<PAGE>

    As filed with the Securities and Exchange Commission on March 30, 2000
================================================================================

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

                                   FORM 10-K

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

                  For the fiscal year ended December 31, 1999
                                      or

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

            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. [X]

As of March 1, 2000, the aggregate market value of the Common Stock held by non-
affiliates of the registrant was approximately $118,511,003 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 1,
2000: 15,801,467.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be filed with
Securities and Exchange Commission pursuant to Regulation 14A in connection with
the 2000  Annual Meeting are incorporated by reference into Part III of this
Report. Such Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the registrant's fiscal year ended
December 31, 1999.

================================================================================
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                    Page
                                                                                                                    -----
<S>                                                                                                                 <C>
Item 1.   BUSINESS................................................................................................      3
          General.................................................................................................      3
          Business Strategy.......................................................................................      5
          Acquisitions............................................................................................      6
          Vertical Integration....................................................................................      8
          Products................................................................................................      9
          Customers...............................................................................................      9
          Design, Merchandising and Sales.........................................................................     10
          Sourcing................................................................................................     11
          Backlog.................................................................................................     13
          Import Restrictions.....................................................................................     13
          Competition.............................................................................................     14
          Employees...............................................................................................     15

Item 2.   PROPERTIES..............................................................................................     15

Item 3.   LEGAL PROCEEDINGS.......................................................................................     15

Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................     16

Item 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS.................................................................................................     17
          NASDAQ Listing..........................................................................................     17
          Dividend Policy.........................................................................................     17
          Stock Split.............................................................................................     17

Item 6.   SELECTED FINANCIAL DATA.................................................................................     18

Item 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS...................................................................................     19
          General.................................................................................................     19
          Factors That May Affect Future Results..................................................................     20
          Results of Operations...................................................................................     22
          Quarterly Results of Operations.........................................................................     24
          Liquidity and Capital Resources.........................................................................     24

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............................................     26

Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................     26

Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE................................................................................     26

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS........................................................................     27

Item 11.  EXECUTIVE COMPENSATION..................................................................................     27

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT..............................................................................................     27

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................................     27

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.........................................     28

SIGNATURES........................................................................................................    S-1
</TABLE>

                                       2
<PAGE>

                                    PART I

Item 1.   BUSINESS
          --------

General

     This 1999 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, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Those statements include statements regarding the intent, belief or
current expectations of the Company and its management. 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, competitive and
economic factors in the textile and apparel markets, raw materials and other
costs, weather-related delays, general economic conditions and other risks and
uncertainties that may be detailed herein.

     Tarrant Apparel Group (the "Company"), a leading provider of private label
casual apparel, serves specialty retail, mass merchandise and discount
department store chains by designing, merchandising, contracting for the
manufacture of, manufacturing directly and selling casual, moderately-priced
apparel for women, men and children, under private label. In 1999, management
responsibilities were divided between two operating divisions, one responsible
for the production of "fashion" garments and the other for "basic" garments.
Since 1988, when the Company began designing and supplying private label denim
jeans to a single specialty retail store chain, it has successfully expanded its
product lines and built a private label business which during 1999 served over
20 customers. The Company's current products are manufactured in a variety of
woven and knit fabrications and include jeanswear, casual pants, t-shirts,
shorts, blouses, shirts and other tops, dresses, leggings and jackets. See
"Business--Products" and "--Customers."

     Over the past five years, the Company has achieved a compound annual growth
rate in net sales of approximately 19% from $205 million in 1995 to $395 million
in 1999. Pre-tax income has risen approximately 25% on a compound annual basis,
from $8.3 million in 1995 to $20.3 million in 1999.

     The Company continues to geographically diversify its worldwide sourcing
operations. Commencing in the second quarter of 1997, the Company substantially
expanded its use of independent cutting, sewing and finishing contractors in
Mexico, primarily for its increasing sales of basic garments.  The gross sales
of products sourced in Mexico was $271 million in 1999.  The Company expects
that the costs and inefficiencies that initially will occur as a result of this
strategy will, over time, be offset by the benefits of  lower cost production
and better quality control over its products.

On August 1, 1999, the Company acquired all of the outstanding stock of
Industrial Exportadora Famian. S.A. de C.V., and Coordinados Elite, S.A. de
C.V., both Mexican corporations ("Grupo Famian"). Grupo Famian operates seven
apparel production facilities in and near Tehucan, Mexico which have the
capacity to provide "full package production" (i.e., cut, sew, launder, finish
and pack) of 110,000 units per week. The purchase price consisted of  (i)
$1,000,000 cash paid at closing, (ii) a $3,000,000 non interest bearing
promissory note paid in three installments of $1,000,000 each on August 31,
September 30 and October 29, 1999 and (iii) $8,000,000 payable in installments
                 ----------------
of $833,000, $3,000,000, $1,667,000, $1,667,000 and $833,000 on each of March
31, 2000, August 31, 2000, March 31, 2001, March 31, 2002, and September 30,
2002 provided, except with respect to the payment due August 31, 2000, the Grupo
Famian subsidiary meets specified pretax income requirements. See "--Vertical
Integration" and "Acquisitions".

On April 18, 1999, the Company finalized an agreement to acquire certain assets
of a denim mill located in Puebla, Mexico with an annual capacity of 18 million
meters ("Jamil"). The purchase price consisted of $22.0 million paid in cash on
May 7, 1999 and 1,724,000 shares (the "Shares") of the Company's Common Stock
issued on May 24, 1999 valued at $45.3 million. See "--Vertical Integration" and
"Acquisitions".

On March 23, 1999, the Company purchased certain assets of CMG, Inc., a
California corporation ("CMG"). CMG designs, produces and sells private label
and "CHAZZZ" branded woven (denim and twill) and knit apparel for women,
children and men for national chain stores, including J.C. Penny, Sears and
Mervyns.  The purchase price consisted of (i) $4,275,000 plus inventory at cost
payable at closing, (ii) a $2,500,000 non-interest bearing promissory note
payable in three equal installments on the first three anniversary dates of the
closing convertible into 62,550 shares of common stock of the Company, (iii)
$500,000 payable in two equal installments of $250,000 on the second and third
anniversary dates of the closing, and (iv) $1,500,000 payable in three equal
installments of $500,000 on the first three anniversary dates of the closing
provided the CMG division meets specified net sales and pretax income
requirements. See "--Acquisitions".

                                       3
<PAGE>

     On December 2, 1998, the Company contracted to acquire a turn-key facility
being constructed near Puebla, Mexico by an affiliate of the seller of the denim
mill described above. This facility is ultimately expected to have an annual
capacity of approximately 18 million meters of twill and will also house
ancillary facilities to cut, launder and finish garment production. Construction
of this facility commenced in the third quarter of 1998. During the fourth
quarter of 1999, the Company began using this facility for washing, finishing
and packing. It is anticipated that the Company will take full possession of
this facility and begin spinning, weaving, dying and cutting during the year
2000. The Company anticipates that the cost of this facility will be
approximately $90 million. See "--Vertical Integration".

  The Company has no previous history of owning and operating fabric production
facilities and has purchased textile raw materials from third party sources in
the past.

                                       4
<PAGE>

Business Strategy

     Management believes that the following trends currently are shaping apparel
retailing and manufacturing:

     .    The increasing acceptance of casual apparel in the workplace and
          emphasis on a casual, active lifestyle has increased the demand for
          casual, moderately-priced, private label products.

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

     .    A decline in brand loyalty and increased competition among retailers
          due to consolidation have resulted in an increased demand for private
          label apparel which generally offers retailers higher margins and
          permits them to differentiate their products.

     .    The North American Free Trade Agreement ("NAFTA") has reduced many
          trade barriers that previously limited apparel production in Mexico.
          Because of competitive labor costs and shorter transportation
          distances, Mexico represents a cost efficient and timely alternative
          for certain types of apparel production.

     .    The current fashion cycle has increased the demand for apparel
          manufacturers who have demonstrated their ability to rapidly identify
          changes in fashion trends.

     The Company's strategy to take advantage of these trends to become a
principal value-added supplier of casual, moderately-priced, private label
apparel includes the following key elements:

     .    The Company believes that it has established a reputation with its
          customers as a fashion resource--a manufacturer that is capable of
          designing and producing a broad range of quality merchandise and
          reacting rapidly to changing fashion trends.

     .    The Company has developed a diversified network of international
          contract manufacturers and fabric suppliers which enables the Company
          to accept orders of varying size and delivery schedules and to produce
          a broad range of garments at varying prices depending upon lead time
          and other requirements of the customer.

     .    The Company seeks to develop an in-depth understanding of the fashion
          and pricing strategies of its customers and to support those
          strategies with its design expertise, sample-making capability and
          ability to assist customers in market-testing designs by the rapid
          production of small, "test order" quantities of products.

     .    The Company has commenced the vertical integration of its business
          through the development and acquisition of fabric and production
          capacity in Mexico. The Company believes that this strategy will
          increase its production capacity, increase its control over the
          production process, lower costs and shorten lead times.

     .    The Company's size, access to public capital and ability to use its
          stock as currency in acquisitions provides the Company flexibility not
          afforded to other, smaller private label manufacturers.

     The Company believes that by employing these strategies it can attract new
customers and increase sales to existing customers.

                                       5
<PAGE>

Acquisitions

Grupo Famian

     Effective August 1, 1999, the Company purchased all of the outstanding
stock of Industrial Exportadora Famian, S.A. de C.V. and Coordinados Elite, S.A.
de C.V., both Mexican corporations ("Grupo Famian"). Grupo Famian operates seven
apparel production facilities in and near Tehuacan, Mexico which have the
capacity to provide "full package production" (i.e., cut, sew, launder, finish
and pack) of 110,000 units per week. The purchase price consisted of (i)
$1,000,000 paid on closing, (ii) a $3,000,000 non-interest bearing promissory
note payable in three installments of $1,000,000 on each of August 31, September
30 and October 29, 1999 and (iii) $8,000,000 payable in installments of
$833,000, $3,000,000, $1,667,000, $1,667,000 and $883,000 on each of March 31,
2000, August 31, 2000, March 31, 2001, March 31, 2002 and September 30, 2002
provided, except with respect to the payment due August 31, 2000, that the Grupo
Famian subsidiary meets specified pretax income requirements. The purchase price
paid on closing was financed by the Company under its existing bank credit
facilities. The former shareholders of Grupo Famian were granted a security
interest in the shares of Grupo Famian which was released following the October
29, 1999 payment. This transaction has been accounted for as a purchase, and the
purchase price was allocated based on the fair value of assets acquired and
liabilities assumed. The excess of cost over fair value of net assets acquired
will be amortized over 15 years. The operations of Grupo Famian are included
with those of the Company commencing on August 1, 1999.

Jamil Denim Plant

     On April 18, 1999, the Company finalized an agreement to acquire certain
assets of a denim mill located in Puebla, Mexico with an annual capacity of 18
million meters ("Jamil"). The purchase price consisted of $22.0 million in cash
paid on May 7, 1999 and 1,724,000 shares (the "Shares") of the Company's Common
Stock issued on May 24, 1999 valued at $45.3 million.  The Shares will be
distributed to the sellers in three equal installments on April 1, 2000, 2001
and 2002; provided, however, that any distribution (i) shall be offset by any
claims of the Company against the sellers under the asset purchase agreement and
(ii) will be proportionally reduced in the event the assets fail to produce at
least 15 million yards of marketable denim in the fiscal year immediately
preceding the dates of such distributions of Shares. In addition, the Company
has granted the holders of the Shares certain registration rights and the right
to vote the Shares.   The Company has also assumed the obligations of the
sellers under an existing collective bargaining agreement; provided, however,
that the sellers shall reimburse the Company for any costs (including, but not
limited to, salaries and benefits) arising before the closing date or as a
result of this acquisition.

     The Company has entered into a three-year employment agreement with Mr.
Nacif, the principal shareholder of the sellers, pursuant to which Mr. Nacif
shall be entitled to receive (i) an annual base salary of $1 million, subject to
such periodic increases, if any, as the Company may deem to be appropriate, (ii)
reimbursement of all reasonable and documented business expenses, (iii)
participation in all plans sponsored by the Company for employees in general and
(iv) the right (the "Option") for ten years to purchase up to 500,000 shares of
the Company's Common Stock at an exercise price of $25 per share. The Option
will vest in three equal installments on April 1, 2000, 2001 and 2002 and will
terminate upon the termination of Mr. Nacif's employment by the Company;
provided, however, that (i) the vesting of any installment shall be deferred to
the date ten business days before the stated expiration date in the event the
operating income of the Company's Mexican operations does not reach certain
levels, and (ii) if such termination of employment results from Mr. Nacif's
death or permanent disability, any vested portion shall terminate on the earlier
of the stated expiration date or the first anniversary of such termination of
employment. In the event the Company terminates Mr. Nacif's employment without
cause (as defined) the Company shall remain obligated to pay Mr. Nacif an amount
equal to his base salary for the remainder of the stated term. In the event Mr.
Nacif's employment is terminated for any other reason (including death,
disability, resignation or termination with cause), neither party shall have any
further obligation to the other, except that the Company shall pay to Mr. Nacif,
or his estate, all reimbursable expenses and such compensation as is due
prorated through the date of termination.

C M G (Chazzz)

     On March 23, 1999, the Company purchased certain assets of CMG, Inc., a
California corporation ("CMG"). CMG designs,produces and sells private label and
"CHAZZZ"(R) branded woven (denim and twill) and knit apparel for women, children
and men for national chain stores, including J.C. Penney, Sears and Mervyns. The
purchase price consisted of (i) $4,275,000 and an amount equal to seller's cost
of the inventory purchased, payable in cash on closing, (ii) a $2,500,000
non-interest bearing promissory note payable in three equal annual installments
on the first three anniversary dates of the closing convertible into 62,550
shares of common stock of the Company, (iii) $500,000 payable in two equal
installments of $250,000 on the second and third anniversary dates of closing,
and (iv) $1,500,000 payable in three equal installments of $500,000 on the first
three anniversary dates of closing provided the CMG Division meets specified net
sales and pretax income requirements. The purchase price paid on closing was
financed by the Company from its cash flow from operations. The Company was
granted a security interest in the 62,550 shares to secure the performance of
obligations under the purchase agreement, including, without

                                       6
<PAGE>

limitation, the indemnification obligations. This transaction has been accounted
for as a purchase, and the purchase price has been allocated based on the fair
value of assets acquired and liabilities assumed. The excess of cost over fair
value of net assets acquired is being amortized over 15 years. The operations of
CMG have been included with those of the Company commencing on March 23, 1999.

     The Company has entered into an employment agreement with Charles Ghailian,
the sole shareholder of CMG, under which he is employed as President - Chazzz
Division of the Company for a term commencing on March 23, 1999 and ending on
March 31, 2002, and will be paid an annual base salary of $480,000. In the event
the Company terminates his employment without cause, Mr. Ghailian shall be
entitled to receive a lump sum payment of $480,000. In addition, Mr. Ghailian
has agreed not to compete with the Company during the two years following the
termination of his employment for any reason.

  Rocky

     On July 2, 1998, the Company purchased the partnership interests of Rocky
Apparel, L.P., a Delaware limited partnership ("Rocky"). Rocky operates
manufacturing facilities in Mississippi and also sources garments in Mexico. The
purchase price consisted of $7.4 million in cash and 81,000 shares of the Common
Stock of the Company, valued at $1.4 million, paid on closing. In addition, the
Company was required to repay $3.4 million of debt to one of the sellers on
closing and to guarantee the bank indebtedness of Rocky in the amount of $5.0
million. The Company was granted a security interest in the 81,000 shares to
secure the performance of obligations under the purchase agreement, including,
without limitation, the indemnification obligations. This transaction has been
accounted for as a purchase, and the purchase price has been allocated based on
the fair value of assets acquired and liabilities assumed. The excess of cost
over fair value of net assets acquired is being amortized over 15 years. The
operations of Rocky have been included with those of the Company commencing on
July 1, 1998.

     Rocky designs, develops and contracts for the manufacture of men's, women's
and children's denim apparel, for Abercrombie & Fitch, Limited Stores, Express
and Structure.

     In connection with this acquisition, Rocky extended the term of an existing
employment agreement with Gabriel Zeitouni, the President and a former principal
owner of Rocky. Under this employment agreement, Mr. Zeitouni will continue to
be employed as the President of Rocky for a term ending on December 31, 2002,
unless extended by the mutual agreement of the Company and Mr. Zeitouni, will be
paid a base salary which increases from $350,000 for 1998 to $450,000 for 2002
and will receive cash bonuses based upon certain performance criteria. Also, Mr.
Zeitouni was awarded a stock option for 75,000 shares of the Company's Common
Stock which vests periodically through December 31, 2002 subject to certain
performance criteria. In the event the Company terminates his employment without
cause, Mr. Zeitouni shall be entitled to receive (i) a lump sum payment equal to
his base salary for the shorter of the balance of the term or two years and (ii)
accrued bonus, if any, through the date of termination. In the event the Company
terminates Mr. Zeitouni's employment with cause, the Company is obligated to pay
the compensation required by the agreement only through the date of termination.
In addition, Mr. Zeitouni has agreed not to compete with the Company during the
two years following the termination of his employment for cause.

     During 1999, as part of the Company's consolidation effort to improve
efficiencies, the Company discontinued operations at two Rocky facilities and
moved this production to its Mexico based plants.

  MGI

     On February 23, 1998, the Company purchased certain assets of MGI
International Limited, a Turks and Caicos corporation. The assets purchased
consisted primarily of inventory. The purchase price consisted of (i) $4.6
million, together with an amount equal to the seller's cost of the inventory
purchased, paid in cash on closing and (ii) $500,000 paid on July 21, 1998,
together with interest at 7% per annum.

     On February 23, 1998, the Company also purchased certain assets of Marshall
Gobuty International U.S.A., Inc., a California corporation ("MGI USA"). The
assets purchased consisted primarily of inventory. The purchase price consisted
of (i) $500,000, together with an amount equal to the seller's cost of the
inventory purchased, paid in cash on closing and (ii) $500,000 paid on July 21,
1998, together with interest at 7% per annum.

     MGI International Limited and MGI USA (collectively, "MGI") each designs,
develops and contracts for the manufacture of men's apparel, including knit and
woven tops, shirts and outerwear (including jackets), for national chain
department stores, including J.C. Penney and Goody's. The purchase price was
financed by the Company from its cash flow from operations. This transaction has
been accounted for as a purchase and the purchase price has been allocated based
on the fair value of the assets acquired and liabilities assumed. The excess of
cost over fair value of net assets acquired is being amortized over five years.
The operations of MGI have been included with those of the Company commencing on
February 23, 1998. During 1999 management of operations for the MGI division was
consolidated with Chazzz.

                                       7
<PAGE>

Vertical Integration

     In 1997, the Company commenced the vertical integration of its business.
Key elements of this strategy include (i) establishing cutting, sewing, washing,
finishing, packing, shipping and distribution activities in company-owned
facilities or through the acquisition of established contractors and (ii)
establishing fabric production capability through the acquisition of established
mills or the construction of new mills. The Company has no history of operating
textile mills or cutting, sewing, washing, finishing, packing or shipping
operations upon which an evaluation of the prospects of the Company's vertical
integration strategy can be based. In addition, such operations are subject to
the customary risks associated with owning a manufacturing business, including,
but not limited to, the maintenance and management of manufacturing facilities,
equipment, employees and inventories.

