2001 were caused by a special  reserve of $2.4  million for bad debt
related to a  particular  customer.  After  adjusting  for the  reduction in the
allowance  expense for discounts and returns and the reserve for the litigation,
general  and  administrative  expenses  decreased  by  $2.6  million  in 2002 as
compared to 2001. This decrease was due to our continuing cost cutting efforts.

         Income from  operations was $4.5 million in 2002, or 1.3% of net sales,
compared  to $1.9  million  in 2001,  or 0.6% of net sales,  due to the  factors
described above.

         Interest expense decreased from $7.8 million in 2001 to $5.4 million in
2002.  This decrease in interest  expense was as a result of reduced  borrowings
due to the pay down of certain debt  facilities  during 2002 and  interest  rate
reductions positively impacting the variable rate debt. Interest income was $4.7
million in 2002  compared to $3.3 million in 2001.  Included in interest  income
were  approximately  $4.5  million  for 2002 and $3.2  million for 2001 from the
related  party  note  receivable  related  to  the  sale  of  certain  equipment
pertaining  to the twill  mill  which we  re-acquired  in  December  2002.  This
interest income was recorded on a cash collected  basis.  Other income increased
from $1.9 million in 2001 to $2.6 million in 2002 while other expenses increased
from $856,000 to $2.0 million in 2002.

         Minority  interest  expense  was $(4.6)  million in 2002 as compared to
($412,000)  in 2001.  The  minority  interest in 2001 and 2002  represented  the
minority holder's share of the UAV subsidiary's income.


                                       24
<PAGE>


         Loss before taxes and cumulative  effect of accounting  change was $2.0
million in 2001 and $163,000 in 2002,  representing  0.6% and 0.0% of net sales,
respectively. The decrease in loss before taxes as a percentage of net sales was
due to the factors discussed above.

         Provision for income taxes was $852,000 in 2001 versus $1.1 million in
2002.

         Loss after taxes and  cumulative  effect of accounting  change was $2.9
million  in 2001 and $6.1  million  in 2002,  representing  0.9% and 1.7% of net
sales, respectively.

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,    June 30,  Sept. 30,   Dec.  31,   Mar. 31,    June 30,   Sept. 30,   Dec. 31,
                     2002        2002       2002       2002        2003        2003        2003       2003
                   -------     -------    -------    -------     -------     -------     -------    -------
                                                         (In millions)
<S>                <C>         <C>        <C>        <C>         <C>         <C>         <C>        <C>
Net sales ......   $  65.2     $  95.3    $  94.3    $  92.6     $  78.7     $  78.2     $  96.5    $  67.0
Gross profit ...       8.4        14.5       14.2        8.2         8.8        (0.4)       11.5       12.1
Operating income
 (loss) ........      (0.8)        4.8        3.6       (3.1)       (1.3)      (34.4)        1.4        0.8
Net income
 (loss) ........      (6.6)        1.3        1.1       (1.9)       (3.9)      (32.6)        0.1        0.4
</TABLE>


<TABLE>
<CAPTION>
                                                          Quarter Ended
                   ----------------------------------------------------------------------------------------
                   Mar. 31,    June 30,  Sept. 30,   Dec.  31,   Mar. 31,    June 30,   Sept. 30,   Dec. 31,
                     2002        2002       2002       2002        2003        2003        2003       2003
                   -------     -------    -------    -------     -------     -------     -------    -------
<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 ...     12.9        15.1       15.1        8.9        11.2        (0.6)       11.9       18.0
Operating income
 (loss) ........     (1.3)        5.0        3.8       (3.4)       (1.7)      (44.0)        1.5        1.2
Net income
 (loss) ........    (10.1)        1.4        1.2       (2.1)       (4.9)      (41.7)        0.1        0.6
</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.

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, borrowings from principal shareholders,  issuance of long-term debt,
sales of equity securities,  borrowing from affiliates and the proceeds from the
exercise of stock options.


                                       25
<PAGE>


         Our liquidity is dependent,  in part, on customers  paying on time. Any
abnormal  chargebacks or returns may affect our source of short-term funding. We
are also subject to market price  changes.  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.

         Cash flows for the years ended December 31, 2001, 2002 and 2003 were as
follows (dollars in thousands):

CASH FLOWS:                                      2001        2002        2003
                                               --------    --------    --------

Net cash provided by operating activities ..   $ 30,051    $ 15,493    $  9,484
Net cash used in investing activities ......   $(15,445)   $ (5,670)   $ (1,053)
Net cash used in financing activities ......   $(15,916)   $ (8,435)   $ (6,295)

         Net cash provided by operating  activities was $9.5 million in 2003, as
compared to net cash  provided by  operations in 2002 of $15.5 million and $30.1
million in 2001. Net cash provided by operations in 2003 resulted primarily from
a net loss of $35.9 million offset by  depreciation  and  amortization  of $16.1
million,  asset  impairment of $22.3  million and inventory  write-down of $11.0
million. In addition to these items, the components of working capital impacting
cash from operations included a decrease of $7.9 million in accounts receivable,
a decrease of $9.6 million in inventory,  a decrease of $4.2 million in accounts
payable and an increase of $14.8  million in due from  affiliates.  Changes from
prior years were a result of net income provided and changes in working capital.

         During 2003,  cash flow used in investing  activities was $1.1 million,
as  compared  to $5.7  million in 2001 and $15.4  million in 2001.  Cash used in
investing  activities  in 2003 included  approximately  $984,000 for purchase of
other assets.

         During  2003,  cash used in  financing  activities  was $6.3 million as
compared  to $8.4  million  in 2002 and  $15.9  million  in 2001.  Cash  used in
financing   activities  in  2003   included   $36.5  million  net  repayment  of
indebtedness  under our credit  facilities  offset by $31.0  million of proceeds
from a private placement of equity securities.


                                       26
<PAGE>


CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

         Following is a summary of our  contractual  obligations  and commercial
commitments available to us as of December 31, 2003 (in millions):

                                            PAYMENTS DUE BY PERIOD
                            ----------------------------------------------------
CONTRACTUAL OBLIGATIONS                Less than   Between    Between     After
                             Total      1 year    2-3 years  4-5 years   5 years
------------------------    --------    -------    -------    -------    -------
Long-term debt .........    $   39.3    $  38.7    $   0.6    $   0      $   0

Operating leases .......    $    1.3    $   0.8    $   0.4    $   0.1    $   0
Minimum royalites ......    $   10.1    $   0.5    $   1.2    $   1.6    $   6.8
Purchase commitment ....    $  108.0    $  18.0    $  36.0    $  36.0    $  18.0
Employment contracts ...    $    3.8    $   1.4    $   2.4    $   0      $   0
Total Contractual
  Cash Obligations .....    $  162.5    $  59.4    $  40.6    $  37.7    $  24.8



                              TOTAL   AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
OTHER COMMERCIAL             AMOUNTS  ------------------------------------------
COMMITMENTS AVAILABLE       COMMITTED  Less than   Between    Between     After
TO US                         TO US     1 year    2-3 years  4-5 years   5 years
------------------------    --------    -------    -------    -------    -------
Lines of credit ........    $  123.1    $  37.3    $  85.8        --        --
Letters of credit
   (within lines
   of credit) ..........    $   27.9    $  27.9        --         --        --
Total Commercial
   Commitments .........    $  123.1    $  37.3    $  85.8        --        --


         On June 13, 2002,  we entered  into a letter of credit  facility of $25
million with UPS Capital Global Trade Finance Corporation ("UPS") to replace the
credit  facility of The Hong Kong and Shanghai  Banking  Corporation  Limited in
Hong Kong.  Under this  facility,  we may arrange for the issuance of letters of
credit and acceptances.  The facility is a one-year  facility subject to renewal
on its anniversary and is  collateralized by the shares and debentures of all of
our  subsidiaries  in Hong Kong, as well as our permanent quota holdings in Hong
Kong. In addition to the  guarantees  provided by Tarrant  Apparel Group and our
subsidiaries,  Fashion Resource (TCL) Inc. and Tarrant  Luxembourg Sarl,  Gerard
Guez,  our  Chairman,  also signed a guarantee  of $5 million in favor of UPS to
secure this facility. This facility bears interest at 4.5% per annum at December
31, 2003. Under this facility, we are subject to certain restrictive  covenants,
including that we maintain a specified  tangible net worth,  fixed charge ratio,
and leverage  ratio.  We were in compliance  with all the covenants in the third
quarter of 2002.  In the fourth  quarter of 2002,  we violated  the fixed charge
ratio  covenant and obtained a waiver at a cost of $5,000.  In the first quarter
of 2003,  we were in violation of the  no-consecutive-quarterly-losses  covenant
and the fixed charge ratio  covenant and obtained a waiver for the quarter for a
fee of $10,000.  In the second  quarter of 2003,  we breached all the  financial
covenants and obtained a waiver for the quarter for a fee of $25,000. In October
2003,  we  established  new financial  convenants  with UPS for the period ended
September 30, 2003 and the remainder of fiscal 2003 based on our projections. We
were in compliance  with all the  covenants in the third and fourth  quarters of
2003.  Tangible net worth,  fixed charge ratio and leverage  ratio were fixed at
$65 million,  0.74 to 1 and 2.55 to 1,  respectively,  for the fourth quarter of
2003.  Capital  Expenditures  were capped at $800,000 per  quarter.  In December
2003, a temporary additional line of credit consisting of a $2.8 million standby
letter of credit was made  available to us against a restricted  deposit of $2.8
million.  This temporary facility was cancelled in February 2004 and the deposit
has since been released.  The expiration  date of our main credit  facility with
UPS has been extended to December 31, 2004 with certain  conditions.  One of the
conditions  requires  that on or before May 31, 2004,  we have to refinance  the
Debt Facility  currently  provided by GMAC Commercial  Credit LLC. If we fail to
satisfy this condition,  we will incur a penalty of $100,000  payable to UPS. As
of December 31, 2003, $23.7 million was outstanding under this facility,  and an
additional  $350,000 was  available  for future  borrowings.  In addition,  $1.2
million of open letters of credit was outstanding as of December 31, 2003.

         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 and Todd Kay, and Tarrant's  guarantee.  In August 2003,
the letter of


                                       27
<PAGE>


credit facility increased to HKD 23 million (equivalent to US $3.0 million).  In
December 2003, a tax loan for HKD 2 million (equivalent to US $256,000) was also
made  available to our Hong Kong  subsidiaries.  As of December  31, 2003,  $2.9
million was outstanding under this facility.  In addition,  $0.3 million of open
letters of credit was outstanding as of December 31, 2003.

         We are party to a revolving  credit,  factoring and security  agreement
(the "Debt  Facility")  with GMAC  Commercial  Credit,  LLC.  The Debt  Facility
provides a  revolving  facility  of $90  million,  including  a letter of credit
facility  not to exceed $20 million,  and matures on January 31, 2005.  The Debt
Facility  also  provides a term loan of $25  million,  which is being  repaid in
monthly  installments  of $687,500.  The Debt Facility  provides for interest at
LIBOR plus the LIBOR rate  margin  determined  by the Total  Leverage  Ratio (as
defined), and is collateralized by our receivables,  intangibles,  inventory and
various other specified non-equipment assets. This facility bears interest at 6%
per annum at December 31, 2003.  Under the  facility,  we are subject to various
financial covenants on tangible net worth, interest coverage, fixed charge ratio
and leverage  ratio,  and are  prohibited  from paying  dividends.  In 2002,  we
violated  the net worth and fixed  charge  covenants  in the third  quarter  and
obtained a waiver for the quarter for a fee of $50,000. We complied with all the
covenants in the other three quarters. In the first and second quarters of 2003,
we were in violation of all the financial  covenants  and obtained  waivers from
GMAC for each  quarter  at the cost of $45,000  and  $100,000  respectively.  In
October 2003, we  established  new financial  covenants with GMAC for the period
ended  September  30,  2003  and the  remainder  of  fiscal  2003  based  on our
projections.  We were in  compliance  with all the  covenants  in the  third and
fourth  quarters of 2003.  Tangible  net worth,  fixed charge ratio and leverage
ratio in the final  quarter were fixed at $65 million,  0.74 to 1 and 2.55 to 1,
respectively.

         The amount we can borrow under the Debt Facility is determined based on
a defined  borrowing base formula  related to eligible  accounts  receivable and
inventories.  Our borrowing  base  availability  ranged from  approximately  $30
million to $75 million from January 1, 2003 to December 31, 2003. A  significant
decrease in eligible  accounts  receivable and  inventories  due to the aging of
receivables and inventories,  among other factors, 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 decreases in eligible accounts receivables generated from our sales. A
total of $31.6  million (of which $4.8 million  related to the term portion) was
outstanding under the Debt Facility at December 31, 2003. Based on the borrowing
base formula,  no additional amounts were available for borrowing under the Debt
Facility at December 31, 2003.

         At  December  31,  2003,  Tarrant  Mexico  S. de R.L.  de C.V.,  Famian
division is indebted to Banco Nacional de Comercio Exterior SNC in the amount of
$2.1 million  pursuant to a credit facility  assumed by Tarrant Mexico following
its merger with Grupo Famian.  We are now repaying $250,000 plus interest (LIBOR
plus 6%) monthly on this facility.

         We have an equipment  loan with an initial  borrowing of $16.25 million
from GE Capital Leasing ("GE Capital"), which matures in November 2005. The loan
is secured by equipment  located in Puebla and Tlaxcala,  Mexico. As of December
31, 2003,  this  facility had a balance of $3.6 million.  Interest  accrues at a
rate of 2.5% over LIBOR.  Under this  facility,  we are subject to  covenants on
tangible net worth of $30 million,  leverage ratio of not more than two times at
the end of each financial year, and no losses for two consecutive  quarters.  In
the first  quarter  of 2002,  we  breached  the  no-consecutive-quarterly-losses
covenant  and obtained a waiver at a cost of $10,000.  We complied  with all the
covenants in the other three quarters. In the first and second quarters of 2003,
we  were  in  violation  of  the  no-consecutive-quarterly-losses  covenant  and
obtained  waivers at the cost of $25,000  and $50,000  respectively.  We were in
compliance  with all the covenants in the third and fourth quarters of 2003. The
waiver for breach of  covenants  in the  previous  quarter  required  additional
collateral in the form of a second lien on our  headquarters,  which is owned by
Messrs.  Guez, our Chairman of the Board and Kay, our Vice  Chairman.  Due to an
objection  by the  first-lien  holder  to the  second  lien,  we have  agreed to
accelerate the monthly repayment installment by approximately $75,000 commencing
January 2004 in lieu of the additional collateral.

         We also had an  equipment  loan of $5.2  million  from Bank of  America
Leasing  ("BOA").  The  amount  outstanding  as of  December  31,  2002 was $2.4
million. In October 2003, we paid off the BOA facility in its entirety.

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


                                       28
<PAGE>


         During 2000, we financed  equipment  purchases for a new  manufacturing
facility  with  certain  vendors.  A total of $16.9  million was  financed  with
five-year  promissory notes,  which bear interest ranging from 7.0% to 7.5%, and
are payable in semiannual  payments commencing in February 2000. Of this amount,
$4.0 million was outstanding as of December 31, 2003. Of the $4.0 million,  $2.7
million  is  denominated  in the Euro,  and the  remainder  is  payable  in U.S.
dollars.

         From time to time, we open letters of credit under an uncommitted  line
of credit from Aurora Capital Associates who issues these letters of credits out
of Israeli  Discount  Bank.  As of December 31, 2003,  $564,000 was  outstanding
under this  facility  and $3.9 million of letters of credit were open under this
arrangement.

         Unrealized  losses  of $1.0  million  and  $561,000  were  recorded  at
December  31,  2002  and  2003,   respectively,   related  to  foreign  currency
fluctuations  and were  recorded in other income  (expense) in the  accompanying
statement of operations.

         The  effective  interest  rates  on  short-term  bank  borrowing  as of
December 31, 2002 and 2003 were 4.1% and 5.3%, respectively.

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

         From time to time in the past,  we borrowed  funds from,  and  advanced
funds to, certain  officers and principal  shareholders,  including Gerard Guez,
Todd Kay and Kamel Nacif.  The greatest  outstanding  balance of such borrowings
from Mr. Kay in 2003 was  $487,000.  The  greatest  outstanding  balance of such
advances to Mr. Guez during 2003 was  approximately  $4,879,000.  As of December
31, 2003, we were indebted to Mr. Nacif and his affiliates in the amount of $5.4
million. Mr. Guez had an outstanding advance from us in the amount of $4,796,000
as of December 31, 2003 payable on demand. All advances to, and borrowings from,
Messrs. Guez and Kay bore interest at the rate of 7.75% during the period. Total
interest  paid by Messrs.  Guez and Kay were $368,000 and $374,000 for the years
ended  December  31, 2002 and 2003,  respectively.  Since the  enactment  of the
Sarbanes-Oxley Act in 2002, no further personal loans (or amendments to existing
loans) have been or will be made to officers or directors of Tarrant.

