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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of

1934 for the fiscal year ended January 31, 2004.



Commission File Number 0-22102



CYGNE DESIGNS, INC.

(Exact name of
Registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 04-2843286                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|1410 Broadway, New York, New York                              |  | 10018                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             



Registrants
telephone number, including area code: (212) 997-7767



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



None

(Title of class)



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



Common Stock, $.01 par value

(Title of class)



Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes x No ̈



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



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12 b-2 of the Act).



Yes ̈No x



Based on the closing sale price as reported by the OTC Bulletin Board on
August 2, 2003, the last business day of the registrants most recently completed second fiscal quarter, the aggregate market value of the registrants Common Stock, par value $.01 per share, held by non-affiliates of the registrant was
approximately $1,498,212*.



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|* | For purposes of this calculation, the number of shares held by non-affiliates was determined by aggregating the number of shares held by officers and directors of the registrant,
and by others who, to the registrants knowledge, own more than 10% of the registrants Common Stock, and subtracting those shares from the total number of shares outstanding. As of April 16, 2004, 12,438,038 shares of Common Stock of the
registrant were outstanding.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Documents incorporated by
reference: Portions of the Registrants definitive proxy statement for its 2004 annual meeting of stockholders are incorporated by reference into Part III of this report.



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|ITEM 1. | BUSINESS
|------- | --------



Unless otherwise noted, all references to a year refer to the fiscal year of the Company commencing in that calendar year and ending on the Saturday nearest January 31 of the following year. Unless the context
indicates otherwise, the terms Company or Cygne include the operations of the Company and its subsidiaries as then in existence. This Report contains forward-looking statements, which involve risks and uncertainties. The
Companys actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below.



General



Cygne Designs, Inc. (the Company or Cygne) is a manufacturer of private label womens career and casual apparel
with sales primarily to Lerner New York (Lerner). As a private label manufacturer, the Company produces apparel upon orders from its customers for sale under the customers own labels, rather than producing its own inventory of
apparel for sale under the Cygne name.



The manufacture of private label
apparel is characterized by high volume sales to a small number of customers at competitive prices. Although private label gross margins are lower than the gross margins in the brand name apparel industry, collection and markdown costs are typically
commensurably lower, and inventory turns are generally higher. Inventory risks are also reduced because the purchasing of fabric and other supplies begins only after purchase commitments have been obtained from customers. The Company believes that
retailers, including customers of the Company, are increasingly sourcing private label products themselves rather than utilizing outside vendors like the Company.



The Company historically has been dependent on one or more key customers. A significant portion of the Companys sales has been and is
expected to continue to be to Lerner, formerly a division of Limited Brands. For 2003, sales to Lerner accounted for 91% of Cygnes net sales from continuing operations (See Item 1 Significant Financial and Business Developments).



For 2002 and 2001, sales to Lerner accounted for 93% and 77% respectively, of
the Companys net sales from continuing operations. Although Cygne has a long-established relationship with Lerner, its key customer, Cygne does not have long-term contracts with Lerner. The Companys future success will be dependent upon
its ability to attract new customers and to maintain its relationship with Lerner. During 2003, Cygne was able to attract two new customers. Cygne continues to maintain its positive working relationship with Lerner by providing on-time deliveries of
quality products.



There is no assurance that Lerner will continue to purchase
merchandise from the Company at the same rate or at all in the future, or that the Company will be able to attract new customers. In addition, as a result of the Companys dependence on Lerner, Lerner has the ability to exert significant
control over the Companys business decisions, including prices.



The
principal executive offices of the Company are located at 1410 Broadway, New York, New York 10018 and its telephone number is 212-997-7767.