  Acquisition of Denim Mill

     On April 18, 1999, the Company finalized an agreement to purchase certain
assets of a denim mill located in Puebla, Mexico with an annual capacity of 18
million meters. The purchase price consisted of $22 million in cash paid on May
6, 1999 and 1,724,000 shares (the "Shares") of the Company's Common Stock. The
Shares will be distributed to the sellers in three equal installments on April
1, 2000, 2001, 2002; provided, however, that any distribution (i) shall be
offset by any claims of the Company against the sellers under the asset purchase
agreement and (ii) will be proportionally reduced in the event the assets fail
to produce at least 15 million yards of marketable denim in the fiscal year
immediately preceding the dates of such distributions of Shares. In addition,
the Company has granted the holders of the Shares certain registration rights
and the right to vote the Shares.

     The Company has also assumed the obligations of the sellers under an
existing collective bargaining agreement; provided, however, that the sellers
shall reimburse the Company for any costs (including, but not limited to,
salaries and benefits) arising before the closing date or as a result of this
acquisition.

     The Company has entered into a three-year employment agreement with Mr.
Nacif, the principal shareholder of the sellers, pursuant to which Mr. Nacif
shall be entitled to receive (i) an annual base salary of $1 million, subject to
such periodic increases, if any, as the Company may deem to be appropriate, (ii)
reimbursement of all reasonable and documented business expenses, (iii)
participation in all plans sponsored by the Company for employees in general and
(iv) the right (the "Option") for ten years to purchase up to 500,000 shares of
the Company's Common Stock at an exercise price equal to the average closing
price for the ten trading days prior to the closing date. The Option will vest
in three equal installments on the first three anniversary dates of the closing
date and will terminate upon the termination of Mr. Nacif's employment by the
Company; provided, however, that (i) the vesting of any installment shall be
deferred to the date ten business days before the stated expiration date in the
event the operating income of the Company's Mexican operations does not reach
certain levels, and (ii) if such termination of employment results from Mr.
Nacif's death or permanent disability, any vested portion shall terminate on the
earlier of the stated expiration date or the first anniversary of such
termination of employment. In the event the Company terminates Mr. Nacif's
employment without cause (as defined) the Company shall remain obligated to pay
Mr. Nacif an amount equal to his base salary for the remainder of the stated
term. In the event Mr. Nacif's employment is terminated for any other reason
(including death, disability, resignation or termination with cause), neither
party shall have any further obligation to the other, except that the Company
shall pay to Mr. Nacif, or his estate, all reimbursable expenses and such
compensation as is due prorated through the date of termination.

  Acquisition of Twill Mill and Production Facility

     On December 2, 1998, the Company contracted with an affiliate of Mr. Nacif,
the seller of the denim mill described above, for the construction of a turn-key
facility near Puebla, Mexico for the production of twill fabric. The facility
will also house ancillary facilities. The purchase price of the facility shall
be the sum of (i) the cost of construction and equipment installed, which cost
will not include operating expenses, estimated to be approximately $60 million,
and (ii) a promissory note of the Company (the "Note") in the principal amount
of $28 million.

     The principal balance of the Note will be payable on the third anniversary
date of the closing date, and interest on the unpaid principal balance from time
to time outstanding will be payable semi-annually in arrears on each June 30 and
December 31 at the rate of 7% per annum. Payment under the Note will be subject
to the right of the Company to set off any amount payable by (i) the developer
to the Company under the facility development agreement, including, but not
limited to, any amount payable under the indemnification provisions of the
facility development agreement upon the breach by the developer of any
representations, warranties or agreements contained in the facility development
agreement, or (ii) the sellers of the denim mill assets under the asset purchase
agreement, including, but not limited to, any amount payable under the
indemnification provisions of such agreement. During the fourth quarter of 1999
the Company began using a portion of this facility to wash, finish and pack. The
building should be completed and fully operational by the end of fiscal year
2000.

                                       8
<PAGE>

Products

     In 1988, the Company received its first orders for private label women's
denim jeans from Express, a division of The Limited. While women's jeans have
historically been, and continue to be, the Company's principal product, in
recent years the Company has expanded its sales of moderately-priced, women's
apparel to include casual, denim and non-denim woven tops and bottoms and has
commenced the sale of men's apparel, including knit and woven tops, shirts and
outerwear (including jackets), as a result of the acquisition of MGI on February
23, 1998. The Company's women's apparel products currently include jeanswear,
casual pants, t-shirts, shorts, blouses, shirts and other tops, dresses,
leggings 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 $3.00 to over $25.00 per garment.

     Over the past three years, approximately fifty percent of net sales were
derived from the sale of pants and jeans, approximately fifteen percent from the
sale of shorts and approximately ten percent from the sale of shirts. The
balance of net sales consisted of sales of dresses, jackets, leggings and other
products.

     The Company, in the ordinary course of its business, regularly evaluates
new markets and potential acquisitions and believes that numerous opportunities
exist due, in part, to the adverse effect on the earnings of many apparel
companies of the recent decline in retail sales, and consolidation among
retailers. Such opportunities could include transactions involving acquisitions
or brand affiliations. Although the Company currently is evaluating several
acquisitions, there are no existing commitments with respect to any acquisition
or affiliation, except as described under "Business--Acquisitions" and "Vertical
Integration."

Customers

     For the year ended December 31, 1999, affiliated stores owned by The
Limited, including Express, Lerner New York, Limited Stores, Structure and Lane
Bryant, accounted for approximately 42.5% of the Company's net sales. In
addition in 1999 sales to Target Stores (a division of Dayton Hudson) and
Walmart accounted for approximately 12.4% and 11.4% of net sales respectively.
No other customer accounted for more than 10% of the Company's net sales. In the
same period, virtually all of the Company's sales were of private label apparel.
The Company currently serves over 20 customers which also include, K-Mart,
Mervyns, Sears, Abercrombie & Fitch and J.C. Penney. Additionally, the Company
manufactures "branded" merchandise for several major designers. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--General."

     The Company generally targets only high-volume retailers that it believes
could grow into major accounts. By limiting its customer base to a select group
of larger accounts, the Company seeks to build stronger long-term relationships
and leverage its operating costs against large bulk orders. Although the Company
continues to diversify its customer base, the majority of any growth in sales is
expected to come from existing customers, as they consolidate their buying power
over fewer key vendors.

     On October 22, 1998, Limited Direct Associates LP, an entity 100% owned by
The Limited ("LDA"), acquired one million shares of the Company's Common Stock
(or approximately 6.3% of the Common Stock outstanding as of March 1, 2000)
through the exercise of an option granted by Mr. Guez and Mr. Kay, the Chairman
and President, respectively, of the Company, to LDA at the time of the Company's
initial public offering. The option granted LDA the right to purchase 10% of the
total shares of Common Stock outstanding at the time of the initial public
offering, or 1,299,998 shares, at a price of $3.60 per share (as adjusted for a
two-for-one stock split effective May 8, 1998). The transaction was done on a
cashless basis, whereby Mr. Guez and Mr. Kay transferred ownership of one
million shares to LDA and, in lieu of receiving cash, Mr. Guez and Mr. Kay
retained ownership of the remaining 299,998 shares. The one million shares were
subject to a lockup provision, which expired October 9, 1999.

     The Company does not have long-term contracts with any of its customers
and, therefore, there can be no assurance that any customer will continue to
place orders with the Company 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 the
Company's financial condition and results of operations would not be adversely
affected.

                                       9
<PAGE>

Design, Merchandising and Sales

     While many private label producers only arrange for the bulk production of
styles specified by their customers, the Company not only designs garments, but
also assists some of its customers in market testing new designs. The Company
believes that its design, sample-production and test-run capabilities give it a
competitive advantage in obtaining bulk orders from its customers. The Company
also often receives bulk orders for garments it has not designed because many of
its customers allocate bulk orders among more than one producer.

     The Company has 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 generally are divided between import and domestic 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. In particular, 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 wishes 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, the Company and its customer can make appropriate arrangements
regarding any delay or other change in the order. The Company believes that this
team approach enables its 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 1999, the Company opened an office
in Columbus, Ohio to support this approach and better service the needs of The
Limited.

     As part of the Company's merchandising strategy, the Company produces, at
its own expense, one or more samples of garments embodying new designs. The
Company produces samples at its facilities in Guangdong Province, China, Hong
Kong and Mexico. The Chinese facility, which has 121 employees, currently
furnishes a significant portion of the Company's sample requirements. As the
Company continues to develop its Mexico based operation a significant amount of
sample production has shifted to Mexico during 1999.

     From time to time and at scheduled seasonal meetings, the Company presents
its samples to the customer's buyers, who determine which, if any, of those
samples will be produced on a test run or a bulk scale. 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 the Company's customers to identify garments
that may appeal to consumers and also provides the Company with important
information regarding the cost and feasibility of the bulk production of the
tested garment. If the test is determined to be successful, the Company
generally receives a significant percentage of the customer's total bulk order
of the tested item. In addition, as is typical in the private label business,
the Company receives bulk production orders to produce merchandise designed by
its competitors or other designers, since most customers allocate bulk orders
among a number of suppliers.

                                      10
<PAGE>

Sourcing

  General

     When bidding for or filling an order, the Company's international sourcing
network enables it to choose from among a number of suppliers and manufacturers
based on the customer's price requirements, product specifications and delivery
schedules. Historically, the Company has manufactured its products through
independent cutting, sewing and finishing contractors located primarily in Hong
Kong and China and has purchased its fabric from independent fabric
manufacturers with weaving mills located primarily in Hong Kong and China. In
recent years, the Company has expanded its network to include suppliers and
manufacturers located in a number of additional countries, including Thailand,
Korea and Mexico. Key elements of the Company's sourcing strategy include (i)
continuing to expand its production of basic denim and twill products in Mexico
through both independent contractors and the acquisition or construction of
cutting, sewing and finishing facilities and (ii) acquiring or constructing
denim and twill weaving mills in Mexico. The following table sets forth the
percent of the Company's merchandise, on the basis of the free on board cost at
the supplier's plant ("FOB Basis"), by country for the periods indicated:

<TABLE>
<CAPTION>
                                                                                      1996   1997   1998   1999
                                                                                      -----  -----  -----  -----
     <S>                                                                              <C>    <C>    <C>    <C>
     International Sourcing
       Hong Kong and China..........................................................  78.3%  60.5%  50.4%  36.3%
       Other(1).....................................................................   7.7   13.7   10.0   12.3
     Domestic Sourcing
       United States................................................................  13.8   14.9    5.7    2.6
       Mexico and Central America...................................................   0.2   10.9   33.9   48.8
</TABLE>

__________________
(1)  In 1999, such countries consisted of Thailand, Philippines, UAE/Oman, and
     Indonesia and Korea.

  Dependence on Contract Manufacturers

     The Company has reduced its reliance on outside third party contractors
through its Mexico vertical integration strategy. However, all international and
a portion of its Mexico sourcing is manufactured by independent cutting, sewing
and finishing contractors. The use of contract manufacturers and the resulting
lack of direct control over the production of its products could result in the
Company's failure to receive timely delivery of products of acceptable quality.
Although the Company believes 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 the Company's results of
operations until an alternative source is located and has commenced producing
the Company's products.

     Although the Company monitors the compliance of its independent contractors
with applicable labor laws, the Company does not control its contractors or
their labor practices. The violation of federal, state or foreign labor laws by
one of the Company's contractors can result in the Company being subject to
fines and the Company's goods which are manufactured in violation of such laws
being seized or their sale in interstate commerce being prohibited. From time to
time, the Company has been notified by federal, state or foreign authorities
that certain of its contractors are the subject of investigations or have been
found to have violated applicable labor laws. To date, the Company has not been
subject to any sanctions that, individually or in the aggregate, could have a
material adverse effect upon the Company, and the Company is not aware of any
facts on which any such sanctions could be based. There can be no assurance,
however, that in the future the Company will not be subject to sanctions as a
result of violations of applicable labor laws by its contractors, or that such
sanctions will not have a material adverse effect on the Company. In addition,
the Company's customers require strict compliance by their apparel
manufacturers, including the Company, with applicable labor laws. There can be
no assurance that the violation of applicable labor laws by one of the Company's
contractors will not have a material adverse effect on the Company's
relationship with its customers.

     In addition, as is customary in the industry, the Company does not have any
long-term contracts with independent fabric suppliers. The loss of any of its
major fabric suppliers could have a material adverse effect on the Company's
financial condition and results of operations until alternative arrangements are
secured.  The impact of such a loss will may be offset in part by the
acquisition of or development of fabric mills and production facilities in
Mexico.  See "____ Vertical Integration"

                                      11
<PAGE>

  Diversified Production Network

     The Company believes that it has the ability, through its production
network, to operate on production schedules with lead times as short as 30 days.
Typically, the Company's 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 Target Stores, are beginning to operate on shorter lead
times, they are occasionally able to estimate their needs as much as six months
to one year in advance for "program" business--basic products that do not change
in style significantly from season to season. The Company's ability to operate
on production schedules with a wide range of lead times helps it to meet its
customers' varying needs.

     By allocating an order among different manufacturers, the Company seeks to
fill the high-volume orders of its customers, while meeting their delivery
requirements. Upon receiving an order, the Company determines which of its
suppliers and manufacturers, (both owned and third party contractors) can best
fill the order and meet the customer's price, quality and delivery requirements.
The Company considers, 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. The Company's 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 the Company stagger the delivery of
products over several weeks.

  International Sourcing

     The Company conducts and monitors its international sourcing operations
from its international offices. At December 31, 1999, the Company had offices in
Hong Kong, China, Thailand, Korea and Mexico. The staff 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 the Company's senior management, including
local staff, visit and inspect the facilities and operations of the Company's
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 and other non-tariff barriers (including changes in
the allocation of quotas). In addition to these risk factors, the Company faces
additional risks arising from the uncertainty regarding the future status of
Hong Kong since resumption of Chinese sovereignty on July 1, 1997, the
continuation of favorable trade relations between the U.S. and China (in
particular the continuation of China's Normal Trade Relations ("NTR") status for
tariff purposes), and the continuation of economic reform programs in China
which encourage private economic activity. Each of these factors could have a
material adverse effect on the Company.

     While the Company is in the process of establishing business relationships
with manufacturers and suppliers located in countries other than Hong Kong or
China, the Company still primarily contracts with manufacturers and suppliers
located primarily in Hong Kong and China for its international sourcing needs
(not including Mexico), and currently expects that it will continue to do so for
the foreseeable future. Any significant disruption in the Company's operations
or its relationships with its manufacturers and suppliers located in Hong Kong
or China could have a material adverse effect on the Company.

     The Company commenced manufacturing basic denim and twill products through
independent contractors in Mexico in the second quarter of 1997, and is
continuing to expand its use of manufacturing facilities in this region. During
1999 the Company continued to expand its Mexico production capabilities, and
acquired several Mexico manufacturing operations. The Company believes that the
further diversification of its international sourcing network by increasing the
use of manufacturing facilities in Mexico along with its Vertical Integration
Strategy will (i) reduce its cost of goods, (ii) enhance the proximity of the
Company's sourcing operations to the Company's customers and the Company's
executive offices, thereby improving delivery times and increasing management's
control, and (iii) lessen certain risks of doing business in Asia. See "--
Vertical Integration," and "Acquisitions".

                                      12
<PAGE>

  The Sourcing Process

     As is customary in the industry, the Company does not have any long-term
contracts with its manufacturers. The Company typically contracts (on the basis
of a written purchase order) with one to three manufacturers to produce a bulk
order. During the manufacturing process, the Company's 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 the
Company's offices in Hong Kong, Mexico and Los Angeles. The Company, in turn,
keeps its 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 the Company's plans to rectify them.

     The Company often arranges on behalf of manufacturers for the purchase of
fabric from a single supplier. The Company has the fabric shipped directly to
the cutting factory and invoices the factory for the fabric. Generally, the
factories pay the Company for the fabric with offsets against the price of the
finished goods. For its longstanding program business, the Company 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, the Company believes that production costs per garment are reduced and
customer specifications as to fabric quality and color can be better controlled.

Backlog

     At February 23, 2000, the Company had unfilled customer orders of
approximately $142 million as compared to approximately $137 million at February
23, 1999. The Company believes that all of its backlog of orders as of February
23, 2000 will be filled within the current fiscal year. Backlog is based on the
Company's 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 actual shipments. The Company's
experience has been that the cancellations, rejections or returns of orders have
not materially reduced the amount of sales realized from its backlog.


Import Restrictions

Quotas

     The Company imported approximately 96% of its products (on an FOB Basis) in
1999, including approximately 55% imported from Mexico. In the case of Mexico,
imports are subject to special rules under the North American Free Trade
Agreement ("NAFTA"), which limits certain types of apparel imports into the
United States from Mexico, but not nearly to the extent that imports are
restricted from countries subject to bilateral textile agreements. Most of the
remaining products imported were manufactured in a foreign jurisdiction (e.g.,
Hong Kong and China) with which the U.S. has entered into a bilateral textile
agreement that, among other restrictions, imposes specific quantitative
restraints, or "quotas," on the amounts of various categories of textiles and
apparel that can be imported into the U.S. from that foreign jurisdiction during
a particular quota year. These bilateral textile agreements also include
provisions which allow the U.S. to impose quotas on categories of textiles and
apparel not previously under quota or to "charge" (i.e., impose deductions upon)
the quotas for origin-related violations. Accordingly, the Company's operations
are subject to the restrictions imposed by these bilateral agreements.

     Until recently, the Arrangement Regarding International Trade in Textiles,
known as the Multifiber Arrangement ("MFA"), provided the international
framework for the global regulation of the textile and apparel trade. Pursuant
to the MFA, the U.S. entered into these bilateral textile agreements for the
purpose of imposing quotas on the imports of textiles and apparel. However,
under "The Final Act Embodying the Results of the Uruguay Round of Multilateral
Trade Negotiations" (the "Uruguay Round Agreement") which was agreed to on a
preliminary basis in December 1993 by 117 member nations of the General
Agreement on Tariffs and Trade ("GATT"), and enacted into U.S. domestic law in
December 1994 under the Uruguay Round Agreements Act (the "URAA"), the MFA has
been replaced by the World Trade Organization Agreement on Textiles and Clothing
(the "ATC"). Under the ATC, quotas implemented under the MFA on the importation
of textiles and apparel from countries that are members of the World Trade
Organization (the "WTO," which is the successor organization to GATT under the
Uruguay Round Agreement) will be phased out over a ten-year period that
commenced on January 1, 1995 (with the U.S. phasing out quotas on most of the
sensitive categories at the end of this period). However, a member country may,
under the Uruguay Round Agreement on Safeguards, re-impose quotas on textiles
and apparel under certain specified conditions.

     China is a signatory to the MFA, but was not a member of GATT and,
therefore, was not a party to the Uruguay Round Agreement. China has not been
admitted as a member of the WTO, although it is in the process of trying to
negotiate its accession

                                      13
<PAGE>

to the WTO at this time. Because China is not a member of the WTO, its exports
of textiles and apparel to the U.S. are not covered by the ATC. Accordingly, the
U.S. continues to control imports of textiles and apparel from China under the
existing bilateral agreement between the U.S. and China. On January 17, 1994,
the U.S. and China signed a three-year agreement which set the 1994 textile and
apparel quotas from China at their 1993 levels and increased the quota by 1.0%
for each of 1995 and 1996. A new agreement, to replace the expiring 1994
Agreement, was signed in February 1997, covering the period January 1, 1997 to
December 31, 2000. This agreement continues to permit some growth in most quota
categories.