         We intend to accumulate a cash reserve to meet any payment  obligations
we have  to  taxing  authorities  relating  to the  Internal  Revenue  Services'
examination  of our Federal  income tax returns for the years ended December 31,
1996 through  2001. We intend to fund this cash reserve from  operations,  which
will  require us to set aside on a periodic  basis a  significant  amount of our
cash, which cannot be used for other purposes.  See "--Significant  Developments
in 2003 -- Internal Revenue Service Audit."

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

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


                                       29
<PAGE>


RELATED PARTY TRANSACTIONS

         We lease our principal  offices and  warehouse  located in Los Angeles,
California and office space in Hong Kong from corporations owned by Gerard Guez,
our Chairman and Chief Executive Officer, and Todd Kay, our Vice Chairman of the
Board of Directors.  We believe,  at the time the leases were entered into,  the
rents on these  properties were  comparable to then prevailing  market rents. We
paid  $1,330,000 in 2003 for rent for office and  warehouse  facilities at these
locations.

         On October 16, 2003, we leased to affiliates of Mr. Kamel Nacif, one of
our  shareholders,  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.  The assets  subject to
these leases have a net book value of  approximately  $92 million as of December
31, 2003. In connection with this transaction, we also entered into a management
services  agreement  pursuant to which Mr.  Nacif's  affiliates  will manage the
operation of our remaining  facilities in Mexico in exchange for the use of such
facilities.  The term of the management  services agreement is also for a period
of 6 years.  We have 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.  Based on current market price,  the purchase
commitment would be approximately $18 million annually.

         From time to time,  we borrowed  funds  from,  and  advanced  funds to,
certain officers and principal shareholders, including Gerard Guez, Todd Kay and
Kamel Nacif. The greatest outstanding balance of such borrowings from Mr. Kay in
2003 was $487,000. The greatest outstanding balance of such advances to Mr. Guez
during 2003 was  approximately  $4,879,000.  As of December  31,  2003,  we were
indebted to Mr. Nacif and his  affiliates  in the net amount of $5.4 million for
working  capital lent by him to us to support our Mexican  operations.  Mr. Guez
had an  outstanding  advance from us in the amount of  $4,796,000 as of December
31, 2003 payable upon demand. All advances to, and borrowings from, Messrs. Guez
and Kay bore  interest at the rate of 7.75%  during the period.  Total  interest
paid by the Chairman and Vice  Chairman were $368,000 and $374,000 for the years
ended December 31, 2002 and December 31, 2003, respectively. Since the enactment
of the  Sarbanes-Oxley  Act in 2002, no further personal loans (or amendments to
existing loans) have been or will be made to officers or directors of Tarrant.

         Since  June  2003,  United  Apparel  Venture  LLC,  a  majority  owned,
controlled  and  consolidated  subsidiary of Tarrant,  has been selling to Seven
Licensing  Company,  LLC,  jeans  wear  bearing  the  brand  "Seven7",  which is
ultimately purchased by Express. Seven Licensing is beneficially owned by Gerard
Guez.  Total sales during the year ended December 31, 2003 were $8.1 million.

         On December 31, 2002, our wholly owned subsidiaries, Tarrant Mexico and
Tarrant Luxembourg Sarl (previously known as Machrima Luxembourg Sarl), acquired
a denim  and  twill  manufacturing  plant in  Tlaxcala,  Mexico,  including  all
machinery and equipment used in the plant, the buildings, and the real estate on
which the plant is located.  Pursuant to an Agreement for the Purchase of Assets
and Stock,  dated as of December 31, 2002,  Tarrant Mexico  purchased from Trans
Textil  International,  S.A. de C.V.  ("Trans  Textil") all of the machinery and
equipment  used in and located at the plant,  and the  Purchasers  acquired from
Jorge  Miguel   Echevarria   Vazquez  and  Rosa  Lisette  Nacif  Benavides  (the
"Inmobiliaria  Shareholders")  all the issued and  outstanding  capital stock of
Inmobiliaria  Cuadros, S.A. de C.V.  ("Inmobiliaria"),  which owns the buildings
and real estate.  The purchase price for the machinery and equipment was paid by
cancellation  of $42  million in  indebtedness  owed by Trans  Textil to Tarrant
Mexico.  The purchase price for the  Inmobiliaria  shares consisted of a nominal
cash payment to the Inmobiliaria  Shareholders of $500, and subsequent repayment
by us and our  affiliates  of  approximately  $34.7 million in  indebtedness  of
Inmobiliaria  to Kamel Nacif Borge,  his daughter Rosa Lisette Nacif  Benavides,
and certain of their affiliates, which payment was made by: (i) delivery to Rosa
Lisette Nacif  Benavides of one hundred  thousand  shares of our newly  created,
non-voting Series A Preferred Stock,


                                       30
<PAGE>


which shares will become  convertible  into three million shares of common stock
if our common  stockholders  approve the conversion at the Annual Meeting;  (ii)
delivery to Rosa Lisette Nacif Benavides of an ownership  interest  representing
twenty-five  percent of the voting power of and profit  participation in Tarrant
Mexico; and (iii) cancellation of approximately $14.9 million of indebtedness of
Mr. Nacif and his  affiliates.  The Series A Preferred  Stock was converted into
3,000,000  shares of common stock  following  approval of the  conversion by our
shareholders at the annual shareholders' meeting held on May 28, 2003.

         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  Production
International,  Inc. is owned by Hubert Guez,  the brother of Gerard  Guez,  our
Chairman and Chief Executive Officer.  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., a wholly owned  subsidiary of ours,  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. Since
October  2002 and March 2003,  UAV has begun to service both  parties'  business
with Express and Levi Strauss & Co., respectively.  UAV makes purchases from two
related parties in Mexico, Azteca and Tag-It Pacific, Inc.

         We purchased $5.8 million,  $37.0 million and $37.1 million of finished
goods and service from Azteca and its  affiliates  for the years ended  December
31, 2001, 2002 and 2003, respectively.  Our total sales of fabric and service to
Azteca in 2001, 2002 and 2003 were $7.2 million,  $2.9 million and $9.9 million,
respectively.  Two and one half percent of gross sales as  management  fees were
paid  in  2002  and  2003 to each  of the  members  of  UAV,  per the  operating
agreement.

         At December 31, 2003, Messrs. Guez and Kay beneficially owned 1,018,000
and 1,005,000  shares,  respectively,  of common stock of Tag-It  Pacific,  Inc.
("Tag-It"),  collectively representing 17.5% of Tag-It Pacific's common stock at
December  29,  2003.  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.  This
arrangement  is  terminable  by either Tag-It or us at any time. 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.  We purchased  $17.9 million,  $23.9 million and $16.8 million of
trim from Tag-It  during the years ended  December 31, 2001,  2002 and 2003.  We
also sold Tag-It $1.5 million from our trim and fabric inventory during the year
ended December 31, 2003. From time to time we have  guaranteed the  indebtedness
of Tag-It for the  purchase of trim on our  behalf.  See Note 8 of the "Notes to
Consolidated Financial Statements."

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

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

RISKS RELATED TO OUR BUSINESS

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

         Affiliated  stores owned by The Limited  (including  Limited Stores and
Express) accounted for approximately  12.7% and 15.3% of our net sales in fiscal
years 2002 and 2003, respectively.  Lane Bryant


                                       31
<PAGE>


accounted  for 17.6% and 12.1% of our net sales in fiscal  years  2002 and 2003,
respectively.  Lerner New York  accounted  for 9.9% and 8.3% of our net sales in
fiscal years 2002 and 2003, respectively.  Kohl's accounted for 5.1% and 6.6% of
our net sales in fiscal  years  2002 and 2003,  respectively.  We  believe  that
consolidation  in the retail industry has centralized  purchasing  decisions and
given customers  greater leverage over suppliers such as Tarrant,  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  any  of  them,  including  Express.  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 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,  production capability,  distribution
facilities and receivables  management.  Any disruption in our order processing,
sourcing or  distribution  systems  could cause orders to be shipped  late,  and
under  industry  practices,  retailers  generally can cancel orders or refuse to
accept goods due to late shipment.  Such  cancellations and returns would result
in a reduction in revenue,  increased  administrative  and shipping  costs and a
further burden on our distribution facilities.

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

         We have determined to cease directly  operating a substantial  majority
of our equipment and fixed assets in Mexico, and to lease a large portion of our
facilities  and  operations  in  Mexico  to a  related  third  party,  which  we
consummated  effective  September  1, 2003.  As a  consequence,  we have  become
primarily a trading company, relying on third party manufacturers to produce the
merchandise we sell to our  customers.  We face many  challenges  related to our
decision to cease directly operating a substantial majority of our equipment and
fixed  assets in Mexico.  Any failure on our part to  successfully  manage these
challenges, or other unanticipated  consequences may result in loss of customers
and sales,  which would have an adverse impact on operations.  The challenges we
face include:

         o        We may lose  customers  who  desire  to  purchase  merchandise
                  directly from the manufacturer;


                                       32
<PAGE>


         o        We may  experience  unanticipated  expenses  in  winding  down
                  manufacturing  operations in Mexico, including labor costs and
                  additional write down of inventory, which may adversely affect
                  our results of operations in the short term;

         o        The party to whom we lease  our  manufacturing  operations  in
                  Mexico may default in its  obligations to us, in which case we
                  may not be able to lease the facilities to another  party,  or
                  recommence use of the facilities to manufacture  goods without
                  significant cost; and

         o        We may not be able to  transfer  Mexico  sales to our  trading
                  model in time to replace direct to manufacturer orders we have
                  experienced  in the past due, for  instance,  to difficulty in
                  finding third party manufacturers, and capital constraints.

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,  quotas,  the  occurrence  of charge  backs in excess of
reserves and the timing of  expenditures  in anticipation of increased sales and
actions  of  competitors.  Due to  fluctuations  in our  revenue  and  operating
expenses,  we  believe  that  period-to-period  comparisons  of our  results  of
operations are not a good indication of our future  performance.  It is possible
that in some future quarter or quarters, our operating results will be below the
expectations of securities analysts or investors.  In that case, our stock price
could fluctuate significantly or decline.

INCREASES IN THE PRICE OF RAW  MATERIALS  OR THEIR  REDUCED  AVAILABILITY  COULD
INCREASE OUR COST OF SALES AND DECREASE OUR PROFITABILITY.

         The principal raw material used in our apparel is cotton. The price and
availability  of cotton may fluctuate  significantly,  depending on a variety of
factors,   including  crop  yields,  weather,   supply  conditions,   government
regulation,  economic climate and other unpredictable  factors. Any raw material
price increases could increase our cost of sales and decrease our  profitability
unless we are able to pass  higher  prices on to our  customers.  Moreover,  any
decrease  in the  availability  of cotton  could  impair our ability to meet our
production requirements in a timely manner.

THE SUCCESS OF OUR BUSINESS DEPENDS UPON OUR ABILITY TO OFFER  FASHION-RIGHT AND
TIMELY PRODUCTS.

         The apparel industry is  characterized  by constant product  innovation
due  to  changing  consumer  preferences  and by the  rapid  replication  of new
products by competitors.  As a result,  our success depends in large part on our
ability to continuously  develop,  market and deliver  innovative  products at a
pace and intensity  competitive  with other  manufacturers  in our segments.  In
addition, we must create products that appeal to multiple consumer segments at a
range of price points.  Any failure on our part to regularly develop  innovative
products and update core products could:

         o        limit our  ability  to  differentiate,  segment  and price our
                  products;

         o        adversely  affect  retail  and  consumer   acceptance  of  our
                  products; and

         o        limit sales potential.


                                       33
<PAGE>


         The increasing  importance of product innovation in apparel requires us
to strengthen our internal research and commercialization  capabilities, to rely
on successful commercial  relationships with third parties such as fiber, fabric
and  finishing  providers  and to  compete  and  negotiate  effectively  for new
technologies and product components.

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

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

THE  SUCCESS  OF OUR  BUSINESS  DEPENDS ON OUR  ABILITY  TO  ATTRACT  AND RETAIN
QUALIFIED EMPLOYEES.

         We need  talented  and  experienced  personnel  in a  number  of  areas
including  our  core  business   activities.   Our  success  is  dependent  upon
strengthening  our  management  depth  across our  business at a rapid pace.  An
inability  to retain and attract  qualified  personnel or the loss of any of our
current  key  executives  could harm our  business.  Our  ability to attract and
retain qualified  employees is adversely affected by the Los Angeles location of
our  corporate  headquarters  due to the high cost of living in the Los  Angeles
area.

WE DEPEND ON OUR COMPUTER AND COMMUNICATIONS SYSTEMS.

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

WE MAY REQUIRE ADDITIONAL CAPITAL IN THE FUTURE.

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


                                       34
<PAGE>


OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH IMPORTING PRODUCTS.

         Substantially  all of our  import  operations  are  subject  to tariffs
imposed  on  imported  products  and  quotas  imposed  by trade  agreements.  In
addition,  the countries in which our products are  manufactured or imported may
from  time to time  impose  additional  new  quotas,  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
and/or  quotas  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  quotas on products  that may be imported into the United
States from a particular country. In addition,  the World Trade Organization may
commence a new round of trade  negotiations  that  liberalize  textile  trade by
further  eliminating  quotas or reducing  tariffs.  The elimination of quotas on
World Trade  Organization  member  countries by 2005 and other  effects of these
trade  agreements   could  result  in  increased   competition  from  developing
countries,  which  historically  have lower  labor  costs,  including  China and
Taiwan,  both of which recently became members of the World Trade  Organization.
This potential  increase in competition from developing  countries is one of the
several reasons why we have determined to lease our manufacturing  operations in
Mexico.

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

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

         We depend on independent contract  manufacturers to secure a sufficient
supply of raw  materials  and  maintain  sufficient  manufacturing  and shipping
capacity in an environment  characterized by declining  prices,  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.

         Although we monitor the compliance of our independent  contractors with
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 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.


                                       35
<PAGE>


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,  including  The  Limited,  require  strict
compliance by their apparel  manufacturers,  including us, with applicable labor
laws  and  visit  our  facilities  often.  There  can be no  assurance  that the
violation of  applicable  labor laws by one of our  contractors  will not have a
material adverse effect on our relationship with our customers.

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

         Approximately  96% of our products  were imported from outside the U.S.
in fiscal  2003,  and most of our fixed  assets are  located  in Mexico.  We are
subject to the risks  associated  with doing business and owning fixed assets 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
(including changes in the allocation of quotas) and cultural issues. Any changes
in those  countries'  labor laws and government  regulations may have a negative
effect on our profitability.

WE CANNOT GUARANTEE THAT OUR FUTURE ACQUISITIONS WILL BE SUCCESSFUL.

         In the future, we may seek to grow through acquisition.  We compete for
acquisition and expansion  opportunities with companies which have significantly
greater  financial and  management  resources than us. There can be no assurance
that suitable acquisition or investment  opportunities will be identified,  that
any of these  transactions can be consummated,  or that, if acquired,  these new
businesses can be integrated  successfully  and profitably  into our operations.
These acquisitions and investments may also require a significant  allocation of
resources,  which will reduce our ability to focus on the other  portions of our
business, including many of the factors listed in the prior risk factor.

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.  This has
been  underscored  by the events of September 11, 2001 and the war in the Middle
East.

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;


                                       36
<PAGE>


         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        providing strong and effective marketing support.

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

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

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 by an aggregate of  approximately  $14.5 million.  This  adjustment
would  also  result  in  additional  state  taxes,  penalties  and  interest  of
approximately $12.6 million. 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 balance sheet
included in the Consolidated  Financial Statements.  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.  While we intend to accumulate a
cash reserve to meet this cash outflow contingency from operations, no assurance
can be given that we will have sufficient  surplus cash from operations to build
and maintain this reserve by the time such payments are required.  Additionally,
cash used to build  this  reserve  will not be  available  for  other  corporate
purposes,  which could have a material adverse effect on our financial condition
and results of operations.


                                       37
<PAGE>


THE FAILURE TO  ESTABLISH  FINANCIAL  COVENANTS  UNDER OUR CREDIT  FACILITY IN A
TIMELY MANNER WOULD RESULT IN A DEFAULT UNDER OUR CREDIT AGREEMENTS, WHICH WOULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR LIQUIDITY.