Significant Financial and Business Developments



On May 13, 2001, the Company acquired from Best Knits, L.L.C (Best Knits) the rights and obligation of all the customer purchase orders held by Best Knits and
the trade name Best Knits (Jordanian



3



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business). Best Knits, located in Irbid, Jordan, was a manufacturer of private label womens knit tops for sale to retailers located in the United
States. The Company (i) assumed all outstanding vendor purchase orders issued by Best Knits directly related to the acquired customer purchase orders, (ii) purchased from Best Knits all raw materials on hand directly related to acquired customer
purchase orders, (iii) entered into a lease in Irbid, Jordan with Best Knits for the eighteen month period starting May 1, 2001 for (a) its 66,000 square feet of manufacturing and office space, (b) its approximately 550 sewing machines, (c) its
cutting and pressing equipment and (d) its office furniture and equipment, (iv) hired substantially all of its approximately 650 employees, and (v) agreed to purchase from Best Knits its trade name and customer relationships. The Company accounted
for this transaction as a purchase.



Pursuant to an agreement dated June 10,
2002 modified by an amendment dated July 29, 2002, the Company sold its Jordanian business to Century Investment Group (CIG) for $833,000 plus the assumption of all outstanding liabilities of the Jordanian company of approximately
$943,000. The agreement also stated that any disputes between the parties must be submitted to arbitration in Jordan.



The first payment of $400,000 was received at the closing and the final payment of $433,000 was due on April 30, 2003. As Cygne has not received the final payment of
$433,000, it has submitted its claim for this payment to arbitration. As the outcome of this arbitration is uncertain, Cygne management, at January 31, 2004, deemed it appropriate to provide a reserve of $433,000 against this receivable.



Cygne agreed not to compete with CIG for knit business in Jordan for five years starting
June 1, 2002 in consideration of $350,000 payable by February 5, 2006. In connection with the non-compete agreement, the Company recorded deferred income of $350,000 which it was amortizing to income over a five-year period. At January 31, 2004, as
a result of the uncertainty of the arbitration with CIG, Cygne has discontinued the amortization of remaining deferred income of $309,000, and has reserved the corresponding net receivable of $309,000 and has written off the related deferred income.
The impact of these transactions had no effect on the results of continuing operations.



The sale of the Jordanian business and its related operating results have been excluded from the results from continuing operations and is classified as a discontinued operation for all periods presented in accordance with the requirements
of FAS 144 Accounting for Impairment or Disposal of Long-Lived Assets. The Company decided to sell the Jordanian business as a result of the political uncertainty in the region that adversely affected the profitability of the business.



Effective January 1, 2005, the United States will discontinue textile import
quotas affecting the products sourced by the Company. As a result, the Companys customers may be able to secure the products currently being purchased from the Company in other places at a lower price. While it is not possible to forecast the
impact to the Company of the discontinuance of textile import quotas, this change could cause the Company to face severe liquidity pressures, which would adversely affect the Companys financial condition and results of operations and cash
flows.



The Company has in the past incurred costs in restructuring its
operations due to loss of customers. The Company is continuing to review its existing business operations and could incur additional costs in the future associated with the further restructuring of its operations.



See also Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations and Note 2 of Notes to Consolidated Financial Statements of the Company.



4



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Products



The Company currently participates in one segment of the apparel market: womens career and casual apparel. During 2003, the Companys products from continuing
operations included woven jackets, skirts and pants and cut and sewn knit tops and bottoms.



Sourcing, Manufacturing and Sales



Cygne currently sources and manufactures garments for its customers which have been designed and developed by the customer.



Private label manufacturing usually operates on a tighter schedule than brand name manufacturing because garments are not manufactured until purchase orders are received
from its customers. The Companys customers strive for quick response time in order to react to market changes and test results. Delivery cycles vary according to the type of products manufactured, but frequently occur within a period of six
weeks from fabric delivery to garment delivery. Meeting customer delivery requirements is both essential and difficult given the global nature of the manufacturing process.



During 2003, substantially all of the Companys products for its continuing business were manufactured outside the United States,
either by non-affiliated contract manufacturers or at the Companys manufacturing facilities located in Guatemala. During 2003, products representing approximately 99% and 1% of the Companys net sales from continuing operations were
produced in Guatemala and the United States, respectively. The Company reviews its product sourcing on an ongoing basis and may alter this allocation to meet changing conditions and demands.