     In the event that China eventually becomes a member of the WTO, it will be
afforded the rights granted other members under the ATC, including the phase-out
of textile and apparel quotas over the ten-year period that commenced on January
1, 1995. However, there can be no assurance that China will become a member of
the WTO, particularly since the U.S. has expressed dissatisfaction with China's
progress in opening its domestic market in a number of areas.

     In 1999, products imported using Hong Kong quota accounted for
approximately 30% of the Company's net sales (on an FOB Basis). Under the U.S.
and Hong Kong rules of origin currently in effect, the Company conducts certain,
non-origin conferring manufacturing operations in China for a significant
portion of the products it imports using Hong Kong quota. As part of the URAA,
the U.S. implemented new rules of origin which become effective on July 1, 1996.
These new rules of origin had little actual impact on the country of origin of
the merchandise imported by the Company.

  Duties and Tariffs

     Merchandise imported by the Company into the U.S. is subject to rates of
duty established by U.S. statute. In general, these rates vary, depending on the
type of product, from 3.0% to 34.6% of the appraised value of the product. In
addition to duties, in the ordinary course of its business, the Company, from
time to time, may become subject to claims by the U.S. Customs Service for
penalties, liquidated damages claims and other charges relating to import
activities. Similarly, from time to time, the Company may be entitled to refunds
from the U.S. Customs Service due to the overpayment of duties.

     Products imported from China into the U.S. currently receive the same
preferential tariff treatment accorded goods from countries granted NTR status.
China's NTR status, which is granted on an annual basis, expires in July 2000.
China's NTR status has been a contentious political issue for several years
because of concerns regarding labor and human rights practices, weapons
proliferation, trade policies and failure to protect U.S. intellectual property
rights. Previous legislation attaching conditions to China's NTR status has been
passed by both houses of the Congress, but did not survive presidential vetoes.
There can be no assurance that the U.S. will not revoke China's NTR status
entirely or place greater conditions or restrictions on this status, but absent
a major deterioration in U.S.-China relations, it is anticipated that China will
maintain its NTR status. If China's NTR status were to terminate, and Chinese
origin products had to enter the U.S. without the benefit of NTR status, such
goods would be subject to significantly higher duties than at present. Any such
increased duties would increase the cost or reduce the supply of the Company's
goods imported from China. In 1999, products imported using China quota
accounted for approximately 6% of the Company's net sales (on an FOB Basis). The
Company is taking steps to diversify its sourcing network to reduce its
dependence on Chinese-origin products.

     The Company's continued ability to source products from foreign
jurisdictions may be adversely affected by additional bilateral and multilateral
agreements, unilateral trade restrictions, changes in 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 imports.

Competition

     There is intense competition in the sectors of the apparel industry in
which the Company participates. The Company competes with many other
manufacturers, many of which are larger and have greater resources than the
Company. The Company also faces competition from its 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 the Company and
other private label apparel suppliers for orders from divisions of The Limited.
The Company believes that it competes favorably on the basis of design and
sample capabilities, quality and value of its products, price, the production
flexibility that it enjoys as a result of its sourcing network and vertical
integration initiatives and the long-term customer relationships it has
developed.

                                      14
<PAGE>

Employees

     At December 31, 1999, the Company had approximately 226 full-time employees
in the United States, 4,366 in Mexico (which includes all manufacturing labor to
produce fabric, and cut, sew, trim, wash and pack finished garments), 170 in
Hong Kong, 142 in China, 8 in Thailand and 3 in Korea. The Company considers its
relations with its employees to be good.

Item 2. PROPERTIES
        ----------

     The Company currently conducts its operations from 26 facilities, 24 of
which are leased. The Company's executive offices are located at 3151 East
Washington Boulevard, Los Angeles, California 90023. The Company leases this
facility for an annual rent of $ 540,000 from a California corporation which is
owned by Mr. Guez and Mr. Kay. The base rent is subject to increase on January
1, 2002 based on the Consumer Price Index. The lease for this facility, under
which the Company is responsible for the payment of taxes, utilities and
insurance, terminates in December 2003 subject to a renewal option for five
additional years. The Company also leases 146,000 square feet of warehouse space
in South Gate, California for an annual rent of $160,000 from an unrelated third
party. An additional warehouse for the Chazzz division is being closed during
2000. In Columbus, Ohio the Company opened an adminstrative office during 1999
to handle business related to The Limited. This facility is leased until 2004,
for approximately 6000 square feet at an annual rental of approximately $75,000.
The Company leases 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 the Company is responsible for the payment of taxes, utilities and
insurance, expires in June 2004. The Company leases approximately 50,000 square
feet which it uses to operate its sample-making facility in Giang Dong Province,
China. The lease for this facility terminates in 2004 and the annual rent is
$60,000. The Company also leases office space in Bangkok, Thailand and Seoul,
Korea to house the small staff it maintains in these nations. The Company also
owns two facilities in Ruleville, Mississippi and leases two facilities in
Greenwood, Mississippi with an aggregate of 161,000 square feet. These
facilities are production, distribution, and administrative offices, the annual
rent is $28,000 and the leases expire during the year 2000 and 2001. The Company
also leases three locations in New York City for showroom and sales operations.
The aggregate square footage of these locations is approximately 15,000 with an
annual base rent of $300,000. These leases expire during the years 2000 and
2002. These spaces are currently being consolidated during 2000. The Company
also leases 1,600 square feet of office space in Tehaucan, Mexico for an annual
rent of $40,000 and this lease expires in September, 2008. Through its
subsidiary, Grupo Famian, the company leases seven sewing and washing plants in
and around Tehucan, Mexico. These leases terminate in 10 years and have a
combined annual rental of $314,000. See "Note 8 to Notes to Consolidated
Financial Statements" for additional information with respect to these
facilities.

     On February 22, 1999, the Company agreed to acquire a 250,000 square foot
denim mill in Puebla, Mexico with an annual capacity of approximately 18 million
meters of denim. In addition, on December 2, 1998, the Company contracted to
acquire a 1,500,000 square foot turn-key facility being constructed near Puebla,
Mexico which is ultimately expected to have an annual capacity of approximately
18 million meters of twill, and house ancillary garment production facilities to
cut, launder, finish and ship finished garments.  See "Item 1. Business--
Vertical Integration."

     The Company believes that all of its existing facilities are well
maintained, in good operating condition and adequate to meet its current and
foreseeable needs.


Item 3. LEGAL PROCEEDINGS
        -----------------

     On October 2, 1999, summons were issued by the Hong Kong Special
Administrative Region Magistrate's Court to Tarrant Company Limited ("TCL"), a
wholly owned Hong Kong subsidiary of the Company. The summons allege that TCL
exported apparel to the United States which it claimed was of Hong Kong origin,
using Hong Kong export licenses, when the goods were not of Hong Kong origin, in
violation of Hong  Kong's Import and Export Ordinance. TCL believes that any
violations of Hong Kong law resulted from actions of its non-related suppliers,
and that the Company had no knowledge or control of these actions.  Depending on
the final outcome of this legal proceeding, TCL's exports to the United States
may become subject to significantly increased Customs Service scrutiny, which
could cause delays in the entry of goods into the United States, or in a worst
case scenario, prohibit the entry of such goods into the United States. TCL
believes it has strong defenses to these charges, and will vigorously defend
itself against them. The Company is confident that the policies and procedures
are in place to provide maximum assurances that our  suppliers are in strict
compliance with all international trade regulations.

                                      15
<PAGE>

     In Sepember 1999, the Company was served with a complaint in an action
brought in the Supreme Court of the State of New York, New York County, by DLLC
and Direct Corp., LLC ("Direct"), as plaintiffs.  The complaint alleges that the
Company and DLLC entered into a joint venture for the purpose of producing and
selling apparel products.  The complaint further alleges that the Company
breached its obligations under the joint venture.  The complaint seeks monetary
damages of $50,000,000, plus interest and further seeks permanent injunctive
relief.  The Company has submitted its Answer to the Complaint which generally
denies the principal allegations therin, denies any liability to the plaintiffs
and alleges a number of affirmative defenses to the claims made by plaintiffs.
No discovery has taken place in the action to date.  The Company believes that
it has valid defenses to the claims set forth in the plaintiff's complaint and
intends to vigorously defend against said claims.  A subsidiary of the Company
has commenced a separate action against the plaintiffs in the Superior Court of
the State of California, Los Angeles County, seeking damages of $623,138.90 for
goods sold and delivered to plaintiffs.


Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
        ---------------------------------------------------

     No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of fiscal 1999.

                                      16
<PAGE>

                                    PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
        ---------------------------------------------------------------------

NASDAQ Listing

     The Company's Common Stock began trading on The Nasdaq Stock Market's
National Market ("NASDAQ") 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 the Company's Common Stock as reported by NASDAQ.

<TABLE>
<CAPTION>
                                                                Low        High
                                                              -------     ------
          <S>                                                 <C>         <C>
          1998
          First Quarter.....................................  $  7.38      12.31
          Second Quarter....................................    11.50      19.50
          Third Quarter.....................................    17.50      25.50
          Fourth Quarter....................................    13.50      41.25

          1999
          First Quarter.....................................   34.750     45.875
          Second                                               21.000     48.625
          Quarter...........................................
          Third Quarter.....................................    9.750     26.750
          Fourth Quarter....................................    8.969     14.875

          2000
          First Quarter (through March 10)..................    6.000     10.250
</TABLE>

     On March 1, 2000, the last reported sale price of the Company's Common
Stock as reported on NASDAQ was $7.500. Shareholders are urged to obtain current
market quotations for the Common Stock. As of March 1, 2000, there were 29
shareholders of record of the Company. However, proxy data indicates that there
are over 2150 beneficial owners of shares of the Common Stock.

Dividend Policy

     The Company intends to retain future earnings for use in its business and
therefore does 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 the Company's earnings, financial condition, capital
needs and other factors deemed relevant by the Board of Directors. In addition,
the new credit agreement entered into on January 21, 2000, prohibits the payment
of dividends during the term of the agreement.  See Note 16 to the consolidated
financial statements.

Stock Split

     On April 27, 1998, the Company announced a two-for-one stock split
effective on May 8, 1998. Accordingly, all share and per share amounts have been
adjusted to reflect this split.

                                      17
<PAGE>

Item 6. SELECTED FINANCIAL DATA
        -----------------------

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

<TABLE>
<CAPTION>
                                                                                             Year Ended December 31,
                                                                                --------------------------------------------------
                                                                                  1995        1996      1997      1998      1999
                                                                                --------    --------  --------  --------  --------
<S>                                                                             <C>         <C>       <C>       <C>       <C>
                                                                                  (In thousands, except share and per share data)
Income Statement Data:
Net sales..................................................................     $205,174    $229,861  $260,093  $378,155  $395,341
Cost of sales..............................................................      172,959     192,288   220,996   307,077   329,131
                                                                                --------    --------  --------  --------  --------
  Gross profit.............................................................       32,215      37,573    39,097    71,078    66,210
Selling and distribution expenses..........................................        6,761       7,124     8,499    11,274    13,692
General and administrative expenses........................................       13,493      13,990    13,518    19,896    25,259
Amortization of excess of cost over fair market value of net assets
  acquired(1)..............................................................           --          --        --     1,337     2,312

LDA Option(2)..............................................................        1,734          --        --        --        --
                                                                                --------    --------  --------  --------  --------
  Income from operations...................................................       10,227      16,459    17,080    38,571    24,947
Interest expense...........................................................       (4,003)     (1,865)   (1,471)   (2,423)   (5,771)
Interest income............................................................          773         337       171       360       396
Other income/(expense)(3)..................................................        1,274        (302)      242       568       748
                                                                                --------    --------  --------  --------  --------
Income before provision for income taxes ..................................        8,271      14,629    16,022    37,076    20,320
Provision for income taxes(4)..............................................         (961)     (4,627)   (5,235)  (12,410)   (7,439)
                                                                                --------    --------  --------  --------  --------

Net income.................................................................     $  7,310    $ 10,002  $ 10,787  $ 24,666  $ 12,881
                                                                                ========    ========  ========  ========  ========
Net income per common share
  Basic....................................................................     $   0.69    $   0.77  $   0.82  $   1.82  $   0.85
  Diluted..................................................................     $   0.69    $   0.76  $   0.80  $   1.71  $   0.79
Weighted average shares outstanding
  Basic....................................................................       10,707      13,016    13,175    13,520    15,200
  Diluted..................................................................       10,707      13,096    13,567    14,417    16,314

<CAPTION>
                                                                                                 As of December 31,
                                                                                --------------------------------------------------
                                                                                  1995        1996      1997      1998      1999
                                                                                --------    --------  --------  --------  --------
                                                                                                   (In thousands)
<S>                                                                             <C>         <C>       <C>       <C>       <C>
Balance Sheet Data:
Working capital............................................................     $ 23,003    $ 34,029  $ 45,304  $ 57,082  $ 25,196
Total assets...............................................................       57,840      63,420    71,861   153,891   295,042
Bank borrowings and long-term obligations..................................       15,940       6,810     4,288    36,694    99,072
Shareholders' equity.......................................................       26,416      36,953    48,335    79,210   139,403
</TABLE>

(1)  See "Item 1. Business--Acquisitions."
(2)  On the effective date of its initial public offering, the Company incurred
     a non-recurring charge to earnings related to a grant by Messrs. Guez and
     Kay to Limited Direct Associates, L.P., an affiliate of The Limited, Inc.,
     of a four-year option (the "LDA Option") to purchase an aggregate of
     1,299,998 shares, or 10% of the Company's Common Stock, at an exercise
     price equal to $3.60 per share. See "Item 1. Business--Customers" and "Note
     15 to Notes to Consolidated Financial Statements."
(3)  Major components of Other income/(expense) (as presented above) include
     fees paid by affiliate entities for management and administrative services
     provided by the Company, royalty income, and foreign currency gains. See
     "Management's Discussion and Analysis of Financial Condition and Results of
     Operations."
(4)  Reflects, 1995 only, income per common share based upon pro forma net
     income of $7,408 adjusted by providing an income tax provision which is the
     sum of (i) U.S. income taxes computed as if the Company had been taxed as a
     C Corporation at an effective tax rate of 40% for federal and state tax
     purposes for the period it was an S Corporation and (ii) the historical tax
     provision of the Company and its non-U.S. consolidated subsidiaries for all
     other periods. 1996, 1997, 1998, and 1999 have no adjustments since the
     Company was a C Corporation in such years.

                                      18
<PAGE>

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

General

     The Company serves specialty retail, mass merchandise and discount store
chains by designing, merchandising, contracting for the manufacture of,
manufacturing directly, and selling casual, moderately-priced apparel for women,
men and children, under private label. The Company's major customers include
specialty retailers, such as Lerner New York, Limited Stores, Lane Bryant,
Structure and Express, all of which are divisions of The Limited, as well as
Target Stores (a division of Dayton Hudson), Abercrombie & Fitch, Mervyns,
Sears, K-Mart, Walmart and J.C. Penney. The Company's products are manufactured
in a variety of woven and knit fabrications and include jeanswear, casual pants,
t-shirts, shorts, blouses, shirts and other tops, dresses, leggings and jackets.

     Over the past five years, the Company has achieved a compound annual growth
rate in net sales of approximately 19% from $205 million in 1995 to $395 million
in 1999. Pre-tax income has risen approximately 25 % on a compound annual basis,
from $8.3 million in 1995 to $20.3 million in 1999.

     The Company continues to geographically diversify its worldwide sourcing
operations. Commencing in the third quarter of 1997, the Company substantially
expanded its use of independent cutting, sewing and finishing contractors in
Mexico, primarily for its increasing sales of basic garments. The gross sales of
products sourced in Mexico were approximately $104 million and $271 million in
1998 and 1999, respectively. The Company has also commenced the vertical
integration of its business through the development and acquisition of fabric
and production capacity in Mexico. The Company believes that these strategies
will create a more diversified sourcing base, increase the Company's access to
emerging providers of low cost production, enhance the proximity of the
Company's sourcing base to the Company's customers and lessen certain risks
associated with doing business abroad (including transportation delays, economic
or political instability, currency fluctuations, restrictions on the transfer of
funds and the imposition of tariffs, export duties, quotas and other trade
restrictions).

     On August 1, 1999 the Company acquired all of the outstanding stock of
Industrial Exportadora Famian. S.A. de C.V., and Coordinados Elite, S.A. de
C.V., both Mexican corporations ("Grupo Famian").  Grupo Famian operates seven
apparel production facilities in and near Tehucan, Mexico which have the
capacity to provide "full package production" (i.e., cut, sew, launder, finish
and pack) of 110,000 units per week. For a description of the terms of
acquisition see "--Vertical Integration" and "Business Acquisitions".

     On April 18, 1999 the Company finalized an agreement to acquire certain
assets of a denim mill located in Puebla, Mexico with an annual capacity of 18
million meters ("Jamil").  For a description of the terms of acquisition, see "-
-Vertical Integration" and "Business Acquisitions".

     On March 23, 1999, the Company purchased certain assets of CMG, Inc., a
California corporation ("CMG").   CMG designs, produces and sells private label
and "CHAZZZ" branded woven (denim and twill) and knit apparel for women,
children and men for national chain stores, including J.C. Penny, Sears and
Mervyns. For a description of the terms of acquisition,  see "--Acquisitions".

     On December 2, 1998, the Company contracted to acquire a turn-key facility
being constructed near Puebla, Mexico by an affiliate of the seller of the denim
mill described above. This facility is ultimately expected to have an annual
capacity of approximately 18 million meters of twill and will also house
ancillary facilities. Construction of this facility commenced in the third
quarter of 1998. During the fourth quarter of 1999 the Company began using this
facility for washing, finishing and packing. It is anticipated that the Company
will take full possession of this facility and begin spinning, weaving, dying
and cutting during the year 2000. The Company anticipates that the cost of this
facility will be approximately $90 million. See "--Vertical Integration".

     During 1999, the Company began a consolidation strategy to gain
efficiencies as a result of its acquistions. As a result the Company has
discontinued use of two of the four Mississippi Rocky Apparel plants and shifted
this production to its Mexico facilities.

     Management focused much of its attention during 1999 on transforming the
Company from a sourcing company to a fully vertical integrated manufacturer,
providing full package  production from raw materials, (mostly cotton) to
finished garments.  Its manufacturing operations were developed in Mexico
through acquistion and development of manufacturing plants, while its
traditional sourcing business continues at the same time predominantly out of
the Far East.

                                      19
<PAGE>

The transition has been challenging and the Company has experienced lower gross
margins and higher operating expenses during 1999 as a result. In addition,
gross margins were impacted by inventory variance and markdowns, while the SGA
expenses were impacted by an increase in the reserve against accounts
receivable, and an asset impairment to write off its old computer systems.
During the year 2000 the company is installing new computer systems and
controls. Although, the integration process continues, the Company has made
significant progress at developing this strategy, and expects to begin to see
the benefits of lower productions costs, and greater control over quality and
delivery schedules during 2000.