         Our credit  agreement  with GMAC  requires the  maintenance  of certain
financial  covenants,  including minimum levels of tangible net worth,  interest
coverage,  fixed charge ratio and leverage  ratio, as discussed in Note 8 to our
consolidated financial statements. We have agreed with GMAC to set new financial
covenants  for  fiscal  2004  based on our  projections.  In the event  that the
financial  covenants cannot be timely established on terms acceptable to GMAC on
or prior to May 15, 2004,  such failure  would be an event of default  under the
credit agreement. In addition, due to cross-default  provisions in a majority of
our debt agreements, approximately 80% of our long-term debt would become due in
full  if  any of the  debt  is in  default.  We  have  provided  GMAC  with  our
projections and other  necessary  information in connection with setting the new
financial  covenants,  and are  otherwise  fully  cooperating  with GMAC on this
matter. However, there can be no guarantee that such financial covenants will be
established  prior to the  deadline,  or that  GMAC  will not in its  discretion
establish  financial  covenants with which we are unable to comply.  If the debt
under our credit  facilities is accelerated and becomes due and payable prior to
maturity, our default will entitle the creditors to exercise all of their rights
and  remedies,  including  foreclosure  on all of our assets which we pledged as
collateral to secure repayment of the debt.

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 15, 2004,  our  executive  officers and directors and their
affiliates  owned  approximately  36.3% of the outstanding  shares of our common
stock. Gerard Guez, our Chief Executive Officer and Chairman,  and Todd Kay, our
Vice Chairman,  alone own approximately  22.8% and 11.8%,  respectively,  of the
outstanding  shares of our  common  stock at March 15,  2004.  Accordingly,  our
executive  officers and directors  have the ability to affect the outcome of, or
exert considerable  influence over, all matters requiring  shareholder approval,
including the election and removal of directors and any change in control.  This
concentration of ownership of our common stock could have the effect of delaying
or preventing a change of control of us or otherwise  discouraging or preventing
a potential  acquirer from  attempting  to obtain  control of us. This, in turn,
could have a negative  effect on the market price of our common stock.  It could
also prevent our  shareholders  from  realizing a premium over the market prices
for their shares of common stock.

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.

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


                                       38
<PAGE>


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 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 the 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  LIBOR  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

         During 2003, our prior independent public  accountants,  Ernst & Young,
LLP, advised us and discussed with the Audit Committee of our Board of Directors
that,  due in part to certain  acquisitions  by our  subsidiaries  in Mexico and
modifications to our inventory costing methodology,  certain improvements in the
internal controls of those  subsidiaries were necessary to ensure reporting from
the  subsidiaries  would be  sufficient  for us to  develop  reliable  financial
statements.  We have and will continue to address the deficiencies identified by
Ernst & Young, LLP in consultation with Grant Thornton, LLP, our new independent
public accountants.

ITEM 9A. CONTROLS AND PROCEDURES

         EVALUATION OF CONTROLS AND PROCEDURES

         As of December  31,  2003,  our Chief  Executive  Officer and our Chief
Financial  Officer,  with the  participation  of our management,  carried out an
evaluation  of the  effectiveness  of our  disclosure  controls  and  procedures
pursuant to Exchange  Act Rule  13a-14.  Based upon that  evaluation,  the Chief
Executive  Officer and the Chief Financial  Officer believe that, as of the date
of the  evaluation,  our  disclosure  controls and  procedures  are effective in
making  known  to  them  material  information  relating  to us  (including  our
consolidated subsidiaries) required to be included in this report.


                                       39
<PAGE>


         Disclosure  controls and  procedures,  no matter how well  designed and
implemented,  can provide  only  reasonable  assurance  of achieving an entity's
disclosure  objectives.  The likelihood of achieving such objectives is affected
by limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal  control can occur  because of human  failures such as simple errors or
mistakes or intentional circumvention of the established process.

         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,  subsequent to the date of the
evaluation.

         RECOMMENDATIONS OF OUR AUDITORS

         During 2003, our prior independent public  accountants,  Ernst & Young,
LLP, advised us and discussed with the Audit Committee of our Board of Directors
that,  due in part to certain  acquisitions  by our  subsidiaries  in Mexico and
modifications to our inventory costing methodology,  certain improvements in the
internal controls of those  subsidiaries were necessary to ensure reporting from
the  subsidiaries  would be  sufficient  for us to  develop  reliable  financial
statements.  We have and will continue to address the deficiencies identified by
Ernst & Young, LLP in consultation with Grant Thornton, LLP, our new independent
public accountants.

         In connection with its audit of our consolidated  financial  statements
for the year ended  December  31, 2003,  Grant  Thornton  LLP,  our  independent
accountants,  advised  the  Audit  Committee  and  management  of our  need  for
additional staff with expertise in preparing  required  disclosures in the notes
to the financial statements,  and our need to develop greater internal resources
for  researching  and  evaluating  the  appropriateness  of  complex  accounting
principles and evaluating  the effect of new  accounting  pronouncements  on the
company.   Grant  Thornton  LLP  considers   these  matters  to  be  significant
deficiencies as that term is defined under standards established by the American
Institute  of Certified  Public  Accountants.  We  considered  these  matters in
connection with the preparation of the December 31, 2003 consolidated  financial
statements  included in this Form 10-K and also  determined that no prior period
financial  statements were materially  affected by such matters.  In response to
the observations made by Grant Thornton,  LLP, in 2004 we will implement certain
enhancements to our financial reporting processes,  including increased training
of  staff  on SEC  financial  reporting  requirements  and  the  acquisition  of
accounting  research  tools.  We believe  these  steps will  address the matters
raised by Grant Thornton LLP.


                                    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.


                                       40
<PAGE>


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.


                                       41
<PAGE>


                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

         (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)      Reports on Form 8-K filed:

                  Current Report on Form 8-K,  reporting Items 2, 5 and 7, filed
                  as of October 27, 2003.

                  Current Report on Form 8-K, reporting Items 7 and 12, filed as
                  of November 13, 2003.

                  Current Report on Form 8-K,  reporting Items 5 and 7, filed as
                  of November 21, 2003.

                  Current Report on Form 8-K,  reporting Items 5 and 7, filed as
                  of December 10, 2003.

                  Current  Report on Form 8-K/A,  filed as of December 12, 2003,
                  amending  Item 7 of  Current  Report  on Form 8-K  filed as of
                  November 21, 2003.

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


                                       42
<PAGE>


                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULE



                                                                            PAGE
                                                                            ----

Financial Statements

     Report of Independent Certified Public Accountants,
        Grant Thornton LLP...................................................F-2

     Report of Independent Auditors, Ernst & Young LLP.......................F-3

     Consolidated Balance Sheets--December 31, 2002 and 2003.................F-4

     Consolidated Statements of Operations--Three year period
        ended December 31, 2003..............................................F-5

     Consolidated Statements of Shareholders' Equity--Three year
        period ended December 31, 2003.......................................F-6

     Consolidated Statements of Cash Flows--Three year period
        ended December 31, 2003..............................................F-7

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

Financial Statement Schedule

     Schedule II--Valuation and Qualifying Accounts.........................F-35


                                      F-1
<PAGE>



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
Tarrant Apparel Group

We have audited the  consolidated  balance  sheet of Tarrant  Apparel  Group and
subsidiaries as of December 31, 2003, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year ended December 31,
2003.  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 audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

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

We have also  audited  Schedule II of Tarrant  Apparel  Group for the year ended
December 31, 2003. In our opinion, this schedule, when considered in relation to
the  basic  financial  statements  taken as a  whole,  presents  fairly,  in all
material respect, the information therein.






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


Los Angeles, California
April 2, 2004


                                      F-2
<PAGE>


                         REPORT OF INDEPENDENT AUDITORS

Board of Directors
Tarrant Apparel Group

We have audited the accompanying  consolidated  balance sheet of Tarrant Apparel
Group and  subsidiaries  as of December 31, 2002,  and the related  consolidated
statements of operations,  shareholders'  equity, and cash flows for each of the
two years in the period ended  December 31, 2002.  Our audits also  included the
financial  statement  schedule  listed in the Index at Item  15(a) for the years
ended December 31, 2001 and 2002.  These  financial  statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the 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 audits  provide a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial position of Tarrant Apparel
Group and  subsidiaries  at December  31, 2002 and the  consolidated  results of
their  operations  and their  cash flows for each of the two years in the period
ended  December 31, 2002 in  conformity  with  accounting  principles  generally
accepted in the United  States.  Also,  in our  opinion,  the related  financial
statement  schedule  for the  years  ended  December  31,  2001  and  2002  when
considered  in relation  to the basic  financial  statements,  taken as a whole,
presents fairly in all material respects the information set forth therein.

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





                                          /S/ ERNST & YOUNG LLP
                                          -----------------------


Los Angeles, California
March 14, 2003


                                      F-3
<PAGE>



                              TARRANT APPAREL GROUP

                           CONSOLIDATED BALANCE SHEETS
                                                           December 31,
                                                 ------------------------------
                                                      2002             2003
                                                 -------------    -------------
                        ASSETS
                        ------
Current assets:
  Cash and cash equivalents ..................   $   1,388,482    $   3,319,964
  Restricted cash ............................            --          2,759,742
  Accounts receivable, net ...................      65,287,902       57,165,926
  Due from related parties ...................       8,967,493       18,056,488
  Inventory ..................................      44,782,154       23,251,591
  Prepaid expenses and other receivables .....       5,135,672        1,776,142
  Income taxes receivable ....................         280,200          277,695
                                                 -------------    -------------
    Total current assets .....................     125,841,903      106,607,548
  Property and equipment, net ................     159,998,629      135,645,751
  Other assets ...............................       2,539,040        2,269,011
  Excess of cost over fair value of net assets
   acquired, net .............................      28,064,019        8,582,845
                                                 -------------    -------------
    Total assets .............................   $ 316,443,591    $ 253,105,155
                                                 =============    =============
        LIABILITIES AND SHAREHOLDERS' EQUITY
        ------------------------------------
Current liabilities:
  Short-term bank borrowings .................   $  29,326,924    $  29,293,323
  Accounts payable ...........................      27,722,445       23,514,894
  Accrued expenses ...........................      12,566,475       11,194,421
  Income taxes ...............................      12,640,388       16,497,939
  Due to related parties .....................       9,661,647        5,418,795
  Due to shareholders ........................         486,875              496
  Current portion of long-term obligations ...      21,706,502       38,705,240
                                                 -------------    -------------
    Total current liabilities ................     114,111,256      124,625,108
Long-term obligations ........................      55,903,976          588,272
Deferred tax liabilities .....................         407,751          275,129

Minority interest in UAV .....................       3,205,167        5,141,620
Minority interest in Tarrant Mexico ..........      21,654,538       14,766,215

Commitments and contingencies
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized;
   100,000 shares (2002) and no shares (2003)
   issued and outstanding ....................       8,820,573             --
Common stock, no par value, 35,000,000 shares
   (2002) and 100,000,000 shares (2003)
   authorized; 15,846,315 shares (2002) and
   27,614,763 shares (2003) issued and
   outstanding ...............................      69,368,239      107,891,426
Warrant to purchase common stock .............            --          1,798,733
Contributed capital ..........................       1,434,259        1,505,831
Retained earnings ............................      56,873,094       20,988,434
Notes receivable from officer/shareholder ....      (5,601,804)      (4,796,428)
Accumulated other comprehensive loss .........      (9,733,458)     (19,679,185)
                                                 -------------    -------------
    Total shareholders' equity ...............     121,160,903      107,708,811
                                                 -------------    -------------
    Total liabilities and shareholders' equity   $ 316,443,591    $ 253,105,155
                                                 =============    =============

                             See accompanying notes.


                                      F-4
<PAGE>


                              TARRANT APPAREL GROUP

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                              Year Ended December 31,
                                      ----------------------------------------
                                          2001          2002          2003
                                      ------------  ------------  ------------
Net sales...........................  $330,253,548  $347,390,930  $320,422,850
Cost of sales.......................   277,525,010   302,082,144   288,445,173
                                      ------------  ------------  ------------
Gross profit........................    52,728,538    45,308,786    31,977,677
Selling and distribution expenses...    14,345,356    10,757,029    11,329,414
General and administrative
 expenses...........................    33,136,008    30,082,061    31,767,122
Amortization of excess of cost over
 fair value of net assets acquired..     3,317,428        --            --
Write-off of prepaid expenses.......        --            --         2,771,989
Impairment of excess of cost over
 fair value of net assets acquired..        --            --        19,504,521
                                      ------------  ------------  ------------
Income (loss) from operations.......     1,929,746     4,469,696   (33,395,369)
Interest expense....................    (7,807,918)   (5,443,995)   (5,602,556)
Interest income.....................     3,255,843     4,748,144       424,518
Minority interest...................      (412,022)   (4,580,766)    3,461,243
Other income.......................      1,853,066     2,647,975     4,784,479
Other expense .....................       (855,994)   (2,004,073)   (1,425,346)
                                      ------------  ------------  ------------
Loss before provision for income
 taxes and cumulative effect of
 accounting change..................    (2,037,279)     (163,019)  (31,753,031)
Provision for income taxes..........       851,977     1,051,018     4,131,629
                                      ------------  ------------  ------------
Loss before cumulative effect of
 accounting change..................    (2,889,256)   (1,214,037)  (35,884,660)
Cumulative effect of accounting
 change.............................          --      (4,871,244)          --
                                      ------------  ------------  ------------
Net loss ...........................   $(2,889,256)  $(6,085,281) $(35,884,660)
                                      ============  ============  ============
Net loss per share - Basic and
Diluted:
 Before cumulative effect of
  accounting change.................  $      (0.18) $      (0.08) $      (1.97)
 Cumulative effect of accounting
  change............................           --          (0.30)          --
                                      ------------  ------------  ------------
 After cumulative effect of
  accounting change.................  $      (0.18) $      (0.38) $      (1.97)
                                      ============  ============  ============

Weighted average shares outstanding:
  Basic and Diluted.................    15,824,750    15,834,122    18,215,071


                             See accompanying notes.


                                      F-5
<PAGE>


<TABLE>
                              TARRANT APPAREL GROUP

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

<CAPTION>

                                 Preferred    Number       Common      Number               Contributed   Retained
                                   Stock     of Shares      Stock    of Shares    Warrant     Capital     Earnings
                                ----------- ----------- ------------ ---------- ----------- ----------- ------------
<S>                              <C>           <C>      <C>          <C>        <C>         <C>         <C>
Balance at December 31, 2000..   $       --          -- $ 69,302,683 15,820,315          -- $ 1,434,259 $ 65,847,631
  Net loss....................           --          --           --         --          --          --   (2,889,256)
  Currency translation........           --          --           --         --          --          --           --

  Comprehensive income........           --          --           --         --          --          --           --
  Exercise of stock options...           --          --       33,750     20,500          --          --           --
  Income tax benefit from
   exercise of stock options..           --          --        4,657         --          --          --           --
  Advances to shareholders,
   net........................           --          --           --         --          --          --           --
                                ----------- ----------- ------------ ---------- ----------- ----------- ------------
Balance at December 31, 2001..           --          --   69,341,090 15,840,815          --   1,434,259   62,958,375
  Net loss....................           --          --           --         --          --          --   (6,085,281)
  Currency translation........           --          --           --         --          --          --           --

  Comprehensive loss..........           --          --           --         --          --          --           --
  Exercise of stock options...           --          --       24,135      5,500          --          --           --
  Income tax benefit from
   exercise of stock options..           --          --        3,014         --          --          --           --
  Issuance of preferred stock.    8,820,573     100,000           --         --          --          --           --
  Repayment from shareholders,
   net........................           --          --           --         --          --          --           --
                                ----------- -----------  ----------- ---------- ----------- ----------- ------------
Balance at December 31, 2002..    8,820,573     100,000   69,368,239 15,846,315          --   1,434,259   56,873,094
  Net loss....................           --          --           --         --          --          --  (35,884,660)
  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          --          --           --
  Issuance of common stock....           --          --      788,000    200,000          --          --           --
  Retirement of stock.........           --          --     (311,427)  (248,872)         --          --           --
  Compensation expense........           --          --           --         --          --      71,572           --
  Repayment from shareholders.           --          --           --         --          --          --           --
                                ----------- ----------- ------------ ---------- ----------- ----------- ------------

Balance at December 31, 2003..  $        --          -- $107,891,426 27,614,763 $ 1,798,733 $ 1,505,831 $ 20,988,434
                                =========== =========== ============ ========== =========== =========== ============