Foreign manufacturing is subject to a number of risks, including work stoppages,
transportation delays and interruptions, political instability, foreign currency fluctuations, economic disruptions, expropriation, nationalization, the imposition of tariffs and import and export controls, changes in governmental policies
(including U.S. policy toward these countries) and other factors which could have an adverse effect on the Companys business. In addition, the Company may be subject to risks associated with the availability of and time required for the
transportation of products from foreign countries. The occurrence of certain of these factors may delay or prevent the delivery of goods ordered by customers, and such delay or inability to meet delivery requirements would have a severe adverse
impact on the Companys results of operations and could have an adverse effect on the Companys relationships with its customers. Furthermore, the occurrence of certain of these factors in Guatemala, where Cygne owns a manufacturing
facility, could result in the impairment or loss of the Companys investment located in this country.



In 2003, Cygne operated a manufacturing facility for its continuing operations in Guatemala. Operating a manufacturing facility rather than contracting with independent manufacturers requires the Company to maintain a
higher level of working capital. In addition, reduced sales have an even greater adverse impact on the Companys results in light of the fixed costs needed to own and operate its own factory. Because the Companys manufacturing operations
are located outside the U.S., the Company is subject to many of the same risks as relying on foreign contract manufacturers. See Item 2. Properties.



Raw Materials



Cygne usually supplies the raw materials to its manufacturers. Otherwise, the raw materials are purchased directly by the manufacturer in accordance with the Companys specifications. Raw materials,



5



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which are in most instances made and/or colored specifically to the Companys order, consist principally of fabric and trim and are readily available
from numerous domestic and foreign sources.



Cygnes foreign raw materials
and finished goods purchases are sometimes made on a letter of credit basis, while its domestic purchases are made on an open order basis. The Company does not have formal long-term arrangements with any of its suppliers. The Company has experienced
little difficulty in satisfying its raw material requirements and considers its sources of supply adequate.



Quality Assurance



The Companys
quality assurance program is designed to ensure that its products meet the quality standards of its customers. The Company requires its overseas agents to employ qualified quality control personnel. Foreign manufactured fabric is usually inspected
both prior to shipment by the Companys overseas agents as well as upon arrival at their manufacturing destination.



Competition



The private label apparel industry is highly fragmented, and the Company faces intense competition, including competition from its own customers (including their affiliates) who have, or may establish, their own
internal product development and sourcing capabilities. Most of the Companys competitors are larger in size and have greater resources than the Company. The Company competes primarily on the basis of price, quality and short lead time high
volume manufacturing.



The Company believes that many of its own customers
(including their affiliates), who possess, to varying degrees, the know-how and internal resources to develop and source directly a portion of their requirements, constitute its major competition.



The Company believes that its business will depend upon its ability to provide apparel
products, which are of good quality and meet its customers pricing and delivery requirements, as well as its ability to maintain relationships with key customers. There can be no assurance that the Company will be successful in this regard.



Import Restrictions



During 2003, the Company sourced for its continuing operations approximately 99% of its
products from Guatemala and approximately 1% from United States.



Textile
Agreements



Prior to January 1, 1995, apparel imports from most countries
were subject to bilateral textile agreements under the Multifiber Arrangement (MFA) of the General Agreement on Tariffs and Trade (GATT) which allowed the imposition of visa and quota restrictions on certain apparel and
textile articles including a significant portion of those currently sold by the Company. The member countries of the World Trade Organization (WTO) have agreed that quotas on textiles and apparel products will be phased out globally on January 1,
2005. Once phased-out, quotas cannot be imposed except in accordance with GATT rules. These rules generally forbid bilateral quota agreements and other discriminatory, country-specific restraints. The elimination of quota is likely to
significantly impact the textile and apparel trade. It is not possible to predict the impact of these changes on our ability to source imported merchandise.



6



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Duty Rates



The products imported by the Company are subject to Normal Trade Relations (NTR) or column 1 rates of duty which range from zero to 38% ad valorem. As
a result of the Uruguay Round Agreements Act, many of these rates will be reduced over five to fifteen years resulting on average in a 12% reduction from current rates of duty.



The United States is actively pursuing free trade agreements with countries throughout the world. In this regard, the United States has
announced its intention to implement a free trade agreement with Central America (CAFTA). Once adopted, originating apparel and other products from certain Central American countries, including Guatemala, will be eligible for duty free
and quota free entry into the United States retroactive to January 1, 2004.