Subsequent to the year-end 1999, the Company opened a new credit agreement
allowing it to borrow up to $105 million.  The line of credit is granted by
three institutions, GMAC, Finova Capital Corporation, and Sanwa Bank of
California.

Factors That May Affect Future Results

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

     Vertical Integration. In 1997, the Company commenced the vertical
integration of its business. Key elements of this strategy include (i)
establishing cutting, sewing, washing, finishing, packing, shipping and
distribution activities in company-owned facilities or through the acquisition
of established contractors and (ii) establishing fabric production capability
through the acquisition of established mills or the construction of new mills.
The Company has no history of operating textile mills or cutting, sewing,
washing, finishing, packing or shipping operations upon which an evaluation of
the prospects of the Company's vertical integration strategy can be based. In
addition, such operations are subject to the customary risks associated with
owning a manufacturing business, including, but not limited to, the maintenance
and management of manufacturing facilities, equipment, employees and
inventories. See "Item 1. Business--Vertical Integration" and "--Foreign
Manufacturing."

     Variability of Quarterly Results. The Company has experienced, and expects
to continue to experience, a substantial variation in its net sales and
operating results from quarter to quarter. The Company believes that the factors
which influence this variability of quarterly results include the timing of the
Company's 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 the Company participates, 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 chargebacks in excess of reserves and the
timing of expenditures in anticipation of increased sales and actions of
competitors. Accordingly, a comparison of the Company's results of operations
from period to period is not necessarily meaningful, and the Company's results
of operations for any period are not necessarily indicative of future
performance.

     Economic Conditions. The apparel industry historically has been subject to
substantial cyclical variation, and a recession in the general economy or
uncertainties regarding future economic prospects that affect consumer spending
habits have in the past had, and may in the future have, a materially adverse
effect on the Company results of operations. In addition, certain retailers,
including some of the Company customers, have experienced in the past, and may
experience in the future, financial difficulties which increase the risk of
extending credit to such retailers. 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 the Company will
remain a preferred vendor for its existing customers. A decrease in business
from or loss of a major customer could have a material adverse effect on the
Company's results of operations. There can be no assurance that the Company's
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, the Company could
either 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.

     Reliance on Key Customers. Affiliated stores owned by The Limited
(including Lerner New York, Limited Stores, Structure, Express and Lane Bryant)
accounted for approximately 43% and 66% of the Company's net sales in 1999 and
1998, respectively. The loss of such customer could have a material adverse
effect on the Company's results of operations. From time to time, certain of the
Company's major customers have experienced financial difficulties. The Company
does not have long-term contracts with any of its customers and, accordingly,
there can be no assurance that any customer will continue to place orders with
the Company to the same extent it has in the past, or at all. In addition, the
Company's results of operations will depend to a significant extent upon the
commercial success of its major customers.

     Dependence on Contract Manufacturers. The Company has reduced its reliance
on outside third party contractors through its Mexico vertical integretion
strategy. However, all international and a portion of its domestic sourcing is
manufactured by independent cutting, sewing and finishing contractors. The use
of contract manufacturers and the resulting lack of direct control

                                      20
<PAGE>

over the production of its products could result in the Company's failure to
receive timely delivery of products of acceptable quality. Although the Company
believes 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 the Company's results of operations until an
alternative source is located and has commenced producing the Company's
products.

     Although the Company monitors the compliance of its independent contractors
with applicable labor laws, the Company does not control its contractors or
their labor practices. The violation of federal, state or foreign labor laws by
one of the Company's contractors can result in the Company being subject to
fines and the Company's goods which are manufactured in violation of such laws
being seized or their sale in interstate commerce being prohibited. From time to
time, the Company has been notified by federal, state or foreign authorities
that certain of its contractors are the subject of investigations or have been
found to have violated applicable labor laws. To date, the Company has not been
subject to any sanctions that, individually or in the aggregate, could have a
material adverse effect upon the Company, and the Company is not aware of any
facts on which any such sanctions could be based. There can be no assurance,
however, that in the future the Company will not be subject to sanctions as a
result of violations of applicable labor laws by its contractors, or that such
sanctions will not have a material adverse effect on the Company. In addition,
certain of the Company's customers, including The Limited, require strict
compliance by their apparel manufacturers, including the Company, with
applicable labor laws. There can be no assurance that the violation of
applicable labor laws by one of the Company's contractors will not have a
material adverse effect on the Company's relationship with its customers.

     Price and Availability of Raw Materials. Cotton fabric is the principal raw
material used in the Company's apparel. Although the Company believes that its
suppliers will continue to be able to procure a sufficient supply of cotton
fabric for its production needs, the price and availability of cotton may
fluctuate significantly depending on supply, world demand and currency
fluctuations, each of which may affect the price and availability of cotton
fabric. There can be no assurance that fluctuations in the price and
availability of cotton fabric or other raw materials used by the Company will
not have a material adverse effect on the Company's results of operations.

     Management of Growth. Since its inception, the Company has experienced
rapid growth in sales. No assurance can be given that the Company will be
successful in maintaining or increasing its sales in the future. Any future
growth in sales will require additional working capital and may place a
significant strain on the Company's management, management information systems,
inventory management, production capability, distribution facilities and
receivables management. Any disruption in the Company's 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 the Company's distribution facilities. In addition, the
failure to timely enhance the Company's operating systems, or unexpected
difficulties in implementing such enhancements, could have a material adverse
effect on the Company's results of operations.

     Foreign Manufacturing. Approximately 96% of the Company products were
imported (including Mexico) in 1999. As a result, the Company's operations are
subject to the customary risks of doing business abroad, including, among other
things, transportation delays, economic or political instability, currency
fluctuations, restrictions on the transfer of funds and the imposition of
tariffs, export duties, quotas and other trade restrictions.

     Year 2000 Issue. In prior years , the Company discussed the nature and
progress of its plans to become Year 2000 ready.  In late 1999, the Company
completed its remediation and testing of systems.  As a result of those planning
and implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000 date
change. The Company expensed approximately $250,000 during 1999 in connection
with remediating its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, internal systems, or
the products and services of third parties. The Company will continue to monitor
its mission critical computer applications and those of its suppliers and
vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.

                                      21
<PAGE>

Results of Operations

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

<TABLE>
<CAPTION>
                                                                                                 Year Ended December 31,
                                                                                            ---------------------------------
                                                                                             1997         1998          1999
                                                                                            ------       ------        ------
     <S>                                                                                    <C>          <C>           <C>
     Net sales.......................................................................       100.0%       100.0%        100.0%
     Cost of sales...................................................................        84.9         81.2          83.3
                                                                                            -----        -----         -----
     Gross profit....................................................................        15.1         18.8          16.7
     Selling and distribution expenses...............................................         3.3          3.0           3.5
     General and administration expenses.............................................         5.2          5.2           6.3
     Amortization of excess of cost over fair value of net assets acquired(1)........          --          0.4           0.6
                                                                                            -----        -----         -----
     Operating income................................................................         6.6         10.2           6.3
     Interest expense................................................................        (0.6)        (0.6)         (1.4)
     Other income....................................................................         0.2          0.2           0.2
                                                                                            -----        -----         -----
     Income before income taxes......................................................         6.2          9.8           5.1
     Income taxes....................................................................       ( 2.0)        (3.3)         (1.9)
                                                                                            -----        -----         -----
     Net income......................................................................         4.2%         6.5%          3.2%
                                                                                            -----        -----         -----
</TABLE>

(1)  Reflects amortization of the excess of cost over fair value of assets
     acquired in acquisitions of MGI and Rocky.

     Comparison of 1999 to 1998

          Net sales increased by $17.2 million or 4.5%, from $378.2 million in
     1998 to $395.3 million in 1999. The increase in net sales includes $41.7
     million in sales related to the acquired Chazzz division, which was
     acquired in 1999, a decrease of approximately $70 million in sales to
     divisions of The Limited, and an increase to other customers such as mass
     merchants, discounters and branded designs. During 1999, sales to divisions
     of The Limited accounted for 42.5% of total sales as compared to 63.3% in
     1998.

          Gross profit (which consists of net sales less product costs, duties
     and direct costs attributable to production) for 1999 was $66.2 million, or
     16.7% of net sales, compared to $71.1 million, or 18.8 % of net sales, a
     decrease of 2.1%. The decrease was primarily attributable to production
     inefficiencies that the Company experienced as it integrated its newly
     acquired companies (Jamil, and Grupo Famian) into its operating structure.
     In addition, the Company recorded a charge of approximately $2 million as a
     result of year-end book to physical adjustments in the fourth quarter of
     1999.

          Selling and distribution expenses increased from $11.3 million in 1998
     to $13.7 million in 1999. As a percentage of sales these expenses increased
     from 3.0% in 1998 to 3.5% in 1999. This increase was caused by the
     development of the personnel and infrastructure to support the development
     of Mexico production facilites and the additional overhead of the Chazzz
     division of $750,000 compared to zero in 1998.

          General and administrative expenses increased from $19.9 million in
     1998 to $25.3 million in 1999, an increase of 27%. Generally, this increase
     was the result of the Company building its infrastructure to support the
     development of Mexico manufacturing operations plus $2.6 million of
     overhead expenses for the Chazzz division acquired during 1999. The Company
     incurred approximately $1.0 million in charges to replace its old computer
     systems, which are being replaced during 2000. This charge included both
     costs to support the system in 1999 and costs related to the acceleration
     of depreciation.

          Operating income was $38.6 million in 1998, or 10.2% of net sales,
     compared to $24.9 million in 1999 or 6.3% of net sales due to the factors
     described above. The decrease in operating income as a percentage of net
     sales was primarily due to a decrease in gross profit margin, which
     amounted to 2.1% of net sales, an increase in general and adminstrative
     expenses of 1.1% of net sales, and an increase in amortization of excess
     cost over fair value of net assets acquired, which amounted to 0.1% of net
     sales.

          Other income increased from $928,000 in 1998 to $1,144,000 in 1999. As
     a percentage of net sales there was no change. Included in other income in
     1999 is a $668,000 foreign currency gain related to debt repayable in a
     foreign currency.

                                      22
<PAGE>

          Income before taxes was $37.1 million in 1998 and $20.3 in 1999,
     representing 9.8% and 5.1% of net sales respectively. The decrease in
     income before taxes as a percentage of net sales was due to the decrease in
     gross profit margin, an increase in general and administrative expense as
     discussed above, and an increase in interest expense which amounted to 0.8%
     of net sales associated with increased debt levels pertaining to the
     expansion of Mexico operations.


Comparison of 1998 to 1997

     Net sales increased by $118.1 million, or 45.4%, from $260.1 million in
1997 to $378.2 million in 1998. The increase in net sales included an aggregate
increase in sales (excluding Rocky) of $36.7 million to divisions of The
Limited, primarily as a result of an increased volume of unit sales, $75.8
million as a result of the MGI and Rocky Acquisitions and $2.7 million to mass
merchandisers. Excluding acquisitions, sales increased by $42.3 million, or
16.3% over last year. Overall, sales to divisions of The Limited in 1998
amounted to 63.3% of total net sales, as compared to 69.7% in 1997.

     Gross profit (which consists of net sales less product costs, duties and
direct costs attributable to production) for 1998 was $71.1 million, or 18.8% of
net sales, compared to $39.1 million, or 15.1% of net sales, in 1997, an
increase of 81.8% in gross profit. The 3.7% increase in the gross profit margin
included benefits of 1.5% from a reduction in returns and inventory markdown,
0.4% from domestic production of the Men's Division, 0.3% from a reduction of
direct costs attributable to production as a percentage of net sales and the
elimination of certain nonrecurring costs incurred in 1997 on the Company's
production in the U.S. and Mexico.

     Selling and distribution expenses increased from $8.5 million in 1997 to
$11.3 million in 1998. As a percentage of net sales, these expenses decreased
from 3.3% in 1997 to 3.0% in 1998. This percentage decrease is primarily due to
a decrease in freight and commission expenses, each of which amounted to 0.1% of
net sales.

     General and administrative expenses increased from $13.5 million in 1997 to
$19.9 million in 1998. As a percentage of net sales, these expenses were 5.2% in
both years. Overall, 1998 expenses included increases in the allowance for bad
debt, bonus accrual and expenses related to the operations of MGI and Rocky. The
allowance for bad debt includes an allowance for returns and discounts as well
as bad debt expense. The allowance for returns and discounts is primarily based
on a percentage of receivables which increases with the age of the receivables,
but is not a reflection on the credit worthiness of the customer. The increase
in the allowance for returns and discounts during 1998 was $541,000, or 0.1% of
net sales, compared to a decrease in such allowance of $282,000 during 1997. The
most significant portions of the decrease in the allowance for returns and
discounts resulted from changes in the amount and aging of accounts receivable.
Bad debt expense was $189,000 in 1997 as compared to a recovery of $7,000 in
1998. Bonus accrual was $910,000 in 1997 as compared to $3.0 million in 1998.
After adjusting for the net increase in the allowance for bad debt of $627,000,
the $2.1 million increase in bonus accrual and expenses generated by the
operations of MGI and Rocky of $2.4 million in 1998 as compared to no such
expenses in 1997, general and administrative expenses increased by $1.3 million
in 1998 as compared to 1997, as summarized below:

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                       -----------------------
                                                                       1998               1997            Increase/(Decrease)
                                                                       ----               ----            -------------------
<S>                                                                <C>                <C>                 <C>
                                                                   $19,897,000        $13,518,000             $6,379,000
  Less: Bad debt expense*...................................            (7,000)           189,000               (196,000)
        Allowance for returns and discounts*................           541,000           (282,000)               823,000
                                                                   -----------        -----------             ----------
        Allowance for bad debt*.............................           534,000            (93,000)               627,000
        Bonus accruals*.....................................         2,964,000            910,000              2,054,000
        MGI and Rocky operations............................         2,352,000                -0-              2,352,000
                                                                   -----------        -----------             ----------
                                                                   $14,047,000        $12,701,000             $1,346,000
                                                                   ===========        ===========             ==========
</TABLE>

_____________
*    Excluding MGI and Rocky.

     Operating income was $17.1 million in 1997, or 6.6% of net sales, compared
to $38.6 million in 1998, or 10.2% of net sales, due to the factors described
above. This increase in operating income as a percentage of net sales was due to
the increase in the gross profit margin, which amounted to 3.7% of net sales, a
decrease in selling and distribution expenses, which amounted to 0.3% of net
sales, and an increase in amortization of excess of cost over fair value of net
assets acquired, which amounted to 0.4% of net sales.

     Other income increased from $413,000, or 0.2% of net sales, in 1997 to
$928,000, or 0.2% of net sales, in 1998. This increase is primarily the result
of interest income of $171,000 in 1997 compared to $361,000 in 1998, the
realization of no gains

                                      23
<PAGE>

on the sale of securities in 1998 as compared to $237,000, or 0.1% of net sales,
of such income in 1997, and management fee income of $441,000, or 0.1% of net
sales, in 1998 compared to no such income in 1997.

  Income before income taxes was $16.0 million in 1997 and $37.1 million in
1998, representing 6.2% and 9.8% of net sales, respectively. This increase in
income before taxes as a percentage of net sales was due to the increase in the
gross profit margin, which amounted to 3.7% of net sales, a decrease in selling
and distribution expenses, which amounted to 0.3% of net sales, and the increase
in amortization of excess of cost over fair value of net assets acquired, which
amounted to 0.4% of net sales.

Quarterly Results of Operations

  The following table sets forth, for the periods indicated, certain items in
the Company's 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,   Mar. 31,
                          1997       1997        1997       1997       1998       1998        1998       1998       1999
                        ---------  ---------  ----------  ---------  ---------  ---------  ----------  ---------  ---------
<S>                     <C>        <C>        <C>         <C>        <C>        <C>        <C>         <C>        <C>
                                                                                   (In millions)
Net sales.............    $ 53.6     $ 73.9      $ 69.2     $ 63.4     $ 64.3     $100.1      $114.9     $ 98.9     $ 84.1
Gross profit..........       8.8       11.1         9.7        9.6       10.9       20.3        19.7       20.2       16.0
Operating income......       3.4        5.1         4.1        4.5        4.5       11.7        11.4       11.0        7.9
Net Income/(loss)            2.0        3.3         2.7        2.8        2.8        7.2         7.1        7.6        4.6

<CAPTION>
                        -------------------------------
                        June 30,   Sept. 30,   Dec. 31,
                          1999        1999       1999
                        ---------  ----------  ---------
<S>                     <C>        <C>         <C>

Net sales.............  $109.8      $110.5     $ 90.9
Gross profit..........    19.0        19.3       11.9
Operating income......     9.7         9.0       (1.7)
Net Income/(loss)          5.7         4.9       (2.3)
</TABLE>


<TABLE>
<CAPTION>
                                                                             Quarter Ended
                        --------------------------------------------------------------------------------------------------
                        Mar. 31,   June 30,   Sept. 30,   Dec. 31,   Mar. 31,   June 30,   Sept. 30,   Dec. 31,   Mar. 31,
                            1997       1997        1997       1997       1998       1998        1998       1998       1999
                        --------   --------   ---------   --------   --------   --------   ---------   --------   --------
<S>                     <C>        <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%     100.0%
Gross profit..........      16.4       15.0        14.0       15.1       17.0       20.2        17.1       20.4       19.1
Operating Inc/(loss)         6.3        6.9         5.9        7.2        7.1       11.7         9.9       11.1        9.4
Net Income/(loss)            3.8        4.4         3.9        4.4        4.3        7.2         6.2        7.7        5.5


<CAPTION>
                        -------------------------------
                        June 30,   Sept. 30,   Dec. 31,
                            1999        1999       1999
                        --------   ---------   --------
<S>                     <C>        <C>         <C>
Net sales.............   100.0%      100.0%     100.0%
Gross profit..........    17.3        17.5       13.1
Operating Inc/(loss)       8.8         8.1       (1.9)
Net Income/(loss)          5.2         4.4       (2.5)
</TABLE>


  As is typical for the Company, quarterly net sales fluctuated significantly
because the Company's customers typically place bulk orders with the Company,
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

  The Company's liquidity requirements arise from the funding of its working
capital needs, principally inventory, finished goods shipments-in-transit, work-
in-process and accounts receivable, including receivables from the Company's
contract manufacturers that relate primarily to fabric purchased by the Company
for use by those manufacturers. (The Company generally purchases fabric for
delivery directly to the manufacturer's factory. The Company then invoices the
manufacturer for the fabric, and reduces payments to the manufacturer for
finished goods by the amount of outstanding invoices.) The Company's primary
sources for working capital and capital expenditures are cash flow from
operations, borrowings under the Company's bank credit facilities, issuance of
long-term debt and the proceeds from the exercise of stock options.

  During 1999, net cash provided by operating activities was $2.2 million, which
resulted primarily from net income of $12.9 million plus depreciation and
amortization of $8.0 million, as offset by a net increase in working capital
items, including an increase of $4.1 million in accounts receivable and an
increase in inventory of $13.1 million. The increase in inventory primarily
resulted from the company beginning to do its own manufacturing in Mexico as
part of its vertical integration strategy.  The Company now carries inventories
on its books of raw materials, work in process, and finished goods as a result
of this operation.