<CAPTION>
                               Accumulated
                                  Other         Notes          Total
                              Comprehensive     from        Shareholders
                              Income (Loss)  Shareholders      Equity
                              ------------   -------------  ------------
<S>                           <C>            <C>            <C>
Balance at December 31, 2000..$   (719,004)  $  (5,376,486) $130,489,083
  Net loss....................          --             --     (2,889,256)
  Currency translation........   4,268,523             --      4,268,523
                                                            ------------
  Comprehensive income........          --             --      1,379,267
  Exercise of stock options...          --             --         33,750
  Income tax benefit from
   exercise of stock options..          --             --          4,657
  Advances to shareholders,
   net........................          --     (6,742,287)    (6,742,287)
                              ------------   ------------   ------------
Balance at December 31, 2001..   3,549,519    (12,118,773)   125,164,470
  Net loss....................          --             --     (6,085,281)
  Currency translation........ (13,282,977)            --    (13,282,977)
                                                           ------------
  Comprehensive loss..........          --             --    (19,368,258)
  Exercise of stock options...          --             --         24,135
  Income tax benefit from
   exercise of stock options..          --             --          3,014
  Issuance of preferred stock.          --             --      8,820,573
  Repayment from shareholders,
   net........................          --      6,516,969      6,516,969
                              ------------   ------------   ------------
Balance at December 31, 2002..  (9,733,458)    (5,601,804)   121,160,903
  Net loss....................          --             --    (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......          --             --             --
  Issuance of common stock....          --             --        788,000
  Retirement of stock.........          --             --       (311,427)
  Compensation expense........          --             --         71,572
  Repayment from shareholders.          --        805,376        805,376
                              ------------   ------------   ------------
Balance at December 31, 2003..$(19,679,185)  $ (4,796,428)  $107,708,811
                              ============   ============   ============
</TABLE>

                             See accompanying notes


                                       F-6
<PAGE>


<TABLE>
                              TARRANT APPAREL GROUP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                   Year Ended December 31,
                                                           2001             2002             2003
                                                       -------------    -------------    -------------
<S>                                                    <C>              <C>              <C>
Operating activities:
Net loss ...........................................   $  (2,889,256)   $  (6,085,281)   $ (35,884,660)
Adjustments to reconcile net loss to net cash
provided by operating activities:
  Deferred taxes ...................................       1,273,305         (107,162)        (132,622)
  Depreciation and amortization ....................      14,564,623       10,130,132       16,097,595
  Accrued interest on note receivable ..............            --         (4,452,490)            --
  Cumulative effect of accounting change ...........            --          4,871,244             --
  Asset impairments ................................            --               --         22,276,510
  Inventory write-down .............................            --               --         10,986,153
  Loss on sale of fixed assets .....................          26,861            5,291          593,626
  Unrealized (gain) loss on foreign currency .......        (103,705)       1,014,696          560,602
  Minority interest ................................         757,927        4,426,080       (3,218,069)
  Gain on legal settlement .........................            --           (473,041)        (235,785)
  Compensation expense related to stock option .....            --               --             71,572
  Change in the provision for returns and discounts        1,830,841          453,167         (324,387)
  Changes in operating assets and liabilities:
    Restricted cash ................................            --               --         (2,759,742)
    Accounts receivable ............................       5,902,995       (7,141,536)       7,856,700
    Due to/from related parties ....................      (2,102,811)        (673,650)     (14,801,324)
    Inventory ......................................      10,474,030        5,818,431        9,626,509
    Temporary quota ................................        (142,221)         369,849             --
    Prepaid expenses and other receivables .........       1,385,875        1,551,324          590,046
    Accounts payable ...............................       2,343,419       (3,772,979)      (4,207,552)
    Accrued expenses and income tax payable ........      (3,270,616)       8,211,770        2,388,976
                                                       -------------    -------------    -------------
  Net cash provided by operating activities ........      30,051,267       15,493,145        9,484,148

Investing activities:
Purchase of fixed assets ...........................      (3,918,602)      (2,984,547)        (368,113)
Proceeds from sale of fixed assets .................            --               --            209,788
Acquisitions, net of cash ..........................      (6,750,391)      (2,355,954)            --
Collection on note receivable ......................       2,036,924             --               --
(Increase) decrease in other assets ................        (594,660)         509,524         (983,593)
Advances to shareholders/officers ..................      (6,218,458)      (1,008,591)            --
Collection of advances from shareholders/officers ..            --            169,991           88,723
                                                       -------------    -------------    -------------
  Net cash used in investing activities ............     (15,445,187)      (5,669,577)      (1,053,195)

Financing activities:
Short-term bank borrowings, net ....................     (16,927,528)       7,241,576         (161,194)
Proceeds from long-term obligations ................      52,894,023      198,551,201      239,280,109
Payment of long-term obligations and bank borrowings     (40,376,783)    (211,894,730)    (275,640,677)
Repayments of borrowings from shareholders/officers      (11,543,640)      (2,359,847)        (486,379)
Proceeds from issuance of preferred stock and
 warrant ...........................................            --               --         31,024,774
Repurchase of shares ...............................            --               --           (311,427)
Exercise of stock options including related tax
 benefit ...........................................          38,407           27,149             --
                                                       -------------    -------------    -------------
  Net cash used in financing activities ............     (15,915,521)      (8,434,651)      (6,294,794)

Effect of exchange rate on cash ....................         184,591       (1,524,882)        (204,677)
                                                       -------------    -------------    -------------
Increase (decrease)in cash and cash equivalents ....      (1,124,850)        (135,965)       1,931,482
Cash and cash equivalents at beginning of year .....       2,649,297        1,524,447        1,388,482
                                                       -------------    -------------    -------------
Cash and cash equivalents at end of year ...........   $   1,524,447    $   1,388,482    $   3,319,964
                                                       =============    =============    =============
</TABLE>

                             See accompanying notes


                                      F-7
<PAGE>


                              TARRANT APPAREL GROUP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BASIS OF CONSOLIDATION

The accompanying  financial  statements  consist of the consolidation of Tarrant
Apparel Group, a California  corporation  (formerly "Fashion Resource,  Inc.") ,
and its majority owned  Subsidiaries  located primarily in the U.S., Mexico, and
Asia. At December 31, 2003,  we own 75% of our  subsidiaries  in Mexico,  51% of
Jane Doe  International,  LLC  ("JDI"),  and  50.1% of United  Apparel  Ventures
("UAV").  In January  2004,  we acquired the  remaining  49% interest in JDI. 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 25% minority interest
in our subsidiaries in Mexico are owned by affiliates of Mr. Kamel Nacif, one of
our  shareholders.  The  49.9%  minority  interest  in UAV is  owned  by  Azteca
Production  International,  a corporation owned by the brothers of our Chairman,
Gerard Guez.

We serve specialty  retail,  mass  merchandise  and department  store chains and
major  international  brands by designing,  merchandising,  contracting  for the
manufacture of, manufacturing directly 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, one of our
shareholders. (See Note 14).

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.

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

SHIPPING AND HANDLING COSTS

Freight  charges  are  included  in selling  and  distribution  expenses  in the
statement of operations  and amounted to  $2,509,000,  $2,136,000 and $1,817,000
for the years ended December 31, 2001, 2002 and 2003, respectively.

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

Cash equivalents  consist of cash and highly liquid investments with an original
maturity of three months or less when purchased.  Restricted cash refers to cash
deposit(s) held as collateral by landing  institution(s) to either guarantee our
liabilities and/or loans. Cash and cash equivalents,  including restricted cash,
held in foreign financial  institutions totaled to $982,000 and $3,930,000 as of
December 31, 2002 and 2003,  respectively.  Restricted  cash is not considered a
cash equivalent for purposes of the statement of cash flow.

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

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

INVENTORIES

Inventories  are stated 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.


                                      F-8
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

COST OF SALES

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

SELLING AND DISTRIBUTION EXPENSES

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

GENERAL AND ADMINISTRATIVE EXPENSES

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

PRODUCT DESIGN, ADVERTISING AND SALES PROMOTION COSTS

Product design,  advertising and sales promotion costs are expensed as incurred.
Product  design,  advertising  and sales  promotion  costs included in operating
expenses in the  accompanying  statements of operations  (excluding the costs of
manufacturing   production   samples)  amounted  to  approximately   $1,621,000,
$1,225,000 and $1,306,000 in 2001, 2002 and 2003, respectively.

QUOTA

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

Permanent quota entitlements were principally  obtained through free allocations
by the Hong Kong Government  pursuant to an import  restraint  between Hong Kong
and the United States and are renewable on an annual basis, based upon the prior
year utilization. Permanent quota entitlements acquired from outside parties are
amortized over three years on a straight-line basis, and were fully amortized at
December 31, 2002 and 2003.

Temporary  quota  represents  quota rights  acquired from other  permanent quota
entitlement holders on a temporary basis.  Temporary quota has a maximum life of
twelve months. The cost of temporary quota purchased for use in the current year
is assigned to inventory  purchases  while the cost of temporary  quota acquired
for usage in the year  following the balance sheet date is recorded as a current
asset.  At December  31, 2002 and 2003,  there were no  temporary  quota  rights
included in current assets.

PROPERTY AND EQUIPMENT

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


                                      F-9
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

INTANGIBLES

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

IMPAIRMENT OF LONG-LIVED ASSETS

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

DEFERRED FINANCING COST

Included in the other assets are deferred financing costs of $949,000,  $638,000
and $327,000 at December 31, 2001, 2002 and 2003,  respectively.  These costs of
obtaining financing are being amortized as interest expense over the term of the
related debt.

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, 2003, no domestic tax provision has been provided for
$59.5 million of un-remitted  retained earnings of these Hong Kong corporations,
as we intend to maintain these amounts outside of the U.S. on a permanent basis.

NET INCOME (LOSS) PER SHARE

Basic and diluted  income (loss) per share has been computed in accordance  with
SFAS No. 128,  "Earnings Per Share". All options and warrants have been excluded
from  the   computation  in  2001,   2002  and  2003  as  the  impact  would  be
anti-dilutive.

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.


                                      F-10
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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, 2002 approximately
31.7% of accounts  receivable were due from two customers.  At December 31, 2003
approximately  15.6% of  accounts  receivable  were due from one  customer.  The
following table presents the percentage of net sales  concentrated  with certain
customers. Customer A represents a group of customers under common ownership.



                                                            2001   2002   2003
                                                            ----   ----   ----
Customer A................................................. 14.3%  12.7%  15.3%
Customer B................................................. 20.5%  17.6%  12.1%
Customer C................................................. 12.2%   9.7%   8.7%
Customer D.................................................  8.5%   9.9%   8.3%
Customer E.................................................  7.8%  17.4%   6.7%



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.

USE OF ESTIMATES

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

EMPLOYEE STOCK OPTIONS

We account for employee  stock options  using the intrinsic  value method rather
than the alternative  fair-value  accounting method.  Under the  intrinsic-value
method,  if the exercise price of the employee's stock options equals the market
price of the underlying stock on the date of the grant, no compensation  expense
is recognized. For the periods ended December 31, 2001 and 2002, no compensation
cost was reflected in net income related to our stock options.  For period ended
December 31, 2003, $72,000 was recorded as an expense.

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


                                      F-11
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

the following weighted-average assumptions:  weighted-average risk-free interest
rate of 6% for 2001, 4% for 2002 and 2003;  dividend yields of 0% for 2001, 2002
and 2003;  weighted-average  volatility  factors of the expected market price of
our  common   stock  of  1.22  for  2001,   0.65  for  2002  and  2003;   and  a
weighted-average expected life of the option of four years.

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:

                                           2001          2002           2003
                                       -----------   -----------   ------------
Pro forma net loss..................   $(7,035,501)  $(9,519,060)  $(39,928,351)
Pro forma compensation expense, net
  of tax............................   $(4,146,245)  $(3,433,779)  $ (4,043,691)
Net loss as reported................   $(2,889,256)  $(6,085,281)  $(35,884,660)
Pro forma loss per share
  Basic and diluted.................   $     (0.44)  $     (0.60)  $      (2.19)
Net loss per share
  Basic and diluted.................   $     (0.18)  $     (0.38)  $      (1.97)


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 July 2002, the Financial  Accounting  Standards  Board  ("FASB")  issued SFAS
No.146, "Accounting for Costs Associated with Exit or Disposal Activities." This
statement  requires  that a  liability  for a cost  associated  with  an exit or
disposal  activity be recognized when the liability is incurred.  Under previous
guidance,  a  liability  for an exit  cost  was  recognized  at the  date of the
commitment to an exit plan.  The  provisions of this statement are effective for
exit or disposal  activities that are initiated after December 31, 2002 and will
be applied prospectively,  as applicable.  We applied the provisions of SFAS No.
146 to the costs associated with our decision in 2003 to abandon its strategy of
being  both a  trading  and  vertically  integrated  manufacturing  company,  as
discussed in Notes 7 and 14 to the financial statements.

In November 2002, FASB issued FASB  Interpretation No. ("FIN") 45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness  of Others." FIN 45 requires that  guarantees  issued
after  December 31, 2002 are  recorded as  liabilities  at fair value,  with the
offsetting entry recorded based on the  circumstances in which the guarantee was
issued.  Adoption  of FIN 45 did not have a  material  impact  on our  financial
statements.

In  December  2002,  the FASB  issued  SFAS  148,  "Accounting  for  Stock-Based
Compensation  -  Transition  and  Disclosure  - an  amendment of SFAS 123." This
statement provides alternate methods of transition for a voluntary


                                      F-12
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

change to the fair value method of accounting for stock-based compensation. This
statement  also amends the disclosure  requirements  of SFAS 123 and APB Opinion
28, "Interim Financial Reporting" to require prominent disclosure in both annual
and interim financial  statements about the method of accounting for stock-based
compensation  and the effect of the method  used on  reported  results.  We have
adopted the disclosure provisions of SFAS 148.

In  January   2003,   the  FASB  issued   Interpretation   No.  46  ("FIN  46"),
"Consolidation of Variable  Interest  Entities." FIN 46 addresses when a company
should  consolidate  in its financial  statements  the assets,  liabilities  and
activities of a variable  interest entity  ("VIE").  It defines VIEs as entities
that  either  do not have any  equity  investors  with a  controlling  financial
interest,  or have equity  investors  that do not provide  sufficient  financial
resources  for  the  entity  to  support  its  activities   without   additional
subordinated  financial  support.  FIN 46 also requires  disclosures about VIE's
that a company is not required to consolidate, but in which it has a significant
variable interest. The consolidation  requirements of FIN 46 applied immediately
to variable  interest  entities  created  after  January 31,  2003.  We have not
obtained an interest in a VIE subsequent to that date. A modification  to FIN 46
(FIN 46(R)) was released in December  2003. FIN 46(R) delayed the effective date
for VIEs created before February 1, 2003, with the exception of  special-purpose
entities,  until the first fiscal year or interim  period ending after March 15,
2004.  FIN 46(R) delayed the effective date for  special-purpose  entities until
the first fiscal year or interim  period after December 15, 2003. We are not the
primary  beneficiary  of any SPEs at December 31, 2003.  We will adopt FIN 46(R)
for non-SPE entities as of March 31, 2004. The adoption of FIN 46 did not result
in the  consolidation  of any VIEs, nor is the adoption of FIN 46(R) expected to
result in the  consolidation  of any VIEs.  We are  continuing  to evaluate  the
impact FIN 46(R) will have on its financial statements.

In May  2003,  the FASB  issued  SFAS 150,  "Accounting  for  Certain  Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard,  financial  instruments
that  embody  obligations  for the  issuer  are  required  to be  classified  as
liabilities.  SFAS 150 is effective  for all  financial  instruments  created or
modified after May 31, 2003,  and otherwise  shall be effective at the beginning
of the first interim period  beginning after June 15, 2003. The adoption of SFAS
150 as of July 1,  2003  did not  have a  material  impact  on our  consolidated
financial condition or results of operations.

CURRENCY RATE HEDGING

We  manufacture in a number of countries  throughout  the world,  including Hong
Kong and Mexico,  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 (expense) (see Note 17). These instruments are intended
to protect against  exposure related to financing  transactions  (equipment) and
income from international  operations.  The fair value of the exchange contracts
was not significant at December 31, 2002 and 2003.

RECLASSIFICATIONS

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


                                      F-13
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2.       ACCOUNTS RECEIVABLE

Accounts receivable consists of the following:


                                                          December 31,
                                                    ------------------------
                                                       2002         2003
                                                    -----------  -----------
U.S. trade accounts receivable..................... $42,979,762  $30,729,774
Foreign trade accounts receivable..................  16,445,868   24,528,500
Due from factor....................................   4,176,598      955,534
Other receivables..................................   6,002,295    5,178,501
Allowance for returns, discounts and bad debts.....  (4,316,621)  (4,226,383)
                                                    -----------  -----------
                                                    $65,287,902  $57,165,926
                                                    ===========  ===========

The Debt Facility includes a factoring arrangement whereby GMAC advances against
receivables  from  customers  with debt ratings  above BBB and factors the other
receivables  with  credit   insurance.   We  do  not  receive  advances  against
receivables  covered  by  credit  insurance  of  GMAC,  and are paid  only  upon
collection of proceeds. For this credit insurance arrangement, we pay the factor
a commission of 60 basis points.