Additional Restrictions



In the ordinary course of its
business the Company is, from time to time, subject to claims by the U.S. Customs Service for additional duties and other charges. Similarly, from time to time, the Company is entitled to refunds from the U.S. Customs Service due to the overpayment
of duties.



The U.S. and other countries in which the Companys products
are manufactured may, from time to time, impose new quotas, duties, tariffs, or other restrictions, including trade sanctions or revocation of Normal Trade Relations status, or adversely adjust presently prevailing quotas or duty rates,
which could adversely affect the Companys operations and its ability to import products at current or increased levels. The Company cannot predict the likelihood or frequency of any such events occurring.



The Companys ability to import its products is subject to the cost and availability of
transportation to the U.S., the demand for production capacity abroad by other manufacturers, economic or political instability resulting in the disruption of trade from exporting countries, any significant fluctuation in the value of the dollar
against foreign currencies and restrictions on the transfer of funds. The Companys operations have not been materially affected by any of the foregoing factors to date, although there can be no assurance that these factors will not adversely
affect the Company in the future.



Backlog



At January 31, 2004 the Company had unfilled confirmed customer orders of $4,600,000
compared to $6,700,000 at February 1, 2003. In general, the amount of unfilled orders at a particular time is affected by a number of factors, including the scheduling of manufacture and shipping of the product which, in some instances, depends on
the customers demands. 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 do not materially reduce the amount of sales realized from its backlog. However, at this time, the variance between the unfilled customer orders at January 31, 2004 and February 1, 2003 could result in lower sales in
the first quarter 2004 as compared to the first quarter 2003.



7



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Employees



At April 17, 2004, the Company had approximately 1,191 full-time employees. Approximately 1,174 employees were located at its facilities in Guatemala and 17 employees at
its facilities in New York. The Company considers its relations with its employees to be satisfactory.



|ITEM 2. | PROPERTIES
|------- | ----------



The Companys executive and general offices are located at 1410 Broadway, New York, New York. The Company rents 6,100 square feet pursuant to a lease which expires on June 30, 2004 with an annual rental expense
of approximately $265,000. The Company is currently in negotiations for a new lease in both its present location and other locations.



The Company owns a manufacturing facility in Guatemala that it believes is well maintained and in good operating condition.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



Pursuant to an agreement dated June 10, 2002 modified by an amendment dated July 29, 2002, the Company sold its Jordanian business to Century Investment Group for $833,000 plus the assumption of all outstanding
liabilities of the Jordanian company of approximately $943,000. The agreement also stated that any disputes between the parties must be submitted to arbitration in Jordan.



The first payment of $400,000 was received at the closing and the final payment of $433,000 was due on April 30, 2003. As Cygne has not
received the final payment of $433,000, it has submitted its claim for this payment to arbitration. As the outcome of this arbitration is uncertain, Cygne management, at January 31, 2004, deemed it appropriate to provide a reserve of $433,000
against this receivable.



The Company is involved in various legal proceedings
that are incidental to the conduct of its business, none of which the Company believes could reasonably be expected to have a material adverse effect on the Companys financial condition, results of operations and cash flows.



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



|a. | The annual meeting of stockholders of Cygne Designs, Inc. was held on December 2, 2003.
|-- | ---------------------------------------------------------------------------------------



|b. | The following persons, comprising the entire board of directors, were elected at the annual meeting pursuant to the following vote tabulation:
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------



|                  |  |            |  |         
|----------------- |  | ---------- |  | --------
|Name              |  | In Favor   |  | Withheld
|James Groninger   |  | 11,849,117 |  | 80,635  
|Bernard M. Manuel |  | 11,849,117 |  | 80,635  



8



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- | ---------------------------------------------------------------------



Cygne Common Stock is quoted on the OTC Bulletin Board. There are no assurances that the OTC Bulletin Board will continue to give quotes on
the Cygne Company Stock. The following table sets forth for the periods indicated the high and low reported sale prices per share for the Cygne Common Stock as reported by the OTC Bulletin Board.