  During 1999, cash flow used in investing activities was $84.0 million, which
included $4.2 million for the CMG acquisition, $6.8 million for the Famian
acquisition.  The remaining investment was used to acquire fixed assets and
construction costs in Mexico to build production facilities.

  In 1999, cash flow provided by financing activities equaled $79.9 million,
including $61.7 million of net additional bank borrowings and long term debt.
The balance was $16.1 million interim financing from a shareholder, and $2.0
million from the exercise of stock options net of the companies stock repurchase
plan expenditures

  The Company has credit facilities of $33 million and $13 million with the
Hongkong and Shanghai Banking Corporation Limited ("HKSB") and Standard
Chartered Bank ("SCB"), respectively, for borrowings and the purchase and
exportation of finished goods. Under these facilities, the Company may arrange
for the issuance of letters of credit and acceptances, as well as

                                      24
<PAGE>

cash advances. These facilities are subject to review at any time and the right
of either lender to demand payment at any time. Interest on cash advances under
HKSB's facility accrues at HKSB's prime rate for lending U.S. dollars plus one-
half to three-quarters percent per annum. As of December 31, 1999, HKSB's U.S.
dollar prime rate equaled eight and one-half percent. Interest on cash advances
under SCB's facility accrues at SCB's prime rate for lending Hong Kong dollars.
As of December 31, 1999, SCB's Hong Kong dollar prime rate equaled eight and
one-half percent. These facilities are subject to certain restrictive covenants
including a provision that the aggregate net worth, as adjusted, of the Company
will exceed $30 million, the Company will not incur two consecutive quarterly
losses and the Company will maintain a certain debt to equity ratio. As of
December 31, 1999 there were $21.0 million of outstanding borrowings under these
facilities.

     The Company had accounts receivable-secured credit facilities with the CIT
Group/Commercial Services, Inc. ("CIT") and Finova Capital Corporation ("FCC").
Effective January 1, 1998 the Company substantially eliminated its use of a
factor for credit verification and approval purposes on major accounts.  The
Company may receive advances from FCC of up to 90% of certain accounts
receivable, and advances from CIT up to 90-100% of the amount of other accounts
receivable.  Subsequent to the year-end, these facilities from FCC and CIT have
been replaced by a syndicated facility of $105 million lead managed by GMAC
Commercial Credit and participated by GMAC, Finova, and Sanwa Bank of
California.

     The Company had an unsecured $10 million credit facility with SCB which
matured on December 29, 1999 and has been replaced by an uncommitted and
unsecured Money Market Line for the same amount. The Money Market Line is cross
defaulted to the Company's other credit facilities and interest on advances
accrues at the rate of one an one quarter percent over Libor. At December 31,
1999, $4.0 million was outstanding under this facility.

     The Company guarantees a $2.5 million credit facility for Rocky Apparel,
LLC, a wholly-owned subsidiary of the Company which acquired the partnership
interests in Rocky Apparel, L.P., a Delaware limited partnership.

     The Company assumed certain bank liabilities of Grupo Famian upon its
acquisition during the year.  As of December 31, 1999 these amounted to $1
million due to Banco Bilbao and $222,222 due to Banco International.

     The Company had two equipment loans for $16.25 million and $5.2 million
from GE Capital Leasing and Bank of America Leasing respectively. The leases are
secured by equipment located in Puebla and Tlaxcala Mexico. The outstanding
amounts as of December 31, 1999 were $15.5 million due to GE Capital and $5.1
million due to Bank of America. Interest accrues at a rate of 2 1/2% over LIBOR.
The loan from GE Capital will mature in the year 2005 and the loan from Bank of
America in the year 2004. These facilities are subject to the same restrictive
covenants as applicable to the HKSB and SCB facilities.

     During 1999 the Company financed equipment purchases for the new
manufacturing facility with certain vendors of the related equipment. A total of
$16.9 million was financed with five year promissory notes which bear interest
ranging from 7.0% to 7.5%, are payable in semiannual payments commencing in
February 2000. Of the $16.9 million outstanding as of December 31, 1999, $10.9
million is denominated in Deutsch Marks and $1.1 million is denominated in the
Euro. The remainder is payable in U.S. dollars. The Company bears the risk of
any foreign currency fluctuation with regards to this debt.

     The Company has financed its operations from its cash flow from operations,
borrowings under its bank credit facilities, issuance of long-term debt
(including debt to or arranged by vendors of equipment purchased for the Mexican
twill and production facility), and the proceeds from the exercise of stock
options. The Company believes that these sources of cash should be sufficient to
fund its existing operations for the foreseeable future.

     The Company has commenced a capital investment program in Mexico under
which it will invest approximately $160 million in the acquisition of a denim
mill and the construction of a new facility which when fully operational will
spin, weave and dye twill fabric, and provide the capability to cut, launder,
finish and ship finished garments. See "Item 1. Business--General and--
Acquisitions." The Company may seek to finance future capital investment
programs through various methods, including, but not limited to, borrowings
under the Company's bank credit facilities, issuance of long-term debt, leases
and long-term financing provided by the sellers of facilities or the suppliers
of certain equipment used in such facilities. To date, capital expenditures
aggregating approximately $116 million have been made with respect to vertical
integration programs initiated by the Company.

     The Company does 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.

                                      25
<PAGE>

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
         ----------------------------------------------------------

     The Company's earnings are affected by fluctuations in the value of the
U.S. dollar as compared to foreign currencies as a result of certain debt
denominated in the Deutsch Mark and the Euro. At December 31, 1999 the Company
had $10.9 million in U.S. dollars repayable in Deutsch Marks and $1.1 million
U.S. dollars repayable in Euros. The Company bears the risk of exchange rate
gains and losses that may result in the future as a result of this financing
structure. During 1999 the Company recorded a $668,000 exchange rate gain as a
result of a fluctuation. At December 31, 1999 the result of a 10% deterioration
of the Deutsch Mark and Euro to the U.S. dollar would result in an exchange rate
loss of $1.3 million. This hypothetical calculation assumes that each exchange
rate would change in the same direction relative to the U.S. dollar and does not
take into account any actions the Company would likely take to mitigate any
exposure.

     The Company's 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 the Company's debt.  A majority of the Company's credit
facilities are at variable rates.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
        -------------------------------------------

     See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K" for the Company's financial statements, and the notes thereto, and the
financial statement schedules filed as part of this report.

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

     Not applicable.

                                      26
<PAGE>

                                   PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS
         --------------------------------

  The information concerning the directors and executive officers of the Company
is incorporated herein by reference from the section entitled "Proposal 1--
Election of Directors" contained in the definitive Proxy Statement of the
Company to be filed pursuant to Regulation 14A within 120 days after the end of
the Company's last fiscal year (the "Proxy Statement").

Item 11. EXECUTIVE COMPENSATION
         ----------------------

  The information concerning executive compensation is incorporated herein by
reference from the section entitled "Proposal 1--Election of Directors"
contained in the Proxy Statement.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         --------------------------------------------------------------

  The information concerning the security ownership of certain beneficial owners
and management is incorporated herein by reference from the sections entitled
"General Information--Security Ownership of Principal Shareholders and
Management" and "Proposal 1--Election of Directors" contained in the Proxy
Statement.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
         ----------------------------------------------

  The information concerning certain relationships and related transactions is
incorporated herein by reference from the section entitled "Proposal 1--Election
of Directors--Certain Relationships and Related Transactions" contained in the
Proxy Statement.

                                      27
<PAGE>

                                    PART IV

Item 14. 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. None.
      --------------------

  (c) Exhibits. The following is a list of exhibits filed as a part of this
      ---------
report.


Exhibit Number
Description

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

3.2       Restated Bylaws of the Company/(1)/

4.1       Specimen of Common Stock Certificate/(2)/

10.1      Note in the principal amount of $2,600,000 dated March 15, 1995
          in favor of Imperial Bank/(1)/

10.2      General Security Agreement dated March 15, 1995, by and between
          the Company and Imperial Bank/(1)/

10.3      Factoring Agreement effective as of September 28, 1993, as
          amended, by and between the Company and NationsBanc Commercial
          Corporation/(1)/

10.4      1995 Stock Option Plan dated as of May 1, 1995/(1)/

10.5      Letter Agreement dated February 17, 1995 between Tarrant Company
          Limited and The Hongkong and Shanghai Banking Corporation
          Limited/(1)/

10.6      Letter dated April 18, 1995 from The Hongkong and Shanghai
          Banking Corporation Limited to Tarrant Company Limited regarding
          the release of certain security interests/(1)/

10.7      Commercial Lease dated January 1, 1994 and GET and the
          Company/(1)/

10.8      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)/

10.9      Lease Agreement dated June 10, 1994, between Yip Sik Kin and
          Tarrant Company Limited (translated from Chinese)/(1)/

10.10     Tenancy Contract effective as of December 24, 1994, between
          Khalifa al Muhairi and Tarrant Trading Co. Ltd./(1)/

10.11     Agreement dated as of June 1, 1995, by and among Pret-A-Porter,
          the Company, French Designers, Inc., Bernard Aidan, Gerard Guez
          and Todd Kay/(5)/

                                      28
<PAGE>

10.12     Services Agreement dated as of April 1, 1995, by and between F.I.S.,
          Inc. and the Company/(2)/

10.13     Services Agreement dated as of October 1, 1994, by and between the
          Company and GET/(1)/

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

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

10.16     Promissory Note in the initial principal amount of $2 million dated
          February 8, 1995, by Gerard Guez in favor of the Company/(2)/

10.17     Promissory Note in the initial principal amount of $1 million dated
          February 8, 1995, by Todd Kay in favor of the Company/(2)/

10.18     Promissory Note in the principal amount of $1,334,566.71 dated
          December 31, 1994, by F.I.S., Inc. in favor of the Company/(2)/

10.19     Release dated as of June 1, 1995, by and between the Company and
          certain other parties signatory thereto/(2)/

10.20     Option Agreement dated as of July 28, 1995, by and among Limited
          Direct Associates, L.P., Gerard Guez, Todd Kay and the Company/(5)/

10.21     Registration Rights Agreement dated as of July 28, 1995, by and among
          the Company and Limited Direct Associates, L.P./(5)/

10.22     Reorganization and Tax Indemnification Agreement dated as of June 13,
          1995, by and among the Company and its shareholders/(5)/

10.23     Employment Agreement January 1, 1995, by and between the Company and
          Gerard Guez/(2)/

10.23.1   Employment Agreement effective January 1, 1998, by and between the
          Company and Gerard Guez

10.24     Agreement dated as of January 1, 1995, by and between the Company and
          Todd Kay/(1)/

10.24.1   Employment Agreement effective January 1, 1998, by and between the
          Company and Todd Kay

10.25     Employment Agreement dated as of January 1, 1994, by and between the
          Company and Jimmy Esebag, as amended, by that certain Amendment No. 1
          dated as of June 1, 1995/(2)/

10.26     Employment Agreement dated as of November 18, 1994, by and between the
          Company and Mark B. Kristof/(1)/

10.27     Employment Agreement dated as of July 5, 1994, by and between the
          Company and Bradley R. Kenson/(1)/

10.28     License Agreement dated January 1, 1994, by and between the Company
          and GET/(1)/

10.29     Assignment dated as of June 1, 1995 with respect to the GET!
          trademark, executed by GET in favor of the Company/(2)/

10.30     Amendment No. 1 to Commercial Lease dated as of April 1, 1995, by and
          between GET and the Company/(2)/

10.31     Lease and Services Agreement dated as of June 1, 1995, by and between
          Tarrant Company Limited and French Designers, Inc./(2)/

                                      29
<PAGE>

10.32     Note in the principal amount of $2,600,000 dated May 15, 1995, by the
          Company in favor of Imperial Bank/(2)/

10.33     Letter Agreement dated May 17, 1995, by and between Tarrant Company
          Limited and The Hongkong and Shanghai Banking Corporation Limited/(2)/

10.34     Buying Agency Agreement executed as of December 19, 1992, between
          F.I.S., Inc. and Tarrant Company Ltd./(2)/

10.35     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)/

10.36     Tripartite Agreement Assignment of Factoring Proceeds (Advances)
          executed and delivered June 6, 1995, by the Company, and accepted and
          agreed to by The Hongkong and Shanghai Banking Corporation Limited and
          NationsBanc Commercial Corporation/(2)/

10.36.1   Amendment to Three Party Special Deposit Account Agreement/(8)/

10.37     Security Agreement (Guaranty of Tarrant Co. Ltd. Debt) entered into as
          of June 6, 1995, by and between the Hongkong and Shanghai Banking
          Corporation Limited and the Company/(2)/

10.38     Security Agreement (Tarrant Co. Ltd. Draft Acceptance) entered into as
          of June 6, 1995, by and between The Hongkong and Shanghai Banking
          Corporation Limited and the Company/(2)/

10.39     Agreement dated March 14, 1995, by and among Tarrant Company Limited,
          Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong/(3)/

10.40     Agreement dated March 17, 1995, by and among Tarrant Company Limited,
          Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong/(3)/

10.41     Underwriting Agreement dated as of July 24, 1995, by and among the
          Company, Gerard Guez, Todd Kay and Prudential Securities
          Incorporated/(5)/

10.42     Letter agreement dated August 10, 1995, by and among the Company and
          NationsBanc Commercial Corporation/(4)/

10.42.1   Amendment dated June 9, 1997 to Factoring Agreement effective as of
          September 28, 1993, as amended, by and between the Company and
          NationsBanc Commercial Corporation/(8)/

10.43     Letter agreement dated January 30, 1996, by and between Tarrant
          Company Limited and The Hongkong Shanghai Banking Corporation
          Limited/(5)/

10.43.1   Letter agreement dated May 28, 1996, by and between Tarrant Company
          Limited and The Hongkong and Shanghai Banking Corporation Limited/(8)/

10.43.2   Letter agreement dated April 16, 1998, by and between Tarrant Company
          Limited and The Hongkong and Shanghai Banking Corporation
          Limited/(11)/

10.44     Promissory Note in the principal amount of $3 million dated March 25,
          1996, by GET in favor of the Company/(6)/

10.45     Deed of Trust dated March 25, 1996 by and between GET and the
          Company/(6)/

10.46     Guaranty, Pledge & Security Agreement entered into as of March 25,
          1996, by and between Gerard Guez and the Company/(6)/

10.47     Guaranty, Pledge & Security Agreement entered into as of March 25,
          1996, by and between Todd Kay and the Company/(6)/

10.48     Letter agreement dated February 22, 1996, by and between Tarrant
          Company Limited and Standard Chartered Bank/(7)/

10.49     Letter agreement dated March 8, 1996, by and between Tarrant Company
          Limited and Standard Chartered Bank/(7)/

                                      30
<PAGE>

10.50     Guarantee Agreement entered into as of August 30, 1996, by and between
          Standard Chartered Bank and the Company/(7)/

10.51     Letter of Undertaking entered into as of August 30, 1996, by and
          between Standard Chartered Bank and the Company/(7)/

10.52     Intercreditor Agreement entered into as of November 1, 1996, between
          The Hongkong and Shanghai Banking Corporation Limited, Standard
          Chartered Bank and Tarrant Company Limited/(7)/

10.53     Security Agreement entered into as of November 1, 1996, by and between
          Standard Chartered Bank and the Company/(7)/

10.54     Amendment to Security Agreement (Guaranty of Tarrant Co. Ltd. Debt)
          entered into as of November 1, 1996, between The Hongkong and Shanghai
          Banking Corporation Limited and the Company/(7)/

10.55     Agreement dated January 29, 1997 by and among Tarrant Company Limited,
          Cheung Shing Hong Holding Ltd., Yip Sik Kin and Lam Kin Fong/(7)/

10.56     Form of Indemnification Agreement with directors and certain executive
          officers/(8)/

10.57     Special Deposit Account Agreement/(8)/

10.58     Accounts Receivable Financing Agreement dated June 13, 1997, by and
          between the Company and The CIT Group/Commercial Services, Inc./(8)/

10.58.1   Letter Agreement dated October 1, 1997 regarding Accounts Receivable
          Financing Agreement, by and between the Company and The CIT
          Group/Commercial Services, Inc.

10.59*+   Asset Purchase Agreement dated February 18, 1998, by and between
          Marble Limited and MGI International Limited/(10)/

10.60*+   Asset Purchase Agreement dated February 18, 1998, by and between the
          Company and Marshall Gobuty International U.S.A., Inc./(10)/

10.61     Employment Agreement dated February 23, 1998, by and between the
          Company and Marshall Gobuty/(10)/

10.62     Noncompetition Agreement dated February 23, 1998, by and between
          Marshall Gobuty International U.S.A., Inc. and Marshall Gobuty, on the
          one hand, and the Company, on the other hand/(10)/

10.63     Noncompetition Agreement dated February 23, 1998, by and between MGI
          International Limited and Marshall Gobuty, on the one hand, and the
          Company, on the other hand/(10)/

10.64     Loan Agreement dated as of July 1, 1998, between the Company and
          Standard Chartered Bank/(12)/

10.65     Partnership Interest Purchase Agreement dated as of July 2, 1998,
          among Rocky Acquisition, LLC, the Company, Limited Direct Associates,
          L.P., Rocky Apparel, Inc., and Gabriel Manufacturing Company

10.66     Escrow Agreement made as of July 2, 1998, by and among the Company,
          Gabriel Manufacturing Company and Rocky Apparel, Inc.

10.67     Facility Development Agreement dated as of December 2, 1998, by and
          between Tarrant Mexico, S. de R.L. de C.V. nd Tex Transas, S.A. de
          C.V.

10.68 +   Agreement for Purchase of Assets dated as of February 22, 1999, by and
          among Tarrant Mexico, S. de R.L. de C.V., Jamil Textil, S.A. de C.V.,
          Inmobiliaria Cuadros, S.A. de C.V., Kamel Nacif and Irma Benavides
          Montes De Oca.

                                      31
<PAGE>

10.68.1   Final Agreement for Purchase of Assets dated as of April 18, 1999, by
          and among Tarrant Mexico, S. de R.L. de C.V., Jamil Textil, S.A. de
          C.V., Inmobiliaria Cuadros, S.A. de C.V., Kamel Nacif and Irma
          Benavides Montes De Oca

10.69     Agreement for Purchase of Assets effective as of the twenty-third day
          of March, 1999, by and among CMG, Inc., Charles Ghailian, CHAZZZ
          Acquisition, L.L.C. and the Company

10.70     Employment Agreement effective as of the twenty-third day of March,
          1999, by and between Charles Ghailian and the Company

10.71     Non-Negotiable Promissory Note dated March 23, 1999

10.72     Escrow Agreement, by and among the Company, Tarrant Mexico, S. de R.L.
          de C.V. and Jamil Textil, S.A. de C.V. dated as of April 1, 1999.

10.72.1   Final Escrow Agreement dated as of May 24, 1999, by and among Tarrant
          Apparel Group, Tarrant Mexico, S. de R.L. de C.V., Jamil Textil, S.A.
          de C.V., Inmobiliaria Cuadros, S.A. de C.V., Kamel Nacif and Irma
          Benavides Montes De Oca

10.73     Employment Agreement dated as of April 1, 1999 by and between Kamel
          Nacif and Tarrant Mexico, S. de R.L. de C.V.