3.       INVENTORY

Inventory consists of the following:

                                                           December 31,
                                                     ------------------------
                                                         2002         2003
                                                     -----------  -----------
Raw materials, fabric and trim accessories.......... $12,451,447  $ 5,859,558
Raw cotton..........................................   1,017,963        --
Work-in-process.....................................   9,948,700    1,094,786
Finished goods shipments-in-transit.................   4,877,002    7,522,464
Finished goods......................................  16,487,042    8,774,783
                                                     -----------  -----------
                                                     $44,782,154  $23,251,591
                                                     ===========  ===========

We recorded a write down of our inventory totaling $10,986,153 in 2003 following
our  decision  to  withdraw  from our owned and  operated  facilities  in Mexico
effective  September  1, 2003.  The write down  reflected an  adjustment  to net
realizable value of inventory identified for liquidation at reduced prices.


                                      F-14
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

4.       PROPERTY AND EQUIPMENT

Property and equipment consists of the following:


                                                       December 31,
                                            ---------------------------------
                                                 2002                2003
                                            -------------       -------------
         Land ........................      $   4,592,991       $   4,301,138
         Buildings ...................         58,389,310          54,871,724
         Equipment ...................        120,270,968         111,742,558
         Furniture and fixtures ......          2,428,858           2,441,058
         Leasehold improvements ......         10,657,364          11,357,892
         Vehicles ....................          1,099,538             496,942
                                            -------------       -------------
                                              197,439,029       $ 185,211,312
         Less accumulated depreciation
          and amortization ...........        (37,440,400)        (49,565,561)
                                            -------------       -------------
                                            $ 159,998,629       $ 135,645,751
                                            =============       =============

Depreciation  expense,  including  amortization of assets recorded under capital
leases,  totaled  $10,903,237,  $10,056,154  and $15,663,248 for the years ended
December 31, 2001, 2002 and 2003, respectively.

5.       ACQUISITIONS

TWILL MILL

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

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

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

UNITED APPAREL VENTURES

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, the Chairman of
the Company,  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


                                      F-15
<PAGE>

                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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. Since October 2002 and March 2003, UAV has begun to
service  both   parties'   business   with  Express  and  Levi  Strauss  &  Co.,
respectively.  UAV makes  purchases  from two  related  parties  in  Mexico,  an
affiliate of Azteca and Tag-It Pacific, Inc.

AJALPAN

On March 29, 2001, we completed the acquisition of a sewing facility  located in
Ajalpan Mexico from Confecciones  Jamil, S.A. de C.V, which is majority owned by
Kamel Nacif,  one of our  shareholders.  We used this facility,  which was newly
constructed during 1999 and commenced  operations in 2000, for production during
2000 and 2001.  The results of Ajalpan have been  consolidated  into our results
commencing on March 29, 2001.

We paid $11 million for this  operating  facility.  This entire  amount had been
paid in cash and the transfer of certain of our  receivables to the seller.  The
assets  acquired  include land,  buildings and all equipment.  This transfer had
been accounted for as a purchase and the purchase price had been allocated based
on the fair market value of assets acquired and liabilities  assumed. The excess
of cost over fair value of net assets acquired was $4.7 million. Included in the
SFAS No.  142  charge in 2002 was a $1.7  million  impairment  loss  related  to
Ajalpan.  We wrote off the remaining goodwill balance of $2.7 million during the
year ended December 31, 2003, in connection with the restructuring of our Mexico
operations, as discussed in Note 7.

JANE DOE

On April 12, 2000, we formed a new company, Jane Doe International, LLC ("JDI").
This company was formed for the purpose of  purchasing  the assets of Needletex,
Inc.,  owner of the Jane Doe brand. JDI was owned 51% by Fashion Resource (TCL),
Inc.,  our  subsidiary,  and 49% by  Needletex,  Inc.  In  connection  with  the
establishment  of JDI, JDI entered  into an  employment  agreement  with Patrick
Bensimon,  the principal shareholder of Needeltex,  Inc., which provided for the
payment of a salary to Patrick  Bensimon  and a bonus tied to the new  company's
sales performance.  The existing lenders to Needletex,  Inc. agreed to the asset
transfer  in return  for,  among  other  things,  the  confirmation  of  Patrick
Bensimon's  continuing  guaranty of the loan obligations,  the assumption of the
loan  obligations by JDI and a guaranty of those  obligations by us. We received
an express indemnity by Needletex, Inc. and Patrick Bensimon to reimburse us for
all amounts we paid to those  lenders for the account of  Needletex  and Patrick
Bensimon.  The  amounts  paid to those  lenders  totaled  $1.4  million  and was
recorded as additional goodwill.  The goodwill was included in the 2002 SFAS 142
impairment charge.

In March 2001, we converted JDI from an operating company to a licensing company
and entered  into two  licenses in regard to the use of the Jane Doe  trademark.
Thereafter  a dispute  arose as to whether  Patrick  Bensimon  had  performed in
accordance  with his terms of employment set forth in the Employment  Agreement.
When an amicable  resolution  of this  dispute  could not be  achieved,  Patrick
Bensimon commenced an arbitration  preceding against his employer,  JDI, Fashion
Resource (TCL),  Inc., the managing member of Jane Doe International and us. The
licensing  activities  on this  trademark  have been largely  dormant since 2002
pending the outcome of the  litigation  with Patrick  Bensimon.  Included in the
SFAS No. 142 charge in 2002 was a $3.2 million  impairment  loss related to JDI,
see Note 7.

On January 21, 2003,  after  hearing,  the  arbitration  panel issued an interim
award in favor of Patrick Bensimon  awarding him $1,425,655 for salary and bonus
plus  interest  accrued  thereon and legal fees and costs to be  determined.  On
April 7,  2003,  the panel  issued a final  award in favor of  Patrick  Bensimon
confirming  the prior  interim  award and awarding  Patrick  Bensimon  costs and
attorneys fees in the amount of $489,640. We had a total of $1.6 million reserve
for  litigation  as of  December  31,  2002.  In January  2004,  we settled  the
employment  litigation  with  Patrick  Bensimon  for  $1.2  million  in cash and
forgiveness of approximately $859,000 in debts owed by Needletex Inc. As part of
the  settlement,  we received the remaining 49% interest in JDI. We also settled
with our insurance carrier for a cash payment of $330,000. An additional expense
of  approximately  $379,000 was made in the fourth  quarter of 2003 to cover the
forgiveness of debts.


                                      F-16
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

6.       OTHER ASSETS

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, LLC totaling $1.4 million at December
31, 2003 is accounted for under the equity method and included in other assets.

7.       IMPAIRMENT OF ASSETS

IMPAIRMENT OF GOODWILL

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

The following table presents our results on a comparable basis:

<TABLE>
<CAPTION>
                                                       Year  Ended December  31,
                                         ------------------------------------------------
                                              2001             2002              2003
                                         -------------    -------------    --------------
<S>                                      <C>              <C>              <C>
Reported net loss ....................   $  (2,889,256)   $  (1,214,037)   $  (35,884,660)
Goodwill amortization, net of tax ....       2,089,980             --                --
                                         -------------    -------------    --------------

Adjusted net loss before cumulative
effect of accounting change ..........        (799,276)      (1,214,037)      (35,884,660)
Cumulative effect of accounting change            --         (4,871,244)             --
                                         -------------    -------------    --------------

Adjusted net loss ....................   $    (799,276)   $  (6,085,281)   $  (35,884,660)
                                         -------------    -------------    --------------


Basic and diluted earnings per common
share:
Reported loss before cumulative effect
 of accounting change ................   $       (0.18)   $       (0.08)   $        (1.97)
Goodwill amortization, net of taxes ..            0.13          --                --
                                         -------------    -------------    --------------

Adjusted loss before cumulative effect
 of accounting change ................           (0.05)           (0.08)            (1.97)
Cumulative effect of accounting change         --                 (0.30)          --
                                         -------------    -------------    --------------

Adjusted net loss ....................   $       (0.05)   $       (0.38)   $        (1.97)
                                         =============    =============    ==============
</TABLE>


                                      F-17
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

In 2003, we ceased  directly  operating a substantial  majority of our equipment
and  fixed  assets  in  Mexico,  and  started  leasing  a large  portion  of our
manufacturing  facilities  and  operations  in Mexico to affiliates of Mr. Kamel
Nacif, one of our  shareholders,  effective  September 1, 2003.  During 2003, we
made an interim review of our goodwill and  intangible  assets and wrote off all
goodwill and  intangible  assets  affected by our  strategic  changes in Mexico.
Write-offs  included $9.1 million and $2.7 million directly  relating to Tarrant
Mexico - Famian and Ajalpan  divisions,  respectively,  and another $7.5 million
relating to of Rocky Apparel LLC ("Rocky").  It is unlikely that Tommy Hilfiger,
whose business we acquired in the Rocky  acquisition,  will 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 JDI due to the litigation with the minority shareholder.

The following table displays the change in the gross carrying amount of goodwill
by reporting units at the end of December 31, 2003:

<TABLE>
<CAPTION>
                                                                                 REPORTING
                                                                                   UNITS
                                               ----------------------------------------------------------------------------
                                                                  TARRANT         TARRANT      TAG MEX INC.     FR TCL. -
                                                                  MEXICO -       MEXICO -        - ROCKY       CHAZZZ & MGI
                                     TOTAL        JANE DOE        AJALPAN         FAMIAN         DIVISION        DIVISION
                               ------------    ------------    ------------    ------------    ------------    ------------
<S>                            <C>             <C>             <C>             <C>             <C>             <C>
Balance as of
  December 31, 2001 ........   $ 29,196,886    $  1,904,529    $  4,427,843    $  7,260,133    $  7,521,536    $  8,082,845
Additional purchase price ..      3,050,000            --              --         2,550,000            --           500,000
Additional liabilities
  assumed ..................      1,428,588       1,428,588            --              --              --              --
Impairment losses ..........     (4,871,244)     (3,182,779)     (1,688,465)           --              --              --
Foreign currency translation       (740,211)           --              --          (740,211)           --              --
                               ------------    ------------    ------------    ------------    ------------    ------------
Balance as of
  December 31, 2002 ........     28,064,019         150,338       2,739,378       9,069,922       7,521,536       8,582,845
Impairment losses ..........    (19,504,521)       (150,338)     (2,739,378)     (9,093,269)     (7,521,536)           --
Foreign currency translation         23,347            --              --            23,347            --              --
                               ------------    ------------    ------------    ------------    ------------    ------------
Balance as of
  December 31, 2003 ........   $  8,582,845    $          0    $          0    $          0    $          0    $  8,582,845
                               ============    ============    ============    ============    ============    ============
</TABLE>


IMPAIRMENT OF OTHER ASSETS

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


                                      F-18
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

8.       DEBT

Debt consists of the following:

                                                          December 31,
                                                 ------------------------------
                                                     2002               2003
                                                 ------------      ------------

Short term bank borrowings:
  Import trade bills payable ...............     $  5,686,327      $  3,113,030
  Bank direct acceptances ..................       11,272,375        12,660,945
  Other Hong Kong credit facilities ........        6,206,103        11,375,363
  Other Mexican credit facilities ..........        4,968,309         2,143,985
  Uncleared checks .........................        1,193,810              --
                                                 ------------      ------------
                                                 $ 29,326,924      $ 29,293,323
                                                 ============      ============

Long term debt:
  Vendor financing .........................     $  7,257,683      $  3,971,490
  Equipment financing ......................        9,682,290         3,710,355
  Debt facility ............................       58,193,505        31,611,667
  Other debt (including capital leases) ....        2,477,000              --
                                                 ------------      ------------
                                                   77,610,478        39,293,512
  Less current portion .....................      (21,706,502)      (38,705,240)
                                                 ------------      ------------
                                                 $ 55,903,976      $    588,272
                                                 ============      ============

IMPORT TRADE BILLS PAYABLE AND BANK DIRECT ACCEPTANCES

On June 13,  2002,  we entered  into a letter of credit  facility of $25 million
with UPS Capital Global Trade Finance  Corporation ("UPS") to replace the credit
facility of The Hong Kong and Shanghai Banking Corporation Limited in Hong Kong.
Under this  facility,  we may arrange for the  issuance of letters of credit and
acceptances.  The  facility  is a  one-year  facility  subject to renewal on its
anniversary  and is  collateralized  by the shares and  debentures of all of our
subsidiaries in Hong Kong, as well as our permanent quota holdings in Hong Kong.
In  addition  to the  guarantees  provided  by  Tarrant  Apparel  Group  and our
subsidiaries,  Fashion Resource (TCL) Inc. and Tarrant  Luxembourg Sarl,  Gerard
Guez,  our  Chairman,  also signed a guarantee  of $5 million in favor of UPS to
secure this facility. This facility bears interest at 4.5% per annum at December
31, 2003. Under this facility, we are subject to certain restrictive  covenants,
including that we maintain a specified  tangible net worth,  fixed charge ratio,
and leverage  ratio.  We were in compliance  with all the covenants in the third
quarter of 2002.  In the fourth  quarter of 2002,  we violated  the fixed charge
ratio  covenant and obtained a waiver at a cost of $5,000.  In the first quarter
of 2003,  we were in violation of the  no-consecutive-quarterly-losses  covenant
and the fixed charge ratio  covenant and obtained a waiver for the quarter for a
fee of $10,000.  In the second  quarter of 2003,  we breached all the  financial
covenants and obtained a waiver for the quarter for a fee of $25,000. In October
2003,  we  established  new  financial  covenants  with UPS for the period ended
September 30, 2003 and the remainder of fiscal 2003 based on projection. We were
in compliance  with all the covenants in the third and fourth  quarters of 2003.
Tangible net worth,  fixed  charge  ratio and  leverage  ratio were fixed at $65
million, 0.74 to 1 and 2.55 to 1, respectively,  for the fourth quarter of 2003.
Capital  Expenditures  were capped at $800,000 per  quarter.  As of December 31,
2003, we were in compliance with these covenants.  In December 2003, a temporary
additional line of credit  consisting of a $2.8 million standby letter of credit
was made  available  to us  against a  restricted  deposit  $2.8  million.  This
temporary facility was cancelled in February 2004 and the deposit has since been
released.  The  expiration  date of our main credit  facility  with UPS has been
extended to December 31, 2004 with  certain  conditions.  One of the  conditions
requires  that on or before May 31, 2004, we have to refinance the Debt Facility
currently  provided by GMAC  Commercial  Credit LLC. If we fail to satisfy  this
condition,  we will incur a penalty of  $100,000  payable to UPS. As of December
31, 2003, $23.7 million was outstanding  under this facility,  and an additional
$350,000 was available for future borrowings.  In addition, $1.2 million of open
letters of credit was outstanding as of December 31, 2003.


                                      F-19
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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 and Todd Kay, and our guarantee. In August 2003, the letter
of credit facility increased to HKD 23 million  (equivalent to US $3.0 million).
In December  2003, a tax loan for HKD 2 million  (equivalent to US $256,000) was
also made available to our Hong Kong subsidiaries. As of December 31, 2003, $2.9
million was outstanding under this facility.  In addition,  $0.3 million of open
letters of credit was outstanding as of December 31, 2003.

OTHER MEXICAN CREDIT FACILITIES

At December  31, 2003,  Tarrant  Mexico S. de R.L. de C.V.,  Famian  division is
indebted  to Banco  Nacional  de  Comercio  Exterior  SNC in the  amount of $2.1
million  pursuant to a credit facility  assumed by Tarrant Mexico  following its
merger with Grupo Famian. We are now repaying $250,000 plus interest (LIBOR plus
6%) monthly on this facility.

VENDOR FINANCING

During 2000, we financed equipment  purchases for a manufacturing  facility with
certain vendors. A total of $16.9 million was financed with five-year promissory
notes,  which  bear  interest  ranging  from 7.0% to 7.5%,  and are  payable  in
semiannual  payments,  which  commenced in February  2000. Of this amount,  $4.0
million was  outstanding  as of December 31,  2003.  Of the $4.0  million,  $2.7
million is denominated in Euros and the remainder is payable in U.S. dollars.

An  unrealized  gain of  $104,000  and  unrealized  losses of $1.0  million  and
$561,000  were  recorded  at December  31,  2001,  2002 and 2003,  respectively,
related to foreign  currency  fluctuations  and were recorded in other income in
the accompanying financial statements.

From  time to time,  we open  letters  of  credit  under an  uncommitted  credit
arrangement with Aurora Capital  Associates,  which issues these credits through
Israeli Discount Bank. As of December 31, 2003,  $564,000 was outstanding  under
this  facility  and $3.9  million  of  letters  of credit  were open  under this
arrangement.