|                                   |  |      |      |     |   |     
|---------------------------------- |  | ---- | ---- | --- | - | ----
|                                   |  | High |      | Low
|Fiscal Year Ended February 1, 2003 |  |      |      |     |   |     
|First Quarter                      |  | $    | 0.12 |     | $ | 0.08
|Second Quarter                     |  | $    | 0.14 |     | $ | 0.08
|Third Quarter                      |  | $    | 0.17 |     | $ | 0.08
|Fourth Quarter                     |  | $    | 0.14 |     | $ | 0.11
|                                   |  |     
|Fiscal Year Ended January 31, 2004 |  |      |      |     |   |     
|First Quarter                      |  | $    | 0.14 |     | $ | 0.13
|Second Quarter                     |  | $    | 0.30 |     | $ | 0.13
|Third Quarter                      |  | $    | 0.30 |     | $ | 0.20
|Fourth Quarter                     |  | $    | 0.50 |     | $ | 0.23



The number of stockholders of record
of Common Stock on April 16, 2004 was approximately 92. The closing sale price of the Companys Common Stock on April 16, 2004 was $0.33 per share.



Cygne has never declared or paid a cash dividend on its Common Stock. The Company anticipates that all future earnings will be retained by the Company for the development
of its business. Accordingly, Cygne does not anticipate paying cash dividends on the Common Stock in the foreseeable future. The payment of any future dividends will be at the discretion of the Companys Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements, the general financial condition of the Company and general business conditions.



Mr. Manuel, the Chairman of the Company, owns approximately 40% of the outstanding Common Stock and has a significant influence over, and may in fact control, the outcome
of all matters submitted to a vote of stockholders.



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|ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA
|------- | ------------------------------------



The following tables summarize certain selected financial information that should be read in conjunction with Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial statements of the Company, which have been audited by independent auditors. The sale of the Israeli Knit business in 1999, the discontinued operation in 2001, 2002
and 2003 and the reversal of income tax accruals of $4,800,000 and $400,000 in 2002 and 2003 respectively materially affect the comparability of the financial data reflected below.