10.74     Agreement for Purchase of Stock dated as of August 1, 1999, by and
          among Tag Mex, Inc., NO! Jeans, Inc., Antonio Haddad Haddad, Tarrant
          Apparel Group and the shareholders of Industrial Exportadora Famian,
          S.A. de C.V. and Coordinados Elite, S.A. de C.V. *

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

10.77     Loan Agreement dated September 1, 1999 by and between General Electric
          Capital Corporation and Tarrant Apparel Group

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

10.78     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

10.79     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

10.79.1   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

10.80     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

10.80.1   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

10.81     Loan Agreement dated December 30, 1999 by and between Standard
          Chartered Bank and Tarrant Apparel Group.

10.82     Factoring Agreement dated November 24, 1999 by and between MTB Bank
          and Rocky Apparel, LLC.

10.83     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.

                                      32
<PAGE>

10.84     Employment Agreement dated as of August 1, 1999 by and between
          Industrial Exportadora Famian, S.A. de C.V. and Antonio Haddad Haddad

10.85     Employment Agreement dated as of August 1, 1999 by and between
          Industrial Exportadora Famian, S.A. de C.V. and Mario Alberto Haddad
          Yunes

10.86     Employment Agreement dated as of August 1, 1999 by and between
          Industrial Exportadora Famian, S.A. de C.V. and Marco Antonio Haddad
          Yunes

10.87     Employment Agreement dated as of August 1, 1999 by and between
          Industrial Exportadora Famian, S.A. de C.V. and Miguel Angel Haddad
          Yunes

10.88     Non - Negotiable Promissory Note dated August 1, 1999 to pay to the
          order of Antonio Haddad Haddad

10.89     Stock Pledge Agreement dated August 1, 1999 by and between TAG MEX,
          INC. and those individuals whose names appear on the signature page

10.90     Revolving Credit, Factoring and Security Agreement dated January 21,
          2000 by and between Tarrant Apparel Group, TAG MEX, INC., and GMAC
          COMMERCIAL CREDIT LLC

23        Consent of Ernst & Young LLP

27        Financial Data Summary

__________
 *   Confidential treatment has been requested for portions of this document.

 +   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.

(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 June 15, 1995.

(3)  Filed as an exhibit to Amendment No. 2 to Registration Statement on Form S-
     1 filed with the Securities and Exchange Commission on July 11, 1995.

(4)  Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
     quarter ended June 30, 1995.

(5)  Filed as an exhibit to the Company's Annual Report on Form 10-K for the
     year ended December 30, 1995.

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

(7)  Filed as an exhibit to the Company's Annual Report on Form 10-K for the
     year ended December 31, 1996.

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

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

(10) Filed as exhibit to the Company's Annual Report on Form 10-K for the year
     ended December 31, 1997.

(11) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the
     quarter ended March 31, 1998.

(12) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the
     quarter ended June 30, 1998.

27        Financial Data Schedule


                                      33
<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 22, 2000.

                                             TARRANT APPAREL GROUP

                                          By:     /s/ Gerard Guez
                                             -----------------------------------
                                             Gerard Guez,
                                             Chief Executive Officer

     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 Company
and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
        Signature                         Title                       Date
        ---------                         -----                       ----
<S>                         <C>                                  <C>

/s/ Gerard Guez             Chairman, Chief Executive Officer    March 22, 2000
------------------------    and Director (Principal
Gerard Guez                 Executive Officer)

/s/ Todd Kay                Vice Chairman and Director           March 22, 2000
------------------------
Todd Kay

/s/ Barry Aved              President and Director               March 22, 2000
------------------------
Barry Aved

/s/ Scott Briskie           Vice President Finance Chief         March 22, 2000
------------------------    Financial Officer and Director
Scott Briskie               (Principal Financial and
                            Accounting Officer)

/s/ Karen S. Wasserman      Executive Vice President, General    March 22, 2000
------------------------    Merchandising Manager and
Karen S. Wasserman          Director

/s/ James R. Miller         Director                             March 22, 2000
------------------------
James R. Miller

/s/ Nicolas Berggruen       Director                             March 22, 2000
------------------------
Nicolas Berggruen
</TABLE>

                                      S-1
<PAGE>

                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

<TABLE>
<CAPTION>
                                                                                                                        Page
                                                                                                                        ----
<S>                                                                                                                     <C>
Financial Statements

   Report of Independent Auditors--Ernst & Young, LLP...............................................................    F-2

   Consolidated Balance Sheets--December 31, 1998 and 1999..........................................................    F-3

   Consolidated Statements of Income--Three year period ended December 31, 1999.....................................    F-4

   Consolidated Statements of Shareholders' Equity--Three year period ended December 31, 1999.......................    F-5

   Consolidated Statements of Cash Flows--Three year period ended December 31, 1999.................................    F-6

   Notes to Consolidated Financial Statements.......................................................................    F-7

Financial Statement Schedule

   Schedule II--Valuation and Qualifying Accounts...................................................................    F-25
</TABLE>

                                      F-1
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS

Board of Directors
Tarrant Apparel Group

     We have audited the accompanying consolidated balance sheets of Tarrant
Apparel Group and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). 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, 1997, 1998 and 1999 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule when considered in relation to the basic financial
statements, taken as a whole, presents fairly in all material respects the
information set forth therein.

Los Angeles, California                           /s/ ERNST & YOUNG LLP
March 17, 2000



                                      F-2
<PAGE>

                             TARRANT APPAREL GROUP

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                         ------------
                                                                                       1998             1999
                                                                                       ----             ----
<S>                                                                               <C>               <C>
                                    ASSETS
Current assets:
  Cash and cash equivalents.................................................      $  4,318,520      $  2,239,511
  Accounts receivable, net..................................................        65,946,055        70,922,626
  Due from affiliates.......................................................         2,143,527         1,031,879
  Due from officers.........................................................         4,477,461         1,891,739
  Inventory.................................................................        49,230,847        62,362,409
  Temporary quota...........................................................         1,192,888         4,521,200
  Prepaid expenses and other receivables....................................         1,527,392         3,413,416
  Income taxes..............................................................           501,334           296,681
                                                                                  ------------      ------------
     Total current assets...................................................       129,338,024       146,679,461

Property and equipment, net.................................................         5,306,308       111,520,497
Permanent quota, net........................................................           245,464           584,402
Other assets................................................................         4,468,517        11,658,832
Excess of cost over fair value of net assets acquired, net..................        14,532,193        24,599,215
                                                                                  ------------      ------------
     Total assets...........................................................      $153,890,506      $295,042,407
                                                                                  ============      ============

                     LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Bank borrowings...........................................................      $ 33,288,267      $ 55,144,818
  Accounts payable..........................................................        24,200,202        27,915,169
  Accrued expenses..........................................................         8,738,522         7,814,114
  Income taxes..............................................................         5,048,288         4,694,483
  Due to shareholders/officers..............................................                 -        16,143,238
  Current portion of long-term obligations..................................           981,124         9,771,867
                                                                                  ------------      ------------
     Total current liabilities..............................................        72,256,403       121,483,689
Long-term obligations.......................................................         2,424,439        34,155,247
                                                                                  ------------      ------------
     Total liabilities......................................................        74,680,842       155,638,936

Commitments and contingencies

Shareholders' equity:
  Preferred stock, 2,000,000 shares authorized; none issued and
    outstanding.............................................................                 -                 -
  Common stock, no par value, 20,000,000 shares authorized;
    13,832,955 shares (1998) and 15,802,315 (1999) issued and
    outstanding.............................................................        22,290,539        69,595,141
  Contributed capital.......................................................         1,434,259         1,434,259
  Retained earnings.........................................................        55,484,866        68,365,373
  Accumulated other comprehensive income....................................                 -             8,698
                                                                                  ------------      ------------
     Total shareholders' equity.............................................        79,209,664       139,403,471
                                                                                  ------------      ------------
     Total liabilities and shareholders' equity.............................      $153,890,506      $295,042,407
                                                                                  ============      ============
</TABLE>

                            See accompanying notes.

                                          F-3
<PAGE>

                             TARRANT APPAREL GROUP

                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                             -----------------------
                                                                     1997               1998               1999
                                                                     ----               ----               ----
<S>                                                              <C>                <C>                <C>
Net sales..................................................      $260,092,777       $378,155,527       $395,341,275
Cost of sales..............................................       220,995,754        307,077,111        329,131,063
                                                                 ------------       ------------       ------------
Gross profit...............................................        39,097,023         71,078,416         66,210,212
Selling and distribution expenses..........................         8,498,976         11,274,384         13,691,796
General and administrative expenses........................        13,518,441         19,896,522         25,259,733
Amortization of excess of cost over fair value of net
 assets acquired...........................................                 -          1,336,791          2,311,522
                                                                 ------------       ------------       ------------
Income from operations.....................................        17,079,606         38,570,719         24,947,161
Interest expense...........................................        (1,470,762)        (2,423,482)        (5,771,250)
Interest income............................................           171,385            360,580            395,523
Other income (expense).....................................           241,235            567,847            748,139
                                                                 ------------       ------------       ------------
Income before provision for income taxes...................        16,021,464         37,075,664         20,319,573
Provision for income taxes.................................         5,235,000         12,410,000          7,439,066
                                                                 ------------       ------------       ------------
Net income.................................................      $ 10,786,464       $ 24,665,664       $ 12,880,507
                                                                 ============       ============       ============

Net income per share:
  Basic....................................................      $       0.82       $       1.82       $       0.85
                                                                 ============       ============       ============
  Diluted..................................................      $       0.80       $       1.71       $       0.79
                                                                 ============       ============       ============
Weighted average shares outstanding:
  Basic....................................................        13,175,256         13,519,517         15,199,893
  Diluted..................................................        13,567,254         14,416,850         16,314,129
</TABLE>

                            See accompanying notes.

                                                     F-4
<PAGE>

                             TARRANT APPAREL GROUP

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                     Accumulated
                                                                                        Other           Total
                                             Common      Contributed    Retained    Comprehensive   Shareholders'
                                              Stock        Capital      Earnings        Income          Equity
                                           -----------    ----------   -----------  -------------   -------------
<S>                                       <C>            <C>          <C>           <C>             <C>
Balance at December 31, 1996............   $15,485,734    $1,434,259   $20,032,738  $           -    $ 36,952,731
 Net income.............................             -             -    10,786,464              -      10,786,464
 Exercise of stock options..............       495,254             -             -              -         495,254
 Income tax benefit from exercise
  of stock options......................       119,495             -             -              -         119,495
                                           -----------    ----------   -----------  -------------    ------------
Balance at December 31, 1997............    16,100,483     1,434,259    30,819,202              -      48,353,944
 Net income.............................             -             -    24,665,664              -      24,665,664
 Exercise of stock options..............     3,343,492             -             -              -       3,343,492
 Issuance of shares for acquisition.....     1,350,000             -             -              -       1,350,000
 Income tax benefit from exercise
  of stock options......................     1,496,564             -             -              -       1,496,564
                                           -----------    ----------   -----------  -------------    ------------
Balance at December 31, 1998............    22,290,539     1,434,259    55,484,866              -      79,209,664
 Net income.............................                                12,880,507              -      12,880,507
 Currency translation...................             -             -             -          8,698           8,698
                                                                                                     ------------
 Comprehensive income...................             -             -             -              -      12,889,205
 Exercise of stock options..............     1,569,887             -             -              -       1,569,887
 Issuance of shares for
  acquisition-Jamil.....................    45,283,716             -             -              -      45,283,716
 Repurchase of shares...................      (806,633)            -             -              -        (806,633)
 Income tax benefit from exercise
  of stock options......................     1,257,632             -             -              -       1,257,632
                                           -----------    ----------   -----------  -------------    ------------
Balance at December 31, 1999............   $69,595,141    $1,434,259   $68,365,373  $       8,698    $139,403,471
                                           ===========    ==========   ===========  =============    ============
</TABLE>

                            See accompanying notes.

                                                   F-5
<PAGE>

                             TARRANT APPAREL GROUP

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                                -----------------------
                                                                         1997             1998             1999
                                                                         ----             ----             ----
<S>                                                                  <C>              <C>              <C>
Operating activities
Net income.......................................................    $ 10,786,464     $ 24,665,664     $ 12,880,507
Adjustments to reconcile net income to net cash provided
 by (used in) operating activities:..............................
  Deferred taxes.................................................         598,273         (606,241)        (169,919)
  Depreciation and amortization..................................         867,022        2,356,259        8,001,897
  Loss on sale of fixed assets...................................           3,698           21,587           64,562
  Unrealized gain on foreign currency............................               -                -         (667,623)
  Provision for returns and discounts............................        (359,344)         593,447          961,311
  Changes in operating assets and liabilities:
     Accounts receivable.........................................      10,764,877      (28,785,228)      (4,056,532)
     Due (from) to affiliates and officers.......................      (1,508,724)      (5,015,848)       3,697,370
     Inventory...................................................     (12,446,028)     (18,215,979)     (13,125,935)
     Temporary quota.............................................      (1,151,297)       1,681,494       (3,328,312)
     Prepaid expenses............................................        (849,422)        (185,579)      (2,527,640)
     Prepaid income taxes........................................       1,300,887                -                -
     Accounts payable............................................      (1,650,268)       5,906,194        2,789,709
     Accrued expenses and income tax payable.....................         629,236        7,100,702       (2,284,419)
                                                                     ------------     ------------     ------------
        Net cash (used in) provided by operating activities......       6,985,374      (10,483,528)       2,234,976

Investing activities
Purchase of fixed assets.........................................        (764,087)      (1,490,728)     (65,316,947)
Acquisition of MGI...............................................               -       (6,108,685)               -
Acquisition of Rocky, net of cash................................               -      (10,993,407)               -
Acquisition of CMG, Inc..........................................               -                -       (4,233,069)
Acquisition of Famian, net of cash...............................               -                -       (6,757,133)
Purchase of permanent quota......................................        (129,205)        (226,115)        (691,124)
Increase in other assets.........................................               -       (4,245,981)      (7,190,315)
                                                                     ------------     ------------     ------------
     Net cash used in investing activities.......................        (893,292)     (23,064,916)     (84,188,588)

Financing activities
Bank borrowings, net.............................................      (2,522,158)      25,547,109       21,856,551
Proceeds from long term obligations..............................               -        2,635,000       42,232,032
Paydown of long term obligations.................................               -         (460,330)      (2,378,104)
Advance from shareholders/officers...............................               -                -       16,143,238
Repurchase of shares.............................................               -                -         (806,633)
Exercise of stock options including related tax benefit..........         614,749        4,840,056        2,827,519
                                                                     ------------     ------------     ------------
     Net cash provided by (used in) financing
       activities................................................      (1,907,409)      32,561,835       79,874,603
                                                                     ------------     ------------     ------------
Increase (decrease) in cash and cash equivalents.................       4,184,673         (986,609)      (2,079,009)
Cash and cash equivalents at beginning of year...................       1,120,456        5,305,129        4,318,520
                                                                     ------------     ------------     ------------
Cash and cash equivalents at end of year.........................    $  5,305,129     $  4,318,520     $  2,239,511
                                                                     ============     ============     ============
</TABLE>

                            See accompanying notes.

                                              F-6
<PAGE>

                             TARRANT APPAREL GROUP

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1999


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.) (the Parent Company or the Company), NO! Jeans, Inc. (NO), Rocky Mexico,
Inc. (RM), Rocky Apparel, L.L.C. (RA) and Tag Mex, Inc., United States
corporations; the following Hong Kong corporations: Tarrant Company Limited
(Tarrant HK) and Marble Limited (Marble); Tarrant Trading Limited, a United Arab
Emirates corporation (Tarrant UAE); and Tag Mex, S.A., a Mexican corporation
which are wholly-owned subsidiaries of Tag Mex, Inc. Tarrant HK owns a 49%
interest in Tarrant UAE. However, since Tarrant HK effectively controls Tarrant
UAE, the results of Tarrant UAE had been consolidated. The third-party interest
in Tarrant UAE is immaterial.

     The Company serves both specialty retail and mass merchandise store chains
by designing, merchandising and contracting for the manufacture and selling of
casual, moderately priced apparel, for women, men and children under private
label. Commencing in 1999, the Company began production of fabric (denim) for
use in the manufacturing process.

     Revenue Recognition

     Revenues are recorded, net of anticipated returns, at the time of shipment
of merchandise.

     Cash and Cash Equivalents

     Cash equivalents consist of highly liquid investments with an original
maturity of three months or less when purchased.

     Inventories

     Inventories are stated at the lower of cost (first-in, first-out) or
market.

     Quota

     The Company purchases quota rights to be used in the importation of its
products from certain foreign countries. The effect of quota transactions is
accounted for as 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 amounted to
$245,000, net of amortization of $1.1 million at December 31, 1998 and $584,000,
net of amortization of $1.2 million at December 31, 1999.

     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 the current year
utilization has been 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.

                                      F-6
<PAGE>

                             TARRANT APPAREL GROUP

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     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 life 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 income.

     Intangibles

     The excess of cost over fair value of net assets acquired is being
amortized over five to fifteen years. Accumulated amortization at December 31,
1998 and 1999 was $1,337,000 and $ 2,312,000, respectively.

     The Company periodically evaluates whether events and circumstances have
occurred that indicate the remaining useful lives of goodwill and other long-
lived assets may warrant revision or that the remaining balances may not be
recoverable. When factors indicate that the asset should be evaluated for
possible impairment, the Company uses an estimate of the undiscounted net cash
flows over the remaining life of the asset in measuring whether the asset is
recoverable. Based upon the anticipated future income and cash flow from
operations, in the opinion of Company management, there has been no impairment.

     Impairment of Long-Lived Assets

     In accordance with the Financial Accounting Standards Board Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. This methodology includes intangible
assets acquired. Goodwill relating to specific intangible assets is included in
the related impairment measurements to the extent it is identified with such
assets.

     Income Taxes

     The Company utilizes Statement of Financial Accounting Standards 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.

     The Company's Hong Kong corporate affiliates are taxed at an effective Hong
Kong rate of 16%. No domestic tax provision has been provided for $47.6 million
of unremitted retained earnings of these Hong Kong corporations, as the Company
intends to maintain these amounts in Hong Kong on a permanent basis in support
of its working capital requirements.

     Net Income Per Share

     Net income per share has been computed in accordance with Financial
Accounting Standard Board (FASB) Statement No. 128, "Earnings Per Share" (see
Note 10). A two-for-one stock split became effective May 8, 1998. All share and
per share amounts have been restated to reflect the split.

                                      F-7
<PAGE>

                             TARRANT APPAREL GROUP

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     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 income (excluding the costs
of manufacturing samples) amounted to approximately $1,528,000, $840,000 and
$1,740,000 in 1997, 1998 and 1999, respectively.

     Foreign Currency Translation

     Assets and liabilities of the Mexico, Hong Kong and United Arab Emirates
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 principal foreign currency in which the Company
transacts business is 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. Historically, such gains
and losses have been immaterial. At December 31, 1999, the Hong Kong
subsidiaries have retained earnings of $ 47.6 million and an intercompany
receivable due from Tarrant Apparel Group of $ 41.8 million.

     Financial Instruments

     The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. Unless
otherwise described, the fair values of financial instruments approximate their
recorded values.