EQUIPMENT FINANCING

We have an equipment  loan with an initial  borrowing of $16.25  million from GE
Capital  Leasing ("GE  Capital"),  which matures in November  2005.  The loan is
secured by equipment located in Puebla and Tlaxcala,  Mexico. As of December 31,
2003, this facility had a balance of $3.6 million. Interest accrues at a rate of
2.5% over LIBOR.  Under this  facility,  we are subject to covenants on tangible
net worth of $30 million,  leverage  ratio of not more than two times at the end
of each financial year, and no losses for two consecutive quarters. In the first
quarter of 2002,  we breached the  no-consecutive-quarterly-losses  covenant and
obtained a waiver at a cost of $10,000.  We complied  with all the  covenants in
the other three  quarters.  In the first and second quarters of 2003, we were in
violation of the  no-consecutive-quarterly-losses  covenant and obtained waivers
at the cost of $25,000 and $50,000 respectively.  We were in compliance with all
the covenants in the third and fourth quarters of 2003. The waiver for breach of
covenants in the previous quarter required additional  collateral in the form of
a second lien on our headquarters,  which is owned by Messrs. Guez, our Chairman
of the Board and Kay, our Vice  Chairman.  Due to an objection by the first-lien
holder to the second lien,  we have agreed to accelerate  the monthly  repayment
installment  by  approximately  $75,000  commencing  January 2004 in lieu of the
additional  collateral.  In addition,  there was approximately $100,000 of notes
payable to various vendors.

We also had an  equipment  loan of $5.2  million  from Bank of  America  Leasing
("BOA").  The amount  outstanding  as of December 31, 2002 was $2.4 million.  In
October 2003, we paid off the BOA facility in its entirety.

The Debt Facility with GMAC Commercial  Credit,  LLC ("GMAC")  (described below)
and the  credit  facilities  with GE  Capital  and UPS all  carry  cross-default
clauses. A breach of a financial covenant set by GMAC, UPS or GE


                                      F-20
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Capital constitutes an event of default, entitling these banks to demand payment
in full of all  outstanding  amounts  under  their  respective  debt and  credit
facilities.

DEBT FACILITY

We are party to a revolving credit,  factoring and security agreement (the "Debt
Facility")  with GMAC  Commercial  Credit,  LLC.  The Debt  Facility  provides a
revolving facility of $90 million,  including a letter of credit facility not to
exceed $20 million,  and matures on January 31,  2005.  The Debt  Facility  also
provides  a term  loan  of  $25  million,  which  is  being  repaid  in  monthly
installments  of $687,500.  The amount we can borrow under the Debt  Facility is
determined  based on a  defined  borrowing  base  formula  related  to  eligible
accounts receivable and inventories.  The Debt Facility provides for interest at
LIBOR plus the LIBOR rate  margin  determined  by the Total  Leverage  Ratio (as
defined), and is collateralized by our receivables,  intangibles,  inventory and
various other specified non-equipment assets. This facility bears interest at 6%
per annum at December 31, 2003.  Under the  facility,  we are subject to various
financial covenants on tangible net worth, interest coverage, fixed charge ratio
and leverage  ratio,  and are  prohibited  from paying  dividends.  In 2002,  we
violated  the net worth and fixed  charge  covenants  in the third  quarter  and
obtained a waiver for the quarter for a fee of $50,000. We complied with all the
covenants in the other three quarters. In the first and second quarters of 2003,
we were in violation of all the financial  covenants  and obtained  waivers from
GMAC for each  quarter  at the cost of $45,000  and  $100,000  respectively.  In
October 2003, we  established  new financial  covenants with GMAC for the period
ended  September  30,  2003  and the  remainder  of  fiscal  2003  based  on our
projections.  We were in  compliance  with all the  covenants  in the  third and
fourth  quarters of 2003.  Tangible  net worth,  fixed charge ratio and leverage
ratio in the final  quarter were fixed at $65 million,  0.74 to 1 and 2.55 to 1,
respectively.  A total of $31.6  million (of which $4.8  million  related to the
term  portion)  was  outstanding  under the Debt  Facility at December 31, 2003.
Based on the borrowing  base formula,  no additional  amounts were available for
borrowing under the Debt Facility at December 31, 2003.

Debt covenants for the GMAC facility and UPS facility have not been  established
for fiscal  2004 and are  expected  to be set before the end of April  2004.  We
believe that the covenants will be no more restrictive than the covenants set in
2003.

The Debt  Facility with GMAC and the credit  facilities  with UPS and GE Capital
all carry  cross-default  clauses. A breach of a financial covenant set by GMAC,
UPS or GE  Capital  constitutes  an event of  default  under  all of the  credit
facilities,  entitling these 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 and  capital  lease  obligations  are
$38,705,240 (2004),  $543,670 (2005),  $12,854 (2006),  $13,647 (2007),  $14,489
(2008) and $3,613  (thereafter).  The effective interest rate on short-term bank
borrowing  as of  December  31,  2001,  2002 and 2003 were 6.7%,  4.1% and 5.3%,
respectively.

GUARANTEES

Guarantees have been issued since 2001 in favor of YKK, Universal Fasteners, and
RVL Inc. for $750,000, $500,000 and unspecified amount,  respectively,  to cover
trim  purchased  by Tag-It  Pacific  Inc. on our behalf.  We have not reported a
liability for these guarantees. We issued the guarantees to cover trim purchased
by Tag-it in order to ensure our production in a timely  manner.  If Tag-it ever
defaults, we would have to pay the outstanding liability due to these vendors by
Tag-it for purchases made on our behalf.  We have not had to perform under these
guarantees since inception.  It is not predictable to estimate the fair value of
the  guarantee;  however,  we do not  anticipate  that we will incur losses as a
result of these  guarantees.  As of December 31, 2003,  Tag-It  Pacific Inc. had
approximately $83,000 due to RVL Inc.


                                      F-21
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

9.       INCOME TAXES

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

                                            Year Ended December 31,
                              -------------------------------------------------
                                  2001               2002               2003
                              -----------        -----------        -----------
Current:
  Federal .............       $(1,272,918)       $  (307,684)       $ 2,400,000
  State ...............             1,079            293,055           (241,948)
  Foreign .............           850,511          1,162,798          2,106,199
                              -----------        -----------        -----------
                                 (421,328)         1,148,169          4,264,251
Deferred:
  Federal .............           999,201               --                 --
  State ...............           232,821               --                 --
  Foreign .............            41,283            (97,151)          (132,622)
                              -----------        -----------        -----------
                                1,273,305            (97,151)          (132,622)
                              -----------        -----------        -----------
    Total .............       $   851,977        $ 1,051,018        $ 4,131,629
                              ===========        ===========        ===========

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

                                               Year Ended December 31,
                                     ------------------------------------------
                                          2001           2002           2003
                                     ------------   ------------   ------------
Federal............................  $ (8,582,448)  $(11,061,937)  $(18,609,818)
Foreign............................     6,545,169     10,898,918    (13,143,213)
                                     ------------   ------------   ------------
    Total..........................  $ (2,037,279)  $   (163,019)  $(31,753,031)
                                     ============   ============   ============


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.


                                      F-22
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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


                                                Year Ended December 31,
                                     ------------------------------------------
                                         2001           2002           2003
                                     -----------    -----------    ------------
Income tax (benefit) based on
 federal statutory rate ..........   $  (713,048)   $(1,761,992)   $(11,113,561)
State income taxes, net of federal
 benefit .........................       152,035        190,486        (157,266)
Effect of foreign income taxes ...     1,494,708      1,162,798       2,862,550
Nondeductible goodwill impairment           --             --         4,141,426
Increase in tax reserve ..........          --             --         2,400,000
Increase (decrease) in valuation
 allowance and other .............       (81,718)     1,459,726       5,998,480
                                     -----------    -----------    ------------
                                     $   851,977    $ 1,051,018    $  4,131,629
                                     ===========    ===========    ============


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


                                                           December 31,
                                                   ----------------------------
                                                       2002            2003
                                                   ------------    ------------
Deferred tax assets:
  Provision for doubtful accounts and unissued
   credits .....................................   $    835,980    $  1,149,051
  Provision for other  reserves ................      1,347,609       2,711,566
  Domestic and foreign loss carry forwards and
   foreign tax credits .........................        850,326       2,050,179
  Deferred compensation and benefits ...........        238,232         197,486
  Goodwill impairment ..........................      1,260,492       4,422,837
                                                   ------------    ------------
    Total deferred tax assets ..................      4,532,639      10,531,119
Deferred tax liabilities:
  Other ........................................       (407,751)       (275,129)
                                                   ------------    ------------
                                                       (407,751)       (275,129)
Valuation allowance for deferred tax assets ....     (4,532,639)    (10,531,119)
                                                   ------------    ------------
Net deferred tax liabilities ...................   $   (407,751)   $   (275,129)
                                                   ============    ============


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 by an aggregate of  approximately  $14.5 million.  This
adjustment would


                                      F-23
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

also result in  additional  state  taxes and  interest  of  approximately  $12.6
million.  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
balance  sheet  included  in the  Consolidated  Financial  Statements  under the
caption "Income Taxes". 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 balance sheet.

10.      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:

                                                        Related
                                                         Party           Other
                                                       ----------     ----------
2004.................................................. $  336,774     $  479,633
2005..................................................         --        195,459
2006..................................................         --        156,083
2007..................................................         --        102,163
2008..................................................         --             --
Thereafter............................................         --             --
                                                       ----------     ----------
  Total future minimum lease payments................. $  336,774     $  933,338
                                                       ==========     ==========

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  $2,968,000,
$3,166,000 and $3,101,000 for 2001, 2002 and 2003, respectively.

We had open letters of credit of  $17,778,561,  $15,458,189 and $5,975,908 as of
December 31, 2001, 2002 and 2003, respectively.

We have two  employment  contracts  dated  January  1, 1998 with two  executives
providing  for base  compensation  and other  incentives.  On April 1, 2003,  we
amended each of these  contracts to extend the term through March 31, 2006,  and
to provide for base  salary per annum of  $500,000  for the period from April 1,
2003 to March 31, 2004,  $750,000 for the period from April 1, 2004 to March 31,
2005,  and  $1,000,000  for the  period  from  April 1, 2005 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.


                                      F-24
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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  is  one of  our  stockholders.  In  connection  with  this
transaction,  we also entered into a management  services  agreement pursuant to
which  Mr.  Nacif's  affiliates  will  manage  the  operation  of our  remaining
facilities in Mexico in exchange for use of the remaining  facilities.  The term
of  the  management  services  agreement  is  also  for  a  period  of 6  years.
Additionally,  we have 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 14. Using current market prices, the
purchase commitment would be approximately $18 million per year.

Following  the  reduction in workforce in our Mexico  operations,  we became the
target of workers  rights  activists  who have picketed our  customers,  stuffed
electronic mailboxes with protests and threatened our 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 project a loss of approximately
$75 million in revenue from sales of Mexico-produced merchandise for 2004.

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.

11.      EQUITY

We  have  elected  to  follow  Accounting   Principles  Board  Opinion  No.  25,
"Accounting for Stock Issued to Employees" (APB 25) and related  interpretations
in accounting for its employee stock options  because,  as discussed  below, the
alternative  fair value  accounting  provided for under FASB  Statement No. 123,
"Accounting  for  Stock-Based  Compensation",  requires use of option  valuation
models that were not developed for use in valuing employee stock options.  Under
APB 25, when the exercise  price of our employee stock options equals the market
price of the underlying  stock on the date of 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, 2003, the Plan has 2,573,913 options available for future grant.

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


                                      F-25
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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

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

<TABLE>
<CAPTION>
                                                December 31,
                          -----------------------------------------------------------
                                 2001                2002                 2003
                          ------------------- ------------------- -------------------
                                     Weighted            Weighted            Weighted
                                     Average             Average             Average
                                     Exercise            Exercise            Exercise
                           Options    Price    Options    Price    Options    Price
                          ---------  -------- ---------  -------- ---------  --------
<S>                       <C>         <C>     <C>         <C>     <C>         <C>
Outstanding at beginning
 of year................  2,697,487   $14.29  3,520,737   $11.90  6,376,487   $ 8.89
  Granted...............    955,000     5.18  3,004,000     5.50  3,288,100     3.67
  Exercised.............     (8,500)    3.97     (5,500)    4.39        --        --
  Forfeited.............   (123,250)   12.65   (142,750)   12.14   (738,500)    6.91
                          ---------           ---------           ---------
Outstanding at end of
 year...................  3,520,737   $11.90  6,376,487   $ 8.89   8,926,087  $ 7.13
                          =========           =========            =========
Exercisable at end of
 year...................  2,173,587   $14.29  3,535,487   $11.35   4,028,487  $10.56
Weighted average per
 option fair value
 of options granted
 during the year........              $ 3.89              $ 2.89              $ 1.92
</TABLE>


                                      F-26
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following table summarizes  information  about stock options  outstanding at
December 31, 2003:

                            Options Outstanding            Options Exercisable
                  -----------------------------------     ----------------------
                                 Weighted
                                  Average     Weighted                  Weighted
                                 Remaining     Average                   Average
                     Number     Contractual   Exercise       Number     Exercise
Exercise Price    Outstanding      Life        Price      Exercisable    Price
------------------------------------------------------    ----------------------
$2.84 -   3.65     2,688,100       9.5         $3.63               --    $ 0.00
 3.94 -   5.09     1,121,862       8.0          4.47          487,862      4.87
 5.50              3,004,000       8.3          5.50        1,501,000      5.50
 5.55 -   9.97       503,000       4.6          7.03          430,500      7.20
13.50 -  15.50     1,026,000       4.7         13.51        1,026,000     13.51
18.44 -  18.54        39,625       4.7         18.49           39,625     18.49
25.00                500,000       5.3         25.00          500,000     25.00
33.13 -  39.97        41,500       5.2         39.31           41,500     39.31
45.50                  2,000       5.3         45.50            2,000     45.50
                  ----------                              -----------
$2.84 -  45.50     8,926,087       7.8         $7.13        4,028,487    $10.56
                  ==========                              ===========

12. EQUITY TRANSACTIONS

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

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.  Warrant was valued  using the  Black-Scholes  option  valuation
model with the following  assumptions:  risk-free  interest rate of 4%; dividend
yields of 0%;  volatility  factors of the  expected  market  price of our common
stock of 0.51; and an expected life of four years.

In November  2003,  we issued an aggregate of 200,000  shares of common stock to
Antonio  Haddad Haddad,  Miguel Angel Haddad Yunes,  Mario Alberto Haddad Yunes,
and  Marco  Antonio  Haddad  Yunes  in  partial  settlement  of the  balance  of


                                      F-27
<PAGE>

                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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

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

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

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

13.      SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION


                                       2001             2002             2003
                                   -----------      -----------      -----------
Cash paid for interest .......     $ 4,473,000      $ 2,361,000      $ 2,856,000
                                   ===========      ===========      ===========
Cash paid (refunded) for
   income taxes ..............     $(2,554,000)     $(5,086,000)     $   378,000
                                   ===========      ===========      ===========


During  2001,  we  transferred  $5.5  million  in  receivables  to the seller in
connection with the purchase of Ajalpan.  In 2002, we acquired certain assets of
a twill mill located in Puebla, Mexico.  Included in the consideration paid were
100,000 shares of Series A Preferred Stock valued at $8.8 million,  a 25% equity
stake in our  wholly-owned  subsidiary,  Tarrant Mexico and the  cancellation of
approximately  $56.9 million of certain notes and accounts  receivable  due from
the sellers and their  affiliates  for a total  purchase price of $87.4 million.
These non-cash transactions have been excluded from the respective statements of
cash flows.

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

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

14.      RELATED-PARTY TRANSACTIONS

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

                                             2001          2002          2003
                                         -----------   -----------   -----------
Sales to related parties ..............  $ 8,340,000   $ 4,864,000   $22,296,000
Purchases from related parties ........  $32,095,000   $76,231,000   $72,329,000

As of December 31, 2002 and 2003,  related party  affiliates were indebted to us
in the amounts of $14.6 million and $22.9 million,  respectively.  These include
amounts due from our  shareholders  of $5.6 million and $4.8 million at December
31,  2002 and  2003,  respectively,  which  have  been  shown as  reductions  to
shareholders' equity in the accompanying  financial  statements.  Total interest
paid by related  party  affiliates,  the  Chairman  and the Vice  Chairman  were
$368,000  and  $374,000  for  the  years  ended  December  31,  2002  and  2003,
respectively. During


                                      F-28
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2001,  Kamel  Nacif  advanced us a total of $18.1  million  for working  capital
purposes. Such advances were short-term and were paid back within 30 days of the
advance.