|                                                                                                                                                                     |  |                                         |        |   |         |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------ | - | ------- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                                                                     |  | Fiscal Year (1)                         |       
|                                                                                                                                                                     |  | 1999                                    |        |   | 2000(1) |   |        | 2001 |  |   | 2002   |   |  | 2003 |       
|                                                                                                                                                                     |  | (In thousands except per share amounts) |       
|Income Statement Data                                                                                                                                                |  |                                         |        |   |         |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net sales                                                                                                                                                            |  | $                                       | 55,398 |   |         | $ | 28,381 |      |  | $ | 28,249 |   |  | $    | 24,019 |   |  | $ | 27,082 |  
|Cost of goods sold                                                                                                                                                   |  |                                         | 50,657 |   |         |   | 24,852 |      |  |   | 23,311 |   |  |      | 20,694 |   |  |   | 22,932 |  
|                                                                                                                                                                     |  |                                         |        |   |         |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Gross profit                                                                                                                                                         |  |                                         | 4,741  |   |         |   | 3,529  |      |  |   | 4,938  |   |  |      | 3,325  |   |  |   | 4,150  |  
|Selling, general and administrative                                                                                                                                  |  |                                         | 3,874  |   |         |   | 3,508  |      |  |   | 4,008  |   |  |      | 3,099  |   |  |   | 3,448  |  
|Provision for impairment of fixed assets(2)                                                                                                                          |  |                                         |       |   |         |   |       |      |  |   |       |   |  |      | 282    |   |  |   |       |  
|Provision (reversal) for impairment of Knit business assets(3)                                                                                                       |  |                                         | 1,625  |   |         |   |       |      |  |   | (959   | ) |  |      |       |   |  |   |       |  
|Reversal of lease termination expenses(4)                                                                                                                            |  |                                         | (186   | ) |         |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|                                                                                                                                                                     |  |                                         |        |   |         |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|(Loss) income from continuing operations before interest and income taxes                                                                                            |  |                                         | (572   | ) |         |   | 21     |      |  |   | 1,889  |   |  |      | (56    | ) |  |   | 702    |  
|Interest income                                                                                                                                                      |  |                                         | (122   | ) |         |   | (277   | )    |  |   | (34    | ) |  |      | (24    | ) |  |   | (16    | )
|Interest expense                                                                                                                                                     |  |                                         | 530    |   |         |   | 89     |      |  |   | 195    |   |  |      | 223    |   |  |   | 180    |  
|                                                                                                                                                                     |  |                                         |        |   |         |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|(Loss) income from continuing operations before income taxes                                                                                                         |  |                                         | (980   | ) |         |   | 209    |      |  |   | 1,728  |   |  |      | (255   | ) |  |   | 538    |  
|Provision (benefit) for income taxes(5)                                                                                                                              |  |                                         | 47     |   |         |   | 20     |      |  |   | 44     |   |  |      | (4,750 | ) |  |   | (374   | )
|                                                                                                                                                                     |  |                                         |        |   |         |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|(Loss) income from continuing operations                                                                                                                             |  | $                                       | (1,027 | ) |         | $ | 189    |      |  | $ | 1,684  |   |  | $    | 4,495  |   |  |   | 912    |  
|(Loss) from discontinued operation, net (includes a (loss) gain on disposal of $(479) and $400 in year ended January 31, 2004 and February 1,
2003, respectively)(6) |  |                                         |       |   |         |   |       |      |  |   | (1,905 | ) |  |      | (2,410 | ) |  |   | (528   | )
|                                                                                                                                                                     |  |                                         |        |   |         |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net (loss) income                                                                                                                                                    |  | $                                       | (1,027 | ) |         | $ | 189    |      |  | $ | (221   | ) |  | $    | 2,085  |   |  | $ | 384    |  
|                                                                                                                                                                     |  |                                         |        |   |         |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|(Loss) income per share-basic and diluted from continuing operations                                                                                                 |  | $                                       | (0.08  | ) |         | $ | 0.02   |      |  | $ | 0.13   |   |  | $    | 0.36   |   |  | $ | 0.07   |  
|(Loss) income per share-basic and diluted from discontinued operation                                                                                                |  |                                         |       |   |         |   |       |      |  | $ | (0.15  | ) |  | $    | (0.19  | ) |  |   | (0.04  | )
|                                                                                                                                                                     |  |                                         |        |   |         |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net (loss) income per share-basic and diluted                                                                                                                        |  | $                                       | (0.08  | ) |         | $ | 0.02   |      |  | $ | (0.02  | ) |  | $    | 0.17   |   |  | $ | 0.03   |  
|                                                                                                                                                                     |  |                                         |        |   |         |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  



10



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Balance Sheet Data (as of the end of period)



|                                           |  |                 |        |      |   |        |  |      |        |      |   |       |  |   |      
|------------------------------------------ |  | --------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ----- |  | - | -----
|                                           |  | Fiscal Year (1)
|                                           |  | 1999            |        | 2000 |   | 2001   |  | 2002 |        | 2003
|                                           |  | (In thousands) 
|Cash                                       |  | $               | 6,298  |      | $ | 2,378  |  | $    | 2,558  |      | $ | 2,610 |  | $ | 3,345
|Trade accounts receivable/ Due from factor |  |                 | 1,853  |      |   | 3,633  |  |      | 1,167  |      |   | 2,194 |  |   | 1,775
|Inventory                                  |  |                 | 2,421  |      |   | 5,225  |  |      | 2,350  |      |   | 1,939 |  |   | 2,206
|Total assets                               |  |                 | 14,768 |      |   | 14,986 |  |      | 15,537 |      |   | 9,818 |  |   | 9,529
|Working Capital                            |  |                 | 1,349  |      |   | 3,035  |  |      | 2,427  |      |   | 5,323 |  |   | 5,742
|Stockholders Equity                       |  |                 | 5,143  |      |   | 5,332  |  |      | 5,111  |      |   | 7,115 |  |   | 7,502