     Concentration of Credit Risk

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

     The Company's 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. The Company makes substantial
sales to a relatively few, large customers. In order to minimize the risk of
loss, the Company assigns certain of its domestic accounts receivable to a
factor without recourse or requires letters of credit from its customers prior
to the shipment of goods. For nonfactored receivables, account monitoring
procedures are utilized to minimize the risk of loss. Collateral is generally
not required. The following table presents the percentage of net sales
concentrated with certain customers. Customer A represents a group of customers
under common ownership.

<TABLE>
<CAPTION>
                                                         1997    1998    1999
                                                         ----    ----    ----
        <S>                                              <C>     <C>     <C>
        Customer A.....................................  69.7%   63.3%   42.5%
        Customer B.....................................  18.7     8.6    12.4
        Customer C.....................................     -     8.2    11.4
</TABLE>

                                      F-8
<PAGE>

                             TARRANT APPAREL GROUP

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     Products representing over 90% of the Company's net sales, on the basis of
the free on board cost at the supplier's plant, were manufactured by third party
contractors located in foreign countries. There can be no assurance that the
Company will not experience difficulties with third parties responsible for the
manufacture of its products.

     The Company maintains 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 generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

     Stock-Based Compensation

     In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain pro
forma disclosures are made. The Company has elected to account for its stock
compensation arrangements under the provisions of APB 25, "Accounting for Stock
Issued to Employees." The Company adopted the provisions for pro forma
disclosure requirements of SFAS 123 in fiscal 1996.

     New Accounting Pronouncements

     Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), is effective for
financial statements ending June 15, 1999.  SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities.  The Company does not expect adoption
of SFAS 133 to have a material impact on consolidated results of operations.

    Statement of Financial Accounting Standard No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
SFASB Statement No. 133" ("SFAS 137"), is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. SFAS 137 defers the effective
date of SFAS 133. The Company does not expect adoption of SFAS 137 to have a
material impact on consolidated results of operations.

2.   Accounts Receivable

     Accounts receivable consist of the following:

<TABLE>
<CAPTION>
                                                                    December 31,
                                                                    ------------
                                                                 1998          1999
                                                                 ----          ----
        <S>                                                  <C>           <C>
        U.S. trade accounts receivable....................   $53,693,368   $54,546,617
        Foreign trade accounts receivable.................     8,406,558    10,954,919
        Due from factor...................................     4,725,869     2,161,897
        Other receivables.................................     1,367,266     6,467,511
        Allowance for returns and discounts...............    (2,247,006)   (3,208,318)
                                                             -----------   -----------
                                                             $65,946,055   $70,922,626
                                                             ===========   ===========
</TABLE>

     The Company had accounts receivable-secured credit facilities with The CIT
Group/Commercial Services, Inc. ("CIT") and Finova Capital Corporation ("FCC").
During the year, the Company could receive advances from FCC of up to 90% of
certain accounts receivable. Such advances approximated $5.3 million at December
31, 1999. CIT advanced up to 100% of the amount of certain accounts receivable
plus an over-advance of up to $10 million, up to a maximum amount of $25
million. Such advances approximated $1.4 million and $13.7 million at December
31, 1998 and 1999, respectively. Interest on advances from both FCC and CIT
accrues at the rate of one and one-quarter percent below the bank's respective
prime rates or, at the option of the Company, one and one-quarter percent over
the respective LIBOR rates. As of December 31, 1999, the prime rates equaled
8.5% and the LIBOR rates averaged 6.0%. Subsequent to year end these facilities
were replaced by a syndication facility (Note 16).

                                     F-10

<PAGE>
<PAGE>

                             TARRANT APPAREL GROUP

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


3.   Inventory

     Inventory consists of the following:

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                             ------------
                                                                          1998          1999
                                                                          ----          ----
         <S>                                                          <C>           <C>
         Raw materials
            Fabric and trim accessories...........................    $10,424,416   $16,932,830
            Raw cotton............................................      1,043,449     1,555,752
         Work-in-process..........................................      7,620,403     9,949,447
         Finished goods shipments-in-transit......................     10,331,867     7,112,939
         Finished goods...........................................     19,810,712    26,811,441
                                                                      -----------   -----------
                                                                      $49,230,847   $62,362,409
                                                                      ===========   ===========
</TABLE>

4.   Property and Equipment

     Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                             ------------
                                                                          1998          1999
                                                                          ----          ----
         <S>                                                          <C>           <C>
           Land...................................................    $    85,000   $  1,318,265
           Buildings..............................................        559,240     10,943,725
           Equipment, furniture and fixtures......................      5,621,127     98,168,827
           Leasehold improvements.................................      2,402,965      9,961,426
           Vehicles...............................................        260,480      1,456,984
                                                                      -----------   ------------
                                                                        8,928,812    121,849,227
           Less accumulated depreciation and amortization.........     (3,622,504)   (10,328,730)
                                                                      -----------   ------------
                                                                      $ 5,306,308   $111,520,497
                                                                      ===========   ============
</TABLE>

Included in property and equipment is $36.3 million in equipment purchased for
the turn-key twill facility. Depreciation has not yet commenced on the
equipment.

5.   Acquisitions

     Grupo Famian

     On August 1, 1999, the Company has entered into an agreement to purchase
all of the outstanding stock of Industrial Exportadora Famian, S.A. de C.V. and
Coordinados Elite, S.A. de C.V., both Mexican corporations ("Grupo Famian").
Grupo Famian operates seven apparel production facilities in and near Techuacan,
Mexico. The purchase price consists of (i) $1,000,000 paid on closing, (ii) a
$3,000,000 noninterest-bearing promissory note payable in three monthly
installments of $1,000,000 through October 29, 1999 and (iii) $8,000,000 payable
in installments of $833,000, $3,000,000, $1,667,000, $1,667,000 and $883,000 on
each of March 31, 2000, August 31, 2000, March 31, 2001, March 31, 2002 and
September 30, 2002 provided, except with respect to the payment due August 31,
2000, that the Grupo Famian subsidiary meets specified pretax income
requirements. The purchase price paid on closing was financed by the Company
under its existing bank credit facilities. The transaction has been accounted
for as a purchase and the purchase price has been allocated based on the fair
value of assets acquired and liabilities assumed. The excess of cost over fair
value of net assets acquired of $ 5.8 million is being amortized over 15 years.
The operations of Grupo Famian have been included with those of the Company
commencing on August 1, 1999.

                                     F-11
<PAGE>

                             TARRANT APPAREL GROUP

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     Jamil

     On April 18, 1999, the Company finalized an agreement to acquire certain
assets of a denim mill located in Puebla, Mexico ("Jamil"). The price paid for
the asset acquisition consisted of $22.0 million in cash paid on May 7, 1999 and
1,724,000 shares (the "Shares") of the Company's Common Stock issued on May 24,
1999 valued at $45.3 million. The shares will be distributed to the sellers in
three equal installments on April 1, 2000, 2001 and 2002; provided, however,
that any distribution (i) shall be offset by any claims of the Company against
the sellers under the asset purchase agreement and (ii) will be proportionally
reduced in the event the assets fail to produce at least 15 million yards of
marketable denim in the fiscal year immediately preceding the dates of such
distributions of Shares. In addition, the Company has granted the holders of the
Shares certain registration rights and the right to vote the shares. The
acquisition of the denim plant has been accounted for as the acquisition of a
discrete operating asset. The Company did assume obligations of the sellers
under an existing collective bargaining agreement; provided, however, that the
sellers shall reimburse the Company for any costs ( including, but not limited
to, salaries and benefits) arising before the closing date or as a result of the
transaction.

     CMG

     On March 23, 1999, the Company purchased certain assets of CMG, Inc., a
California corporation ("CMG"). CMG designs, produces and sells private label
and "CHAZZZ" branded woven (denim and twill) and knit apparel for women,
children and men for national chain stores, including J.C. Penney, Sears and
Mervyns. The purchase price consisted of (i) $4,275,000 and an amount equal to
the seller's cost of inventory purchased, payable in cash on closing, (ii) a
$2,500,000 noninterest-bearing promissory note payable in three equal annual
installments on the first three anniversary dates of the closing and convertible
into 62,550 shares of Common Stock of the Company, (iii) $500,000 payable in two
equal installments of $250,000 on the second and third anniversary dates of the
closing, and (iv) $1,500,000 payable in three equal installments of $500,000 on
the first three anniversary dates of the closing provided that CMG Division
meets specified net sales and pretax income requirements. The purchase paid was
financed from cash flow form operations. The transaction has been accounted for
as a purchase and the purchase has been allocated based on the fair value of
assets acquired and liabilities assumed. The excess of cost over fair value of
net assets acquired of $6.0 million is being amortized over 15 years. The
operation of CMG have been included with those of the Company commencing on
March 23, 1999.

     Twillmill

     On December 2, 1998, the Company contracted to acquire a turn-key facility
being constructed in Puebla, Mexico by an affiliate of the seller of the denim
mill described above ("Jamil"). This facility is ultimately expected to have an
annual capacity of approximately 18 million meters of twill and will also house
ancillary facilities. Construction of this facility commenced in the third
quarter of 1998, and it is anticipated that the Company will take possession of
this facility by the year 2000. The Company currently anticipates that the cost
of this facility will be approximately $90 million. Of this amount the Company
has purchased related equipment for installation in the Twillmill in the amount
of $36.3 million as of December 31, 1999. Such amount is included in property
and equipment in the accompanying financial statements. The purchase of this
equipment has been financed by certain equipment financing. In addition, $8.8
million has been advanced related to the construction of the twill facility in
Puebla. Such amount is included in other assets in the accompanying financial
statements.

                                     F-11
<PAGE>

                             TARRANT APPAREL GROUP

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


6.   Debt

     Bank borrowings consist of the following:

<TABLE>
<CAPTION>
                                                                December 31,
                                                                ------------
                                                             1998          1999
                                                             ----          ----
       <S>                                               <C>           <C>
       Import trade bills payable......................  $ 4,466,119   $ 5,315,382
       Bank direct acceptances.........................   16,969,565    15,697,171
       Other foreign credit facilities.................       47,603     2,536,033
       United States credit facilities.................   11,804,980    31,596,232
                                                         -----------   -----------
                                                         $33,288,267   $55,144,818
                                                         ===========   ===========

     Long term debt consists of the following:



       Vendor financing................................  $ 2,371,500   $21,427,158
       Equipment loans and capital leases .............    1,034,063    21,115,075
       Other debt......................................            -     1,384,881
                                                         -----------   -----------
                                                           3,405,563    43,927,114
       Less current portion............................     (981,124)   (9,771,867)
                                                         -----------   -----------
                                                         $ 2,424,439   $34,155,247
                                                         ===========   ===========
</TABLE>

     The Company has credit facilities of $33 million and $13 million with the
Hongkong and Shanghai Banking Corporation Limited ("HKSB") and Standard
Chartered Bank ("SCB"), respectively, for borrowings and the purchase and
exportation of finished goods. Under these facilities, the Company may arrange
for the issuance of letters of credit and acceptances, as well as cash advances.
These facilities are subject to review at any time and the right of either
lender to demand payment at any time. Interest on cash advances under HKSB's
facility accrues at HKSB's prime rate for lending U.S. dollars plus one-half to
three-quarters percent per annum. As of December 31, 1999, HKSB's U.S. dollar
prime rate equaled 8.5%. Interest on cash advances under SCB's facility accrues
at SCB's prime rate for lending Hong Kong dollars. As of December 31, 1999,
SCB's Hong Kong dollar prime rate equaled 8.5%. These facilities are subject to
certain restrictive covenants including a provision that the aggregate net
worth, as adjusted, of the Company will exceed $30 million, the Company will not
incur two consecutive quarterly losses and the Company will maintain a certain
debt to equity ratio. As of December 31, 1999, this aggregate net worth, as
adjusted, amounted to approximately $114.8 million. At December 31, 1998 and
1999, there were $21.5 million and $21.0 million of outstandings under the HKSB
and SCB facilities, respectively.

     The Company had an unsecured $10 million credit facility with SCB which
matured on December 29, 1999. This facility has been replaced by an unsecured
money market line for $10.0 million. The new facility is cross-defaulted to the
Company's other bank credit facilities and interest on advances accrues at the
rate of one and one-quarter percent over LIBOR. At December 31, 1999, $4.0
million was outstanding under this facility.

     The Company has two equipment loans for $16.25 million and $5.2 million
from GE Capital Leasing and Bank of America Leasing respectively secured by
equipment located in Puebla and Tlaxcala Mexico. The outstanding loans as of
December 31, 1999 were $15.5 million due to GE Capital Leasing and $5.1 million
due to Bank of America Leasing. Interest accrues at a rate of 2-1/2% over LIBOR.
The loan from GE Capital Leasing will mature in the year 2005 and the loan from
Bank of America Leasing in the year 2004. These facilities are subject to the
same restrictive covenants as applicable to the HKSB and SCB facilities.

     During 1999 certain equipment purchased by the Company was financed by the
vendors. A total of $16.9 million was financed with five year promissory notes
which bear interest ranging from 7.0% to 7.5%, are payable in semi-annual
payments commencing in February 2000.

                                     F-13
<PAGE>

                             TARRANT APPAREL GROUP

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Of the $16.9 million outstanding at December 31, 1999, $10.9 million is
denominated in Deutsch Marks and $1.1 million in the Euro. The remainder is
payable in U.S. dollars. The Company bears the risk of any foreign currency
fluctuation with regards to the debt. An unrealized gain of $668,000 was
recorded during the year related to this fluctuation and is recorded in other
income in the accompanying financial statements.

                                     F-14
<PAGE>

                             TARRANT APPAREL GROUP

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     Annual maturities for the long term debt and capital lease obligations are
$9,772,000 (2000), $8,129,000 (2001), $8,251,000 (2002), $7,337,000 (2003);
$7,228,000 (2004) and $3,210,000 thereafter.

7.   Income Taxes

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

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                                           -----------------------
                                                     1997           1998           1999
                                                     ----           ----           ----
   <S>                                            <C>           <C>            <C>
   Current:
      Federal.................................    $2,470,848    $ 8,684,999    $5,038,514
      State...................................       741,581      2,220,313     1,335,804
      Foreign.................................     1,424,298      2,271,961     1,234,667
                                                  ----------    -----------    ----------
                                                   4,636,727     13,177,273     7,608,985
   Deferred (credit):
      Federal.................................       702,539       (748,629)       (8,030)
      State...................................      (112,257)       (11,157)     (155,261)
      Foreign.................................         7,991         (7,487)       (6,628)
                                                  ----------    -----------    ----------
                                                     598,273       (767,273)     (169,919)
                                                  ----------    -----------    ----------
         Total................................    $5,235,000    $12,410,000    $7,439,066
                                                  ==========    ===========    ==========
</TABLE>

     The source of income before the provision for taxes is as follows:

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                                           -----------------------
                                                     1997           1998           1999
                                                     ----           ----           ----
   <S>                                            <C>           <C>            <C>
   Federal....................................    $ 7,459,582   $23,401,514    $13,527,366
   Foreign....................................      8,561,882    13,674,150      6,792,207
                                                  -----------   -----------    -----------
         Total................................    $16,021,464   $37,075,664    $20,319,573
                                                  ===========   ===========    ===========
</TABLE>

     Foreign deferred income taxes result primarily from temporary differences
in the recognition of bad debt and depreciation expenses for tax and financial
reporting purposes. The resulting foreign deferred income tax liability amounted
to approximately $63,000 and $56,000 at December 31, 1998 and 1999,
respectively.

                                     F-15
<PAGE>

                             TARRANT APPAREL GROUP

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                       -----------------------
                                                                 1997           1998           1999
                                                                 ----           ----           ----
   <S>                                                       <C>            <C>           <C>
   Income tax based on federal statutory rate.........       $ 5,447,297    $12,976,482   $ 7,111,850
   State income taxes.................................           415,354      1,443,203       900,030
   Effect of foreign income taxes at lower rate.......        (1,478,751)    (2,521,479)   (1,147,044)
   Valuation allowance and other......................           851,100        511,794       574,230
                                                             -----------    -----------   -----------
                                                             $ 5,235,000    $12,410,000   $ 7,439,066
                                                             ===========    ===========   ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                                      ------------
                                                                                  1998            1999
                                                                                  ----            ----
        <S>                                                                   <C>             <C>
        Current deferred tax assets:
           Provision for doubtful accounts and unissued credits.........      $   763,218     $ 1,171,428
           Provision for other reserves.................................          664,495       1,053,343
           Deferred compensation and benefits...........................          220,863         156,455
           State taxes..................................................          655,745         304,182
                                                                              -----------     -----------
              Total current deferred tax assets.........................        2,304,321       2,685,408
        Current deferred tax liabilities:
           Unrealized gain..............................................                -        (272,030)
           Accounts receivable valuation................................         (308,930)       (184,718)
           Other........................................................       (1,600,620)     (1,662,941)
                                                                              -----------     -----------
                                                                               (1,909,550)     (2,119,689)
        Valuation allowance for deferred tax assets.....................         (371,487)       (371,487)
                                                                              -----------     -----------
        Net current deferred tax asset..................................      $    23,284     $   194,232
                                                                              ===========     ===========
</TABLE>

     Income tax asset on the balance sheet includes income taxes receivable of
$478,050 in 1998 and $102,449 in 1999 in addition to the net deferred asset.

8.   Commitments and Contingencies

     The Company has entered into various noncancelable operating lease
agreements, principally for executive office, warehousing facilities and
production facilities with unexpired terms in excess of one year. The future
minimum lease payments under these noncancelable operating leases are as
follows:

<TABLE>
<CAPTION>
                                                                             Related
                                                                              Party       Other
                                                                              -----       -----
     <S>                                                                   <C>          <C>
     2000...............................................................   $1,298,666   $384,556
     2001...............................................................    1,298,666    305,103
     2002...............................................................    1,329,924     81,836
     2003...............................................................    1,329,924     42,821
     2004...............................................................      336,774     25,554
     Thereafter.........................................................            -          -
                                                                           ----------   --------
        Total future minimum lease payments.............................   $5,593,954   $839,870
                                                                           ==========   ========
</TABLE>

                                       F-16
<PAGE>

                             TARRANT APPAREL GROUP

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     Certain of the operating leases contain provisions for additional rent
based upon increases in the operating costs, as defined, of the premises. Total
rent expense under the operating leases amounted to approximately $1,509,000,
$1,768,000 and $1,730,000 for 1997, 1998 and 1999, respectively.

     The Company had open letters of credit of $18,276,000 and $19,208,000 as of
December 31, 1998 and 1999, respectively.

     The Company has two employment contracts dated January 1, 1998 with two
executives providing for base compensation and other incentives. Commitments
under these agreements for base compensation amount to $1,000,000 for each of
the two executives annually through December 31, 2002. Each contract also
provides for annual bonuses of up to $2,000,000 for each executive and vesting
of stock options based on attaining specified performance criteria. In addition,
in connection with two acquisitions (see Notes 5 and 16) the Company has or will
enter into employment agreements with two additional executives. Such agreements
extend through 2002 and initially provide for base compensation of $1,350,000,
annually, increasing to $1,450,000 over the term. These agreements also provide
for cash bonuses and vesting of stock options based on attaining specified
performance criteria.