From time to time, we have borrowed  funds from,  and advanced funds to, certain
officers and principal shareholders,  including Messrs. Guez, Kay and Nacif. The
maximum  amount of such  borrowings  from Mr. Kay during 2003 was $487,000.  The
maximum  amount of such  advances  to Mr.  Guez  during  2003 was  approximately
$4,879,000.  Mr.  Guez  had an  outstanding  advance  from us in the  amount  of
$4,796,000 as of December 31, 2003. As of December 31, 2002, we were indebted to
Mr. Kay in the amount of $487,000.  Mr. Guez had an outstanding  advance from us
of  $4,879,000  as of December 31, 2002. As of December 31, 2002 Mr. Kamel Nacif
was indebted to us for $723,000.  All advances to, and borrowings from, Mr. Guez
and Mr. Kay in 2003 bore  interest at the rate of 7.75%.  All existing  loans to
officers  and  directors  before  July 30,  2002  are  grandfathered  under  the
Sarbanes-Oxley  Act of 2002. No further  personal loans will be made to officers
and directors in compliance with the Sarbanes-Oxley Act.

Since June 2003, United Apparel Venture, LLC has been selling to Seven Licensing
Company, LLC ("Seven Licensing"),  jeans wear bearing the brand "Seven7",  which
is ultimately  purchased by Express.  Seven Licensing is  beneficially  owned by
Gerard Guez.  Total sales to Seven Licensing  during the year ended December 31,
2003 was $8.1 million.  In 1998, a California limited liability company owned by
our Chairman and Vice Chairman purchased 2,300,000 shares of the common stock of
Tag- It Pacific, Inc. ("Tag-It") (or approximately 37% of such common stock then
outstanding).  Tag-It is a provider of brand identity  programs to manufacturers
and retailers of apparel and accessories. Starting from 1998, Tag-It assumed the
responsibility  for  managing  and  sourcing  all  trim  and  packaging  used in
connection  with  products  manufactured  by or on behalf of us in Mexico.  This
arrangement is terminable by Tag-It or us at any time. 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.  We
purchased $17.9 million;  $23.9 million and $16.8 million of trim inventory from
Tag-It for the years ended December 31, 2001,  2002 and 2003,  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  $5.8  million,  $37.0 million and $37.1
million of finished  goods and service  from Azteca and its  affiliates  for the
years ended December 31, 2001, 2002 and 2003,  respectively.  Our total sales of
fabric and  service  to Azteca in 2001,  2002 and 2003 were $7.2  million,  $2.9
million and $9.9 million,  respectively. Two and one half percent of gross sales
as management fees were paid in 2002 and 2003 to each of the members of UAV, per
the operating agreement.  The amount paid to Azteca, the minority member of UAV,
totaled  $2.0  million  and $1.7  million  in 2002 and 2003,  respectively.  Net
amounts due from these  related  parties as of  December  31, 2002 and 2003 were
$3.2 million and $17.5 million, respectively.

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


                                      F-29
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Trans  Textil,  an entity  controlled by Mr. Nacif and his family  members,  was
initially  commissioned  by us to  construct  and  develop the plant in December
1998. Subsequent to completion, Trans Textil purchased and/or leased the plant's
manufacturing  equipment  from us and entered into a production  agreement  that
gave us the first right to all production capacity of the plant. This production
agreement  included the option for us to purchase  the facility and  discontinue
the  production  agreement  with Trans Textil  through  September  30, 2002.  We
exercised  the option and acquired the plant as  described  above.  We purchased
$8.5  million,  $12.3  million and $14.9  million of fabric from Trans Textil in
2001, 2002 and 2003,  respectively.  We sold $0.3 million, $2.0 million and $2.6
million  of fabric  to Trans  Textil in 2001,  2002 and 2003,  respectively.  We
purchased $3.6 million of fabric from Acabados y Terminados, an affiliate of Mr.
Nacif, in the year ended December 31, 2003.

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.  The  assets  subject  to  these  leases  have  a  net  book  value  of
approximately  $92  million as of December  31,  2003.  Mr.  Nacif is one of our
shareholders.  In  connection  with this  transaction,  we also  entered  into a
management  services  agreement  pursuant to which Mr. Nacif's  affiliates  will
manage the  operation of our  remaining  facilities  in Mexico.  The term of the
management services agreement is 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 10, "Commitments and Contingencies."  Using current market
prices, the purchase commitment would be approximately $18 million per year.

We were  indebted to Mr.  Kamel Nacif and his  affiliates  in the amount of $5.2
million  and $5.4  million  as of  December  31,  2002 and  December  31,  2003,
respectively.

Under lease agreements  entered into between two entities owned by the Chairman,
Vice  Chairman  and us,  we paid  $1,299,000  in  2001,  $1,330,000  in 2002 and
$1,330,000  in 2003 for rent for office and warehouse  facilities.  One of these
lease  agreements  expires in June  2004;  the second  lease is  currently  on a
month-to-month basis pending our planned relocation.

We reimbursed our principal  shareholder for fuel and related expenses  whenever
our  executives  used the aircraft for business  purposes from 477 Aviation LLC,
which is wholly owned by our principal shareholder.

At December  31, 2002 and 2003,  we had various  employee  receivables  totaling
$457,000 and $450,000, respectively, included in due from related parties.

We entered lease  agreements  with the former  owners of Industrial  Exportadora
Famian and our former employees.  Under theses leases, we paid $832,000 in 2001,
$843,000 in 2002 and $943,000 in 2003 for rent for sewing and washing facilities
in Tehuacan, Mexico. All these lease agreements were cancelled in November 2003.

On February 12, 2001, we entered into an agreement  with Aris  Industries,  Inc.
("Aris")  under which Aris issued 1.5 million  shares of its common  stock to us
and  undertook to repay either $2.5 million in cash or its  equivalent in common
stock  to  us on  December  31,  2001  in  full  satisfaction  of  the  debt  of
approximately  $5.8  million.  As of February  20,  2002,  Aris had issued us an
aggregate of 8,117,647  shares of its common stock  including 1.5 million shares
previously  issued in full satisfaction of this debt. On March 27, 2002, we sold
this stock to an unrelated  third party for an aggregate  of  $1,785,882.  As of
December 31, 2002,  Messrs.  Guez and Kay jointly owned  approximately 7% of the
outstanding shares of Aris.


                                      F-30
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

15.      OPERATIONS BY GEOGRAPHIC AREAS

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

<TABLE>
<CAPTION>
                                                                            Adjustments
                                    United                                      and
                                    States         Asia         Mexico      Eliminations     Total
                                 ------------  ------------  ------------  -------------  ------------
<S>                              <C>           <C>           <C>           <C>            <C>
2001
----
Sales..........................  $312,587,000  $  5,952,000  $ 11,714,000  $          --  $330,253,000
Inter-company sales............    12,341,000    86,291,000    77,062,000   (175,694,000)           --
                                 ------------  ------------  ------------  -------------  ------------
Total revenue..................  $324,928,000  $ 92,243,000  $ 88,776,000  $(175,694,000) $330,253,000
                                 ============  ============  ============  =============  ============
Income (loss) from operations..  $  5,364,000  $  5,369,000  $ (8,803,000) $          --  $  1,930,000
                                 ============  ============  ============  =============  ============
Interest income................  $         --  $      2,000  $  3,254,000  $          --  $  3,256,000
                                 ============  ============  ============  =============  ============
Interest expense...............  $  7,373,000  $     33,000  $    402,000  $          --  $  7,808,000
                                 ============  ============  ============  =============  ============
Provision for depreciation
 and amortization..............  $  3,537,000  $  2,057,000  $  8,971,000  $          --  $ 14,565,000
                                 ============  ============  ============  =============  ============
Capital expenditures...........  $    764,000  $     35,000  $  3,120,000  $          --  $  3,919,000
                                 ============  ============  ============  =============  ============
Total assets...................  $176,178,000  $ 97,175,000  $121,188,000  $(106,074,000) $288,467,000
                                 ============  ============  ============  =============  ============
2002
----
Sales..........................  $332,877,000  $  3,943,000  $ 10,571,000  $          --  $347,391,000
Inter-company sales............    14,474,000    90,830,000    82,531,000   (187,835,000)           --
                                 ------------  ------------  ------------  -------------  ------------
Total revenue..................  $347,351,000  $ 94,773,000  $ 93,102,000  $(187,835,000) $347,391,000
                                 ============  ============  ============  =============  ============
Income (loss) from operations..  $  6,916,000  $  4,950,000  $ (7,396,000) $          --  $  4,470,000
                                 ============  ============  ============  =============  ============
Interest income................  $    287,000  $  4,453,000  $      8,000  $          --  $  4,748,000
                                 ============  ============  ============  =============  ============
Interest expense...............  $  5,160,000  $         --  $    284,000  $          --  $  5,444,000
                                 ============  ============  ============  =============  ============
Provision for depreciation
 and amortization..............  $  1,231,000  $    452,000  $  8,447,000  $          --  $ 10,130,000
                                 ============  ============  ============  =============  ============
Capital expenditures...........  $    367,000  $     34,000  $  2,584,000  $          --  $  2,985,000
                                 ============  ============  ============  =============  ============
Total assets...................  $165,036,000  $107,266,000  $292,113,000  $ 247,971,000  $316,444,000
                                 ============  ============  ============  =============  ============
2003
----
Sales..........................  $291,993,000  $  7,359,000  $ 21,071,000  $          --  $320,423,000
Inter-company sales............    33,441,000   112,481,000    75,716,000   (221,638,000)           --
                                 ------------  ------------  ------------  -------------  ------------
Total revenue..................  $325,434,000  $119,840,000  $ 96,787,000  $(221,638,000) $320,423,000
                                 ============  ============  ============  =============  ============
Income (loss) from operations..  $(25,537,000) $  7,556,000  $(15,414,000) $          --  $(33,395,000)
                                 ============  ============  ============  =============  ============
Interest income................  $    419,000  $         --  $      6,000  $          --  $    425,000
                                 ============  ============  ============  =============  ============
Interest expense...............  $  5,215,000  $     41,000  $    347,000  $          --  $  5,603,000
                                 ============  ============  ============  =============  ============
Provision for depreciation
 and amortization..............  $  1,547,000  $    261,000  $ 14,290,000  $          --  $ 16,098,000
                                 ============  ============  ============  =============  ============
Capital expenditures...........  $     94,000  $     84,000  $    190,000  $          --  $    368,000
                                 ============  ============  ============  =============  ============
Total assets...................  $128,058,000  $117,783,000  $201,050,000  $(193,786,000) $253,105,000
                                 ============  ============  ============  =============  ============
</TABLE>


                                      F-31
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

16.      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 2001,  2002 and 2003  amounted to
approximately $155,000, $149,000 and $157,000 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 2001,  2002 and 2003  amounted  to  approximately  $289,000,
$249,000 and $256,000 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.

17.      OTHER INCOME AND EXPENSE

Other income and expense consists of the following:

                                                2001        2002         2003
                                            ----------   ----------   ----------
Rental and lease income .................   $  586,305   $  495,754   $3,957,365
Unrealized gain on foreign currency .....      103,705         --           --
Realized gain on foreign currency .......         --      1,123,076      304,060
Royalty income ..........................      180,833       62,166         --
Sales of damaged goods and samples ......      192,680         --           --
Gain on legal settlement ................         --        473,041      235,785
Other items .............................      789,543      493,938      287,269
                                            ----------   ----------   ----------
Total other income ......................   $1,853,066   $2,647,975   $4,784,479
                                            ==========   ==========   ==========

Royalty expense .........................   $  500,000   $  655,691   $  242,426
Unrealized loss on foreign currency .....         --      1,014,696      560,602
Loss on sale of fixed assets ............         --           --        593,626
Other items .............................      355,994      333,686       28,692
                                            ----------   ----------   ----------
Total other expense .....................   $  855,994   $2,004,073   $1,425,346
                                            ==========   ==========   ==========


                                      F-32
<PAGE>


                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

18.      QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the quarterly  results of operations for the years
ended December 31, 2002 and 2003:

<TABLE>
<CAPTION>
                                            Quarter Ended                      Year
                          -----------------------------------------------      Ended
                          Mar. 31(1)    Jun. 30     Sept. 30     Dec. 31      Dec. 31
                          ---------    ---------    ---------   ---------    ---------
                                       (In thousands, except per share data)
<S>                       <C>          <C>          <C>         <C>          <C>
2002
----
Net sales .............   $  65,164    $  95,307    $  94,328   $  92,592    $ 347,391
Gross profit ..........       8,419       14,424       14,230       8,236       45,309
Operating income
 (loss) ...............        (831)       4,780        3,626      (3,105)       4,470
Income (loss) before
 cumulative effect of
 accounting change ....   $  (1,726)   $   1,302    $   1,127   $  (1,917)   $  (1,214)
Net income (loss) .....   $  (6,597)   $   1,302    $   1,127   $  (1,917)   $  (6,085)
Income (loss) per share
 before cumulative
 effect of accounting
 change:
  Basic ...............   $    (.11)   $     .08    $     .07   $   (0.12)   $   (0.08)
  Diluted .............   $    (.11)   $     .08    $     .07   $   (0.12)   $   (0.08)
Net income (loss) per
 common share:
  Basic ...............   $    (.41)   $     .08    $     .07   $   (0.12)   $   (0.38)
  Diluted .............   $    (.41)   $     .08    $     .07   $   (0.12)   $   (0.38)
Weighted average shares
 outstanding:
  Basic ...............      15,832       15,832       15,836      15,836       15,834
  Diluted .............      15,832       16,099       15,931      15,836       15,834

2003
----
Net sales .............   $  78,736    $  78,194    $  96,458   $  67,035    $ 320,423
Gross profit ..........       8,802         (432)      11,514      12,094       31,978
Operating income
 (loss) ...............      (1,310)     (34,367)       1,448         834      (33,395)
Income (loss) before
 cumulative effect of
 accounting change ....   $  (3,879)   $ (32,571)   $     138   $     427    $ (35,885)
Net income (loss) .....   $  (3,879)   $ (32,571)   $     138   $     427    $ (35,885)
Income (loss) per share
 before cumulative
 effect of accounting
 change:
  Basic ...............   $   (0.24)   $   (1.94)   $    0.01   $    0.02    $   (1.97)
  Diluted .............   $   (0.24)   $   (1.94)   $    0.01   $    0.02    $   (1.97)
Net income (loss) per
 common share:
  Basic ...............   $   (0.24)   $   (1.94)   $    0.01   $    0.02    $   (1.97)
  Diluted .............   $   (0.24)   $   (1.94)   $    0.01   $    0.02    $   (1.97)
Weighted average shares
 outstanding:
  Basic ...............      15,837       16,832       18,765      21,426       18,215
  Diluted .............      15,837       16,832       18,767      26,250       18,215


                                      F-33
<PAGE>

                              TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


----------
<FN>
(1)     Effective January 1, 2002, we adopted SFAS No. 142,  "Goodwill and Other
        Intangible  Assets."  According  to this  statement,  goodwill and other
        intangible  assets  with  indefinite  lives  are no  longer  subject  to
        amortization, but rather an annual assessment of impairment applied on a
        fair-value-based  test.  We  adopted  SFAS No.  142 in  fiscal  2002 and
        performed its first annual  assessment of impairment,  which resulted in
        an  impairment  loss of $4.9  million  recorded in the first  quarter of
        2002.
</FN>
</TABLE>

19.      SUBSEQUENT EVENTS

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. The warrant has an exercise price of $3.35
per share, is fully vested and exercisable, and has a term of five years.