|(1) | References to a year are to the fiscal year of the Company commencing in that calendar year
and ending on the Saturday nearest January 31 of the following year. The fiscal year ended February 3, 2001 consisted of 53 weeks. All other years presented consist of 52 weeks. The Company has never declared or paid cash dividends on its Common
Stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The provision of $282,000 for impairment of the fixed assets represents the book value of
obsolete sewing machines and pressing equipment located in the Companys Guatemalan factory.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | On November 15, 1999, the Company consummated the sale of its Israeli Knit business to
Jordache Limited. The assets transferred to Jordache consisted of substantially all of the assets used by the Knit business in the manufacture of womens knit clothing. The Company recorded an impairment of Knit business assets of $2,564,000 in
1998 and $1,625,000 in 1999. However, the Companys actual expense was $3,230,000 and the excess $959,000 of the provision for impairment of Knits business assets was reversed in 2001.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | During 1997, the Company had provided for lease termination expense of $3,964,000 for the
expenses connected with the move of its executive and general offices at 1372 Broadway as well as an amount to be paid to the landlord for release of its contingent rent liabilities. The actual expenses contemplated by this provision were
$2,876,000. Therefore, $902,000 of this provision is shown as a reversal in 1998, and the remaining balance of $186,000 of the original provision was reversed in 1999.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | As the result of the settlement agreement between the Company and U.S. Internal Revenue
Service, the Company reversed a tax accrual of $4,800,000 established in connection with a potential deficiency at May 4, 2002. At January 31, 2004, the Company reversed a part of a tax audit reserve by $400,000 based on its knowledge of the status
of the issues of the audit of a subsidiary located in Guatemala.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Pursuant to an agreement dated June 10, 2002 modified by an amendment dated July 29, 2002,
the Company sold its Jordanian business to Century Investment Group (CIG) for $833,000 plus the assumption of all outstanding liabilities of the Jordanian company of approximately $943,000. The agreement also stated that any disputes
between the parties must be submitted to arbitration in Jordan.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The first payment of $400,000 was received at the closing and the final payment of $433,000 was due on April 30, 2003. As Cygne has not received the final payment of $433,000, it has submitted its claim for



11



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this payment to arbitration. As the outcome of this arbitration is uncertain, Cygnes management, at January 31, 2004, deemed it appropriate to provide
a reserve of $433,000 against this receivable.



Cygne agreed not to compete
with CIG for knit business in Jordan for five years starting June 1, 2002 in consideration of $350,000 payable by February 5, 2006. In connection with the non-compete agreement, the Company recorded deferred income of $350,000 which it was
amortizing to income over a five-year period. At January 31, 2004, as a result of the uncertainty of the arbitration with CIG, Cygne has discontinued the amortization of remaining deferred income of $309,000, and has reserved the corresponding net
receivable of $309,000 and has written off the related deferred income. The impact of these transactions had no effect on the results of continuing operations.



The sale of the Jordanian business and its related operating results have been excluded from the results from continuing operations and is classified as a discontinued
operation for all periods presented in accordance with the requirements of FAS 144 Accounting for Impairment or Disposal of Long-Lived Assets.



|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



Unless otherwise noted, all references to a year are to the fiscal year of the Company commencing in that calendar year and ending on the
Saturday nearest January 31 of the following year.



Statements in this Annual
Report on Form 10-K concerning the Companys business outlook or future economic performance; anticipated results of operations, revenues, expenses or other financial items; private label and brand name products, and plans and objectives
related thereto; and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters, are forward-looking statements as that term is defined under the Federal Securities Laws.
Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. Such risks, uncertainties and factors include, but are not limited to, United
States discontinuance of textile import quotas at January 1, 2005, a decline in demand for merchandise offered by the Company or changes and delays in customer delivery plans and schedules, significant regulatory changes, including increases in the
rate of import duties or adverse changes in foreign countries export quotas, dependence on a key customer, an adverse tax ruling, risk of operations and suppliers in foreign countries, competition, and general economic conditions, risks associated
with war and terrorist activities, including reduced shopping activity as a result of public safety concerns and disruption in the receipt and delivery of merchandise, as well as other risks detailed in the Companys filings with the Securities
and Exchange Commission, including this Annual Report on Form 10-K. The Company assumes no obligation to update or revise any such forward-looking statements.