     In connection with the Jamil transaction, the Company entered into a three-
year employment agreement with the principal shareholder of the sellers,
pursuant to which the principal shareholder shall be entitled to receive (i) an
annual base salary of $1 million, subject to such periodic increases, if any, as
the Company may deem to be appropriate, (ii) reimbursement of all reasonable and
documented business expenses, (iii) participation in all plans sponsored by the
Company for employees in general and (iv) the right (the "Option") for ten years
to purchase up to 500,000 shares of the Company's Common Stock at an exercise
price of $25 per share. The Option will vest in three equal installments on
April 1, 2000, 2001 and 2002 and will terminate upon the termination of the
principal shareholders' employment by the Company; provided, however, that (i)
the vesting of any installment shall be deferred to the date ten business days
before the stated expiration date in the event the operating income of the
Company's Mexican operations does not reach certain levels, and (ii) if such
termination of employment results from principal shareholder's death or
permanent disability, any vested portion shall terminate on the earlier of the
stated expiration date or the first anniversary of such termination of
employment. In the event the Company terminates principal shareholder's
employment without cause (as defined) the Company shall remain obligated to pay
the principal shareholder an amount equal to his base salary for the remainder
of the stated term. In the event the principal shareholder's employment is
terminated for any other reason (including death, disability, resignation or
termination with cause), neither party shall have any further obligation to the
other, except that the Company shall pay to the principal shareholder, or his
estate, all reimbursable expenses and such compensation as is due prorated
through the date of termination.

     The Company has entered into an employment agreement with the sole
shareholder of CMG, under which he is employed as President - Chazzz Division of
the Company for a term commencing on March 23, 1999 and ending on March 31,
2002, and will be paid an annual base salary of $480,000. In the event the
Company terminates his employment without cause, the sole shareholder shall be
entitled to receive a lump sum payment of $480,000. In addition, the sole
shareholder has agreed not to compete with the Company during the two years
following the termination of his employment for any reason.

     The Company is involved from time to time in routine legal matters
incidental to its business. In the opinion of the Company's management,
resolution of such matters will not have a material effect on its financial
position or results of operations.

                                     F-17
<PAGE>

                             TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.   Equity

     The Company has 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 the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

     The Company's 1995 Stock Option Plan, as amended and restated in January
1997 (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 2,600,000 shares (as adjusted for a stock split effective May 1998) of
the Company's 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. In
October 1998 the Company granted 1,000,000 non-qualified stock options not under
the Plan. The options were granted to the Chairman and President of the Company
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, subject to
certain performance criteria.

     Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions: weighted-average risk-free interest rate of 6% for 1997, 1998 and
1999; dividend yields of 0% for 1997, 1998 and 1999; weighted-average volatility
factors of the expected market price of the Company's common stock of 0.53 for
1997, 0.58 for 1998 and 0.63 for 1999; and a weighted-average expected life of
the option of four years.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
the management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.

                                     F-18
<PAGE>

                             TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

<TABLE>
<CAPTION>
                                                                          1997             1998             1999
                                                                     ---------------  ---------------  ---------------
<S>                                                                  <C>              <C>              <C>
   Pro forma net income............................................       $9,999,000      $21,251,000       $8,676,000
   Pro forma earnings per share:
       Basic.......................................................       $     0.76      $      1.57       $     0.57
       Diluted.....................................................       $     0.75      $      1.56       $     0.55
</TABLE>

     A summary of the Company's stock option activity, and related information
for the years ended December 31 (as adjusted for a two-for-one stock split
effective May 8, 1998) follows:

<TABLE>
<CAPTION>
                                                   1997                         1998                         1999
                                                   ----                         ----                         ----
                                                          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......       1,495,110        $5.38       1,419,734       $ 5.64       2,401,597       $11.06
  Granted.............................          78,000         7.62       1,624,000        13.94         779,000        22.47
  Exercised...........................        (115,376)        4.30        (532,137)        6.28        (245,360)       26.32
  Forfeited...........................         (38,000)        3.59        (110,000)        6.53         (66,376)       17.36
                                             ---------        -----       ---------       ------       ---------       ------
Outstanding at end of year............       1,419,734        $5.64       2,401,597       $11.06       2,868,861       $14.43
                                             =========        =====       =========       ======       =========       ======
Exercisable at end of year............         568,566                      759,667                      740,211
Weighted average per option fair
 value of options granted during
 the year.............................                        $1.71                       $ 7.22                       $10.64
</TABLE>

     Exercise prices for options outstanding as of December 31, 1999 ranged from
857,111 options at $3.00 to $11.25, 1,449,750 options at $13.31 to $18.94 and
562,000 options at $25.00 to $45.50. The weighted average remaining contractual
life of those options is 8.4 years. Options vest over a period of three or four
years from respective grant dates.

10.  Earnings Per Share

     In February 1997, the FASB issued "Earnings Per Share" (Statement No. 128)
establishing standards for computing and presenting earnings per share for
publicly-held common stock or potential common stock. Statement No. 128
supersedes the standards for computing earnings per share previously found in
APB Opinion No. 15, Earnings Per Share and simplifies the standards for
computing earnings per share. In addition, Statement No. 128 replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share, requires dual presentation of basic and diluted earnings per share on
the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic earnings per share computation to the numerator and denominator of the
diluted earnings per share computation. The statement is effective for financial
statements for both interim and annual periods ending after December 15, 1997,
with earlier application not permitted. All periods presented reflect the
adoption of Statement No. 128. The impact of amounts previously reported was not
material.
                                     F-19
<PAGE>

                             TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     A reconciliation of the numerator and denominator of basic earnings per
share and diluted earnings per share is as follows:

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                    -------------------------------------------------
                                                                         1997             1998             1999
                                                                    ---------------  ---------------  ---------------
<S>                                                                 <C>              <C>              <C>
Basic EPS Computation:
 Numerator........................................................      $10,786,464      $24,665,664      $12,880,507
 Denominator:.....................................................
  Weighted average common shares outstanding......................       13,175,256       13,519,517       15,199,893
                                                                        -----------      -----------      -----------
     Total shares.................................................       13,175,256       13,519,517       15,199,893
                                                                        -----------      -----------      -----------
Basic EPS.........................................................      $      0.82      $      1.82      $      0.85
                                                                        ===========      ===========      ===========
Diluted EPS Computation:
 Numerator........................................................      $10,786,464      $24,665,664      $12,880,507
 Denominator:.....................................................
  Weighted average common shares outstanding......................       13,175,256       13,519,517       15,199,893
  Incremental shares from assumed exercise of options.............          391,998          897,333        1,114,236
                                                                        -----------      -----------      -----------
     Total shares.................................................       13,567,254       14,416,850       16,314,129
                                                                        -----------      -----------      -----------
Diluted EPS.......................................................      $      0.80      $      1.71      $      0.79
                                                                        ===========      ===========      ===========
</TABLE>

Options to purchase 741,000 shares of common stock exercisable at prices in
excess of the average market value were outstanding during 1999 but were not
included in the computation of diluted earnings per share because the effect
would be antidilutive.

11.  Supplemental Schedule of Cash Flow Information

<TABLE>
<CAPTION>
                                                                           1997             1998             1999
                                                                        -----------      -----------      -----------
     <S>                                                                <C>              <C>              <C>
     Cash paid for interest..........................................    $  660,000       $2,079,000       $4,340,000
                                                                         ==========       ==========       ==========
     Cash paid for income taxes......................................    $2,825,000       $7,816,000       $7,024,000
                                                                         ==========       ==========       ==========
</TABLE>

12.  Related-Party Transactions

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

<TABLE>
<CAPTION>
                                                                         1997             1998             1999
                                                                    ---------------  ---------------  ---------------

  <S>                                                               <C>              <C>              <C>
  Sales to related parties........................................       $3,531,000  $            --      $ 2,623,000
  Purchases from related parties..................................       $  620,000  $       725,000      $15,163,000
</TABLE>

     As of December 31, 1998 and 1999, noncombined affiliates were indebted to
the Company in the amounts of $2.1 million and $1.0 million, respectively. Total
interest paid by noncombined affiliates and the Chairman and President was
$195,000 and $214,000 for the years ended December 31, 1998 and 1999,
respectively.

     The Company has, from time to time, advanced funds to officers including
the Chairman and President and to corporations owned by the Chairman and
President. The maximum outstanding amounts of such loans during 1998 and 1999
were $4.0 million $5.7 million, respectively. Loans made to these persons in
1998 and 1999 bore interest at the rate of 7% and 7.75% per annum, respectively.
In addition, in December 1999 advances were received by the Company from the
Chairman and President for working capital purposes. The maximum outstanding was
$16.1 million at December 31, 1999. Total interest paid on such advances
amounted to $257,000 for the year.

     In 1998, the Company advanced an aggregate of $2.0 million to a corporation
controlled by parties related to one of the Original Shareholders. Such advances
were repaid within 90 days.

                                     F-20
<PAGE>

                             TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     Under lease agreements entered into between the Company and two entities
owned by the Chairman and President, the Company paid $1,269,000 in 1998 and
$1,269,000 in 1999 for rent for office and warehouse facilities.

     In 1998, a California limited liability company owned by the Chairman and
President of the Company 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. On December 1, 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 the Company in Mexico.
The Company transferred $3.0 million of trim inventory to Tag-It in December
1998. This arrangement is terminable by either the Company or Tag-It at any
time. The Company believes that the terms of this arrangement, which is subject
to the acceptance of the Company's customers, are no less favorable to the
Company than could be obtained from unaffiliated third parties.  The Company
purchased $15.2 million worth of trim from Tag-it in 1999.

13.  Operations by Geographic Areas

     The Company operates primarily in one industry segment, the design,
manufacturing and importation of private label, moderately-priced, casual
apparel. Information about the Company's operations in the United States and
Asia is presented below. Intercompany revenues and assets have been eliminated
to arrive at the consolidated amounts.

<TABLE>
<CAPTION>
                                                                                             Adjustments
                                                                                                 and
                                        United States         Asia            Mexico        Eliminations          Total
                                       ---------------  ----------------  --------------  -----------------  ----------------
<S>                                    <C>              <C>               <C>             <C>                <C>
1997
Sales................................     $252,136,000      $  7,956,000                     $           -       $260,092,000
Intercompany sales...................                -       148,613,000                      (148,613,000)                 -
                                          ------------      ------------                     -------------       ------------
Total revenue........................     $252,136,000      $156,569,000                     $(148,613,000)      $260,092,000
                                          ============      ============                     =============       ============
Income from operations...............     $  8,581,000      $  8,499,000                     $           -       $ 17,080,000
                                          ============      ============                     =============       ============
Total assets.........................     $ 56,352,000      $ 46,656,000                     $ (31,147,000)      $ 71,861,000
                                          ============      ============                     =============       ============

1998
Sales................................     $345,685,000      $ 32,471,000                     $           -       $378,156,000
Intercompany sales...................       11,289,000       151,957,000                      (163,246,000)                 -
                                          ------------      ------------                     -------------       ------------
Total revenue........................     $356,974,000      $184,428,000                     $(163,246,000)      $378,156,000
                                          ============      ============                     =============       ============
Income from operations...............     $ 24,751,000      $ 13,820,000                     $           -       $ 38,571,000
                                          ============      ============                     =============       ============
Total assets.........................     $143,211,000      $ 78,431,000                     $ (67,751,000)      $153,891,000
                                          ============      ============                     =============       ============

1999
Sales................................     $376,952,000      $ 13,278,000    $  5,111,000     $           -       $395,341,000
Intercompany sales...................       17,517,000       112,517,000      40,597,000      (170,631,000)                 -
                                          ------------      ------------    ------------     -------------       ------------
Total revenue........................     $394,469,000      $125,795,000    $ 45,708,000     $(170,631,000)      $395,341,000
                                          ============      ============    ============     =============       ============
Income from operations...............     $ 16,859,000      $  7,092,000    $    996,000     $           -       $ 24,947,000
                                          ============      ============    ============     =============       ============
Total assets.........................     $182,286,000      $ 81,219,000    $122,827,000     $ (91,290,000)      $295,042,000
                                          ============      ============    ============     =============       ============
</TABLE>

                                     F-21
<PAGE>

                             TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     The Company commenced sourcing operations in Mexico in 1997. Sales of such
operations were approximately $104 million in 1998, and total assets at December
31, 1998 were $1.1 million.

14.  Employee Benefit Plans

     On August 1, 1992, Tarrant HK 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 HK. Participants may contribute up to 5% of
their salary to the plan. Annual matching contributions are made by the Company.
Costs of the plan charged to operations for 1997, 1998 and 1999 amounted to
approximately $59,000, $84,000 and $101,000, respectively.

     On July 1, 1994, the Parent Company established a defined contribution
retirement plan covering all of its 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 the Parent Company. Participants may contribute
from 1% to 15% of their pre-tax compensation up to effective limitations
specified by the Internal Revenue Service. The Company's 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, the Company may also make a discretionary
annual contribution to the plan. Costs of the plan charged to operations for
1997, 1998 and 1999 amounted to approximately $143,000, $166,000 and $191,000,
respectively.

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

     On December 20, 1996, the Compensation Committee of the Company's Board of
Directors established the Incentive Compensation Plan, which provides for both
discretionary bonuses and bonus amounts upon achieving certain earnings
thresholds for certain members of management. The adoption of this plan received
shareholder approval at the 1997 annual meeting.

15.  LDA Option

     On October 22, 1998, Limited Direct Associates LP, an entity 100% owned by
The Limited ("LDA"), acquired 1,000,000 shares of the Company's Common Stock (or
approximately 7.2% of the Common Stock outstanding as of March 1, 1999). The
shares were acquired through the exercise of an option granted by Mr. Guez and
Mr. Kay to LDA at the time of the Company's initial public offering. The option
granted LDA the right to purchase 10% of the total shares of Common Stock
outstanding at the time of the initial public offering, or 1,299,998 shares, at
a price of $3.60 per share (as adjusted for a two-for-one stock split effective
May 8, 1998). The transaction was done on a cashless basis, whereby Mr. Guez and
Mr. Kay transferred ownership of 1,000,000 shares to LDA and, in lieu of
receiving cash, Mr. Guez and Mr. Kay retained ownership of the remaining 299,998
shares. The 1,000,000 shares are subject to a lockup provision, which prohibits
LDA from selling the shares until October 9, 1999. Messrs. Guez and Kay will
continue to have the right to vote the shares for one year following the
exercise of the option, and will also have a right of first refusal to purchase
such shares, subject to certain exceptions.

                                     F-22
<PAGE>

                             TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


16.  Subsequent Events

     On January 21, 2000 the Company entered into a revolving credit, factoring
and security agreement ("Debt Facility") with a syndicate of lending
institutions. The Debt Facility provides for a revolving facility of $105.0,
million, including a letter of credit facility not to exceed $20.0 million, and
matures on January 31, 2005. The Debt Facility provides for interest at LIBOR
plus LIBOR rate margin determined by the Total Leverage Ratio, as defined. The
facility is collaterlized by receivables, intangibles, inventory and various
other specified non-equipment assets of the Company. In addition the facility is
subject to various financial covenants including requirements for tangible net
worth, fixed charge coverage ratios, interest coverage ratios among others and
prohibits the payment of dividends.

17.  Quarterly Results of Operations (Unaudited)

     The following is a summary of the quarterly results of operations for the
years ended December 31, 1997, 1998 and 1999:

<TABLE>
<CAPTION>

                                                                                                                Year
                                                                          Quarter Ended                         Ended
                                                                          -------------
                                                           March        June        September     December     December
                                                            31           30             30           31           31
                                                          -------    ---------      ---------    ---------    ---------
                                                                     (In thousands, except per share data)
<S>                                                       <C>        <C>            <C>          <C>          <C>
1997
Net sales............................................     $53,605     $ 73,879      $ 69,218       $63,391      $260,093
Gross profit.........................................       8,782       11,068         9,690         9,557        39,097
Operating income.....................................       3,393        5,091         4,063         4,533        17,080
Net income...........................................     $ 2,022     $  3,265      $  2,711       $ 2,789      $ 10,787
Net income per common share:
  Basic..............................................     $   .15     $    .25      $    .21       $   .21      $    .82
  Diluted............................................     $   .15     $    .24      $    .20       $   .21      $    .80
Weighted average shares outstanding:
  Basic..............................................      13,110       13,178        13,202        13,210        13,176
  Diluted............................................      13,544       13,592        13,612        13,520        13,568

1998
Net sales............................................     $64,257     $100,100      $114,948       $98,850      $378,155
Gross profit.........................................      10,947       20,265        19,690        20,176        71,078
Operating income.....................................       4,558       11,674        11,374        10,965        38,571
Net income...........................................     $ 2,780     $  7,223      $  7,094       $ 7,569      $ 24,666
Net income per common share:
  Basic..............................................     $   .21     $    .54      $    .52       $   .55      $   1.82
  Diluted............................................     $   .20     $    .51      $    .49       $   .50      $   1.71
Weighted average shares outstanding:
  Basic..............................................      13,281       13,432        13,592        13,773        13,520
  Diluted............................................      13,756       14,254        14,454        15,204        14,417
</TABLE>

                                     F-23
<PAGE>

                             TARRANT APPAREL GROUP

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
                                                                                                                 Year
                                                                          Quarter Ended                          Ended
                                                                          -------------
                                                           March        June       September      December      December
                                                             31          30           30             31            31
                                                          -------     --------     ---------      --------      --------
                                                                     (In thousands, except per share data)
<S>                                                       <C>         <C>          <C>            <C>           <C>
1999
Net sales............................................     $84,063     $109,762      $110,542       $90,974       $395,341
Gross profit.........................................      15,988       19,008        19,269        11,945         66,210
Operating income(loss)(1)............................       7,936        9,722         9,030        (1,741)        24,947
Net income(loss)(1)..................................     $ 4,599     $  5,652      $  4,870       $(2,241)      $ 12,880
Net income(loss) per common share:
  Basic..............................................     $   .33     $    .37      $    .31       $ (0.14)      $    .85
  Diluted............................................     $   .30     $    .33      $    .30       $ (0.14)      $    .79
Weighted average shares outstanding:
  Basic..............................................      13,853       15,361        15,783        15,801         15,200
  Diluted............................................      15,524       17,131        16,438        15,801         16,314
</TABLE>

(1) During the fourth quarter of 1999 the company recorded a change of
    approximately $2.0 million as a result of a year end book to physical
    inventory adjustment.

                                     F-24
<PAGE>

                                                                     SCHEDULE II

                             TARRANT APPAREL GROUP

                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                   Additions   Additions
                                                     Balance at   Charged to   Charged to
                                                    Beginning of   Costs and     Other                 Balance at
                                                                                 -----
                                                        Year       Expenses     Accounts   Deductions  End of Year
                                                    ------------  -----------  ----------  ----------  -----------
<S>                                                 <C>           <C>          <C>         <C>         <C>
For the year ended December 31, 1997
 Allowance for returns and discounts..............    $1,915,156   $(359,344)  $        -  $        -   $1,555,812
                                                      ==========   =========   ==========  ==========   ==========
For the year ended December 31, 1998
 Allowance for returns and discounts..............    $1,555,812   $ 691,194   $        -  $        -   $2,247,006
                                                      ==========   =========   ==========  ==========   ==========
For the year ended December 31, 1999
 Allowance for returns and discounts..............    $2,247,006   $ 961,312   $           $            $3,208,318
                                                      ==========   =========   ==========  ==========   ==========
</TABLE>

                                     25