                                      F-34
<PAGE>


<TABLE>
                                   SCHEDULE II

                              TARRANT APPAREL GROUP

                        VALUATION AND QUALIFYING ACCOUNTS

<CAPTION>
                                                 Additions        Additions
                                Balance at      Charged to        Charged                             Balance
                                Beginning        Costs and        to Other                            at End
                                 of Year         Expenses         Accounts        Deductions          of Year
                               -----------      -----------      -----------      -----------       -----------
<S>                            <C>              <C>              <C>              <C>               <C>
For the year ended
 December 31, 2001
  Allowance for returns
   and discounts ........      $ 3,892,740      $      --        $  (758,754)     $  (452,385)      $ 2,681,601
  Allowance for bad debt       $   442,667      $ 2,283,226      $   758,754      $      --         $ 3,484,647
                               ===========      ===========      ===========      ===========       ===========
For the year ended
 December 31, 2002
  Allowance for returns
   and discounts ........      $ 2,681,601      $   453,167      $      --        $      --         $ 3,134,768
  Allowance for bad debt       $ 3,484,647      $      --        $      --        $(2,302,794)      $ 1,181,853
                               ===========      ===========      ===========      ===========       ===========
For the year ended
 December 31, 2003
  Allowance for returns
   and discounts ........      $ 3,134,768      $      --        $      --        $  (324,387)      $ 2,810,381
  Allowance for bad debt       $ 1,181,853      $   234,149      $      --        $      --         $ 1,416,002
                               ===========      ===========      ===========      ===========       ===========
</TABLE>


                                      F-35
<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  Patrick Chow and Gerard Guez, 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
       ---------                         -----                         ----

    /S/ GERARD GUEZ          Chief Executive Officer and          April 7, 2004
-----------------------         Chairman of the Board of
      Gerard Guez               Directorsd

     /S/ TODD KAY            Vice Chairman of the Board of        April 7, 2004
-----------------------         Directors
       Todd Kay

   /S/ PATRICK CHOW          Chief Financial Officer, Treasurer   April 7, 2004
-----------------------         and Director
     Patrick Chow

    /S/ BARRY AVED           (Principal Financial and Accounting  April 7, 2004
-----------------------         Officer) President and Director
      Barry Aved

    /S/ LARRY RUSS           Director                             April 7, 2004
-----------------------
      Larry Russ

 /S/ STEPHANE FAROUZE        Director                             April 7, 2004
-----------------------
   Stephane Farouze

  /S/ MITCHELL SIMBAL        Director                             April 7, 2004
-----------------------
    Mitchell Simbal

  /S/ JOSEPH MIZRACHI        Director                             April 7, 2004
-----------------------
    Joseph Mizrachi

  /S/ MILTON KOFFMAN         Director                             April 7, 2004
-----------------------
    Milton Koffman


<PAGE>


                             TARRANT APPAREL GROUP

                                  EXHIBIT INDEX

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

3.1               Restated Articles of Incorporation of the Company.  (1)

3.1.1             Certificate    of   Amendment   of   Restated    Articles   of
                  Incorporation. (16)

3.1.2             Certificate    of   Amendment   of   Restated    Articles   of
                  Incorporation. (16)

3.1.3             Certificate    of   Amendment   of   Restated    Articles   of
                  Incorporation. (25)

3.2               Restated Bylaws of the Company. (1)

4.1               Specimen of Common Stock Certificate. (2)

4.2               Rights Agreement dated as of November 21, 2003, by and between
                  the Company 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. (24)

4.3               Certificate  of  Determination  of  Preferences,   Rights  and
                  Limitations of Series B Preferred Stock. (26)

10.1              1995 Stock Option Plan dated as of May 1, 1995. (1)

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

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

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

10.5              Registration  Rights  Agreement  dated as of July 28, 1995, by
                  and among the Company and Limited Direct Associates, L.P.(3)

10.6              Reorganization and Tax  Indemnification  Agreement dated as of
                  June 13, 1995, by and among the Company and its  shareholders.
                  (3)

10.7              Employment Agreement effective January 1, 1998, by and between
                  the Company and Gerard Guez. (6)

10.7.1            First  amendment to Employment  Agreement  dated as of January
                  10, 2000 by and between Gerard Guez and the Company. (12)


                                        i
<PAGE>


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

10.7.2            Second  Amendment to Employment  Agreement dated April 1, 2003
                  between Tarrant Apparel Group and Gerard Guez. (20)

10.8              Employment Agreement effective January 1, 1998, by and between
                  the Company and Todd Kay. (6)

10.8.1            First  Amendment to Employment  Agreement  dated as of January
                  10, 2000 by and between Todd Kay and the Company. (12)

10.8.2            Second  Amendment to Employment  Agreement dated April 1, 2003
                  between Tarrant Apparel Group and Todd Kay. (20)

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

10.10             Guaranty, Pledge & Security Agreement entered into as of March
                  25, 1996, by and between Gerard Guez and the Company. (4)

10.11             Guaranty, Pledge & Security Agreement entered into as of March
                  25, 1996, by and between Todd Kay and the Company. (4)

10.12             Form of  Indemnification  Agreement with directors and certain
                  executive officers. (5)

10.13             Special Deposit Account Agreement. (5)

10.14             Employment  Agreement  effective as of the twenty-third day of
                  March,  1999, by and between Charles  Ghailian and the Company
                  to pay CMG Inc. (7)

10.15             Noncompetition  Agreement  dated as of August 1, 1999,  by and
                  among Tag Mex, Inc., NO! Jeans, Inc., Antonio Haddad,  Tarrant
                  Apparel Group and the  shareholders of Industrial  Exportadora
                  Famian, S.A. de C.V. and Coordinados Elite, S.A, de C.V. (8)

10.16             Loan Agreement  dated September 1, 1999 by and between General
                  Electric Capital Corporation and Tarrant Apparel Group (8)

10.16.1           Amendment No. 1 to Loan Agreement  dated September 12, 1999 by
                  and between General Electric  Capital  Corporation and Tarrant
                  Apparel Group (8)

10.16.2           Modification Agreement entered into as of June 7, 2002, by and
                  between  General  Electric  Capital  Corporation  and  Tarrant
                  Apparel Group. (16)

10.17             Promissory Note dated September 1, 1999 to pay to the order of
                  General Electric Capital  Corporation the loan amount referred
                  to in Exhibit 10.77. (8)

10.18             Corporate  Guaranty dated September 1, 1999 by Tarrant Mexico,
                  S. de R.L. de C.V. in connection with loan agreement  referred
                  to in Exhibit 10.77. (8)

10.18.1           Amendment No. 1 to Corporate Guaranty dated September 12, 1999
                  by Tarrant Mexico,  S. de R.L. de C.V. in connection with loan
                  agreement referred to in Exhibit 10.77 (8)


                                       ii
<PAGE>


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

10.19             Master Security  Agreement made as of September 1, 1999 by and
                  between  General  Electric  Capital  Corporation  and  Tarrant
                  Mexico,  S. de R.L. de C.V. in connection  with loan agreement
                  referred to in Exhibit 10.77 (8)

10.19.1           Amendment  No.  1 to  Master  Security  Agreement  made  as of
                  September  12, 1999 by and between  General  Electric  Capital
                  Corporation  and  Tarrant  Mexico,  S.  de  R.L.  de  C.V.  in
                  connection  with loan  agreement  referred to in Exhibit 10.77
                  (8)

10.20             Loan Agreement dated December 30, 1999 by and between Standard
                  Chartered Bank and Tarrant Apparel Group. (9)

10.21             Factoring Agreement dated November 24, 1999 by and between MTB
                  Bank and Rocky Apparel, LLC. (9)

10.22             Machinery and Equipment  Agreement  dated November 17, 1999 by
                  and  between  Tarrant  Mexico,  S. de R.L.  de C.V and Banc of
                  America Leasing & Capital, L.L.C. (9)

10.23             Revolving  Credit,  Factoring  and  Security  Agreement  dated
                  January 21, 2000 by and between  Tarrant  Apparel  Group,  Tag
                  Mex, Inc., and GMAC Commercial Credit LLC. (9)

10.23.1           First  Amendment to Revolving  Credit,  factoring and security
                  agreement  dated  January  21,  2000  by and  between  Tarrant
                  Apparel Group,  Tag Mex, Inc. and GMAC Commercial  Credit LLC,
                  (11)

10.23.2           Second Amendment to Revolving  Credit,  factoring and security
                  agreement  dated  January  21,  2000  by and  between  Tarrant
                  Apparel Group,  Tag Mex, Inc. and GMAC Commercial  Credit LLC,
                  (11)

10.23.3           Third  Amendment to Revolving  Credit,  factoring and security
                  agreement  dated  January  21,  2000  by and  between  Tarrant
                  Apparel Group,  Tag Mex, Inc. and GMAC Commercial  Credit LLC.
                  (11)

10.23.4           Letter agreement dated June 29,2001 by and between the Company
                  and GMAC Commercial Credit. (13)

10.23.5           Waiver  agreement  dated November 2001 by and between  Tarrant
                  Apparel Group And GMAC Commercial Credit LLC. (14)

10.23.6           Letter  Amendment  dated  March  2002 by and  between  Tarrant
                  Apparel Group, Tag Mex, Inc.,  Fashion  Resource (TCL),  Inc.,
                  United Apparel Ventures,  LLC and GMAC Commercial Credit, LLC.
                  Reference is made to Revolving Credit,  Factoring and Security
                  Agreement dated January 21, 2000. (15)

10.23.7           Letter  Amendment  dated  January  24,  2003  between  Tarrant
                  Apparel Group, Tag Mex, Inc.,  Fashion  Resource (TCL),  Inc.,
                  United Apparel Ventures,  LLC and GMAC Commercial Credit, LLC.
                  Reference is made to Revolving Credit,  Factoring and Security
                  Agreement dated January 21, 2000. (18)

10.23.8           Waiver dated November 13, 2002 between  Tarrant Apparel Group,
                  Tag Mex, Inc.,  Fashion Resource (TCL),  Inc.,  United Apparel
                  Ventures,  LLC and GMAC Commercial  Credit,  LLC. Reference is
                  made to Revolving  Credit,  Factoring  and Security  Agreement
                  dated January 21, 2000. (18)


                                       iii
<PAGE>


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

10.23.9           Letter  Amendment  dated May 9, 2003,  between Tarrant Apparel
                  Group,  Tag Mex, Inc.,  Fashion Resource (TCL),  Inc.,  United
                  Apparel  Ventures,   LLC  and  GMAC  Commercial  Credit,  LLC.
                  Reference is made to Revolving Credit,  Factoring and Security
                  Agreement dated January 21, 2000. (19)

10.23.10          Letter  Amendment  dated  August  14,  2003,  between  Tarrant
                  Apparel Group, Tag Mex, Inc.,  Fashion  Resource (TCL),  Inc.,
                  United Apparel Ventures,  LLC and GMAC Commercial Credit, LLC.
                  Reference is made to Revolving Credit,  Factoring and Security
                  Agreement dated January 21, 2000. (23)

10.23.11          Letter  Amendment  dated  October 28,  2003,  between  Tarrant
                  Apparel Group, Tag Mex, Inc.,  Fashion  Resource (TCL),  Inc.,
                  United Apparel Ventures,  LLC and GMAC Commercial Credit, LLC.
                  Reference is made to Revolving Credit,  Factoring and Security
                  Agreement dated January 21, 2000. (23)

10.24             Agreement  for Purchase of Assets dated April 12, 2000, by and
                  among Harvest Wear, Inc., a California  corporation (HW), Mapa
                  Trading, LTD, a Hong Kong corporation (Mapa), Needletex, Inc.,
                  a California  corporation  (Needletex),  Patrick Bensimon (the
                  Shareholder), Jane Doe International LLC, (formally Needletex,
                  LLC) a Delaware  limited  liability  company (the  Purchaser).
                  (10)

10.25             Promissory  note dated  February  28, 2001 in the amount of US
                  $4,119,545.06  to pay to the order of Standard  Chartered Bank
                  (11)

10.26             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. (19)

10.27             Employment  Agreement effective January 7, 2002 by and between
                  Patrick Chow and the Company. (14)

10.27.1           First  Amendment to Employment  Agreement  dated April 1, 2003
                  between Tarrant Apparel Group and Patrick Chow. (20)

10.28             Security  Agreement  entered in to as of April 9, 2001, by and
                  between  Banco  Nacional  De  Comercio  Exterior,   Industrial
                  Exportadora Famian S.A. and Tarrant Apparel Group. (14)

10.29             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. (16)

10.29.1           Conditional Consent Agreement dated December 31, 2002, between
                  UPS  Capital  Global  Trade  Finance  Corporation  and Fashion
                  Resource (TCL), Inc. (18)

10.30             Guaranty Agreement dated as of May 30, 2002 by and between UPS
                  Capital Global Trade Finance Corporation and Gerard Guez. (16)


                                       iv
<PAGE>


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

10.31             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. (16)

10.31.1           Charge  Over Shares  dated June 13,  2002 by Fashion  Resource
                  (TCL),  Inc.  in favor of UPS  Capital  Global  Trade  Finance
                  Corporation. (16)

10.31.2           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. (16)

10.31.3           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 (20)

10.31.4           Letter  Agreement  dated  September  1,  2003,  among  Tarrant
                  Company Limited,  Marble Limited,  Trade Link Holdings Limited
                  and UPS Capital Global Trade Finance Corporation. (23)

10.31.5           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

10.32             Assignment  of  Promissory  Note by Tarrant  Apparel  Group to
                  Tarrant  Company  Limited and to Trade Link  Holdings  Company
                  dated December 26, 2001. (16)

10.33             Promissory Note dated July 1, 2002 by Tarrant Apparel Group in
                  favor of Todd Kay. (16)

10.33.1           Amendment to Promissory  Note dated  January 2, 2003,  between
                  Todd Kay and the Company. (18)

10.34             Agreement for Purchase of Assets and Stock dated  December 31,
                  2002, by and among the Company,  Tarrant Mexico, S. de R.L. de
                  C.V.,  Machrima Luxembourg  International,  Sarl, Trans Textil
                  International,  S.A. de C.V.,  Inmobiliaria  Cuadros,  S.A. de
                  C.V., Rosa Lisette Nacif  Benavides,  Gazi Nacif Borge,  Jorge
                  Miguel Echevarria Vazquez, and Kamel Nacif Borge.+ (17)

10.35             Exclusive  Distribution Agreement dated April 1, 2003, between
                  Federated  Merchandising Group, an unincorporated  division of
                  Federated Department Stores, and Private Brands, Inc. (19)

10.36             Unconditional  Guaranty of Performance dated April 1, 2003, by
                  Tarrant Apparel Group. (19)

10.37             Charge Over Shares dated February 26, 2003,  between  Machrima
                  Luxembourg  International  Sarl and UPS Global  Trade  Finance
                  Corporation. (19)

10.38             Promissory  Note  dated May 31,  2003  made by Gerard  Guez in
                  favor of Tarrant Apparel Group. (20)

10.39             Indemnification Agreement dated April 10, 2003 between Tarrant
                  Apparel Group and Seven Licensing Company, LLC. (20)


                                        v
<PAGE>


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

10.40             Form of Subscription  Agreement,  by and among the Company and
                  the Purchaser to be identified therein. (21)

10.41             Registration  Rights  Agreement dated October 17, 2003, by and
                  among the Company and Sanders  Morris Harris Inc. as agent and
                  attorney-in-fact for the Purchasers identified therein. (21)

10.42             Placement Agent Agreement dated October 13, 2003, by and among
                  the Company and Sanders Morris Harris Inc. (21)

10.43             Common Stock  Purchase  Warrant dated October 17, 2003, by and
                  between the Company and Sanders Morris Harris Inc. (21)

10.44             Form of Voting Agreement, by and between Sanders Morris Harris
                  Inc. and the Shareholder to be identified therein. (22)

10.45             Lease Agreement,  dated as of August 29, 2003, between Tarrant
                  Mexico S. de R.L. de C.V. and Acabados Y Cortes  Textiles S.A.
                  de C.V. (21)

10.46             Lease Agreement,  dated as of August 29, 2003, between Tarrant
                  Mexico S. de R.L. de C.V. and Acabados Y Cortes  Textiles S.A.
                  de C.V. (21)

10.47             Purchase Commitment Agreement, dated October 16, 2003, between
                  Tarrant  Mexico  S. de R.L.  de C.V.  and  Acabados  Y  Cortes
                  Textiles S.A. de C.V. (21)

10.48             Employment  Agreement,  effective  as of  September  1,  2003,
                  between the Company and Barry Aved. (23)

10.49             Employment  Agreement,  dated  October 24,  2003,  between the
                  Company and Henry Chu. (23)

10.50             Placement  Agent  Agreement dated January 23, 2004 between the
                  Company and Sanders Morris Harris Inc. (27)

10.51             Form of  Subscription  Agreement  between  the Company and the
                  investor to be identified therein. (27)

10.52             Common Stock  Purchase  Warrant dated January 26, 2004 between
                  the Company and Sanders Morris Harris Inc. (27)

14.1              Code of Ethical Conduct.

23.1              Consent of Grant Thornton LLP.

23.2              Consent of Ernst & Young LLP.

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

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

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

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

----------
+     All schedules and or exhibits have been omitted.  Any omitted  schedule or
      exhibit will be furnished  supplementally  to the  Securities and Exchange
      Commission upon request.


                                       vi
<PAGE>


(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  Annual  Report on Form 10-K for the
      year ended December 30, 1995.

(4)   Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
      quarter ended March 31, 1996.

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

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

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

(8)   Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
      quarter ended September 30, 1999.

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

(10)  Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2000.

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

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

(13)  Filed as an exhibit to the Company's  Quarterly Report on Form 10Q for the
      quarter ending June 30, 2001.

(14)  Filed as an exhibit  to the  Company's  Annual  Report on Form 10K for the
      year ending December 31, 2001.

(15)  Filed as an exhibit to the Company's  Quarterly Report on Form 10Q for the
      quarter ending March 31, 2002.

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

(17)  Filed as an  exhibit  to the  Company's  Current  Report  on Form 8K dated
      December 31, 2002 and filed on January 15, 2003.

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

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

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

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

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

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

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

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


                                       vii
<PAGE>


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

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


                                      viii