Overview



On May 13, 2001, the Company acquired from Best Knits, L.L.C (Best Knits) the rights and obligation of all the customer purchase orders held by Best Knits and the trade name Best Knits (Jordanian
business). Best Knits, located in Irbid, Jordan, was a manufacturer of private label womens knit tops for sale to retailers located in the United States. The Company (i) assumed all outstanding vendor purchase orders issued by Best Knits
directly related to the acquired customer purchase orders, (ii) purchased from Best Knits all raw materials on hand directly related to acquired customer purchase orders, (iii) entered into a lease in Irbid, Jordan with Best Knits for the eighteen
month period starting May 1, 2001 for (a) its



12



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66,000 square feet of manufacturing and office space, (b) its approximately 550 sewing machines, (c) its cutting and pressing equipment and (d) its office
furniture and equipment, (iv) hired substantially all of its approximately 650 employees, and (v) agreed to purchase from Best Knits its trade name and customer relationships. The Company accounted for this transaction as a purchase.



Pursuant to an agreement dated June 10, 2002 modified by an amendment dated July 29, 2002,
the Company sold its Jordanian business to Century Investment Group (CIG) for $833,000 plus the assumption of all outstanding liabilities of the Jordanian company of approximately $943,000. The agreement also stated that any disputes
between the parties must be submitted to arbitration in Jordan.



The first
payment of $400,000 was received at the closing and the final payment of $433,000 was due on April 30, 2003. As Cygne has not received the final payment of $433,000, it has submitted its claim for this payment to arbitration. As the outcome of this
arbitration is uncertain, Cygne management, at January 31, 2004, deemed it appropriate to provide a reserve of $433,000 against this receivable.



Cygne agreed not to compete with CIG for knit business in Jordan for five years starting June 1, 2002 in consideration of $350,000 payable by February 5, 2006. In
connection with the non-compete agreement, the Company recorded deferred income of $350,000 which it was amortizing to income over a five-year period. At January 31, 2004, as a result of the uncertainty of the arbitration with CIG, Cygne has
discontinued the amortization of remaining deferred income of $309,000, and has reserved the corresponding net receivable of $309,000 and has written off the related deferred income. The impact of these transactions had no effect on the results of
continuing operations.



The sale of the Jordanian business and its related
operating results have been excluded from the results from continuing operations and is classified as a discontinued operation for all periods presented in accordance with the requirements of FAS 144 Accounting for Impairment or Disposal of
Long-Lived Assets. The Company decided to sell the Jordanian business as a result of the political uncertainty in the region that adversely affected the profitability of the business.



The Company historically has been dependent on one or more key customers. A significant
portion of the Companys sales has been and is expected to continue to be to Lerner, formerly a division of Limited Brands. For 2003, sales to Lerner accounted for 91% of Cygnes net sales from continuing operations. (See Item 1. Business)



For 2002 and 2001, sales to Lerner accounted for 93% and 77% respectively, of
the Companys net sales from continuing operations. Although Cygne has a long-established relationship with Lerner, its key customer, Cygne does not have long-term contracts with Lerner. The Companys future success will be dependent upon
its ability to attract new customers and to maintain its relationship with Lerner. During 2003, Cygne was able to attract two new customers. Cygne continues to maintain its positive working relationship with Lerner by providing on-time deliveries of
quality products.



Effective January 1, 2005, the United States will
discontinue textile import quotas affecting the products sourced by the Company. As a result, the Companys customers may be able to secure the products currently being purchased from the Company in other places at a lower price. While it is
not possible to forecast the impact to the Company of the discontinuance of textile import quotas, this change could cause the Company to face severe liquidity pressures, which would adversely affect the Companys financial condition and
results of operations and cash flows.



13



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The Company has in the past incurred costs in restructuring its operations due to loss of customers. The Company is
continuing to review its existing business operations and could incur additional costs in the future associated with the further restructuring of its operations.



The apparel industry is highly competitive and historically has been subject to substantial cyclical variation, with purchases of apparel
and related goods tending to decline during recessionary periods when disposable income is low. This could have a material adverse effect on the Companys business. Retailers, including customers of the Company, are increasingly sourcing
private label products themselves rather than utilizing outside vendors like the Company.



Results of Operations



The following
table is derived from the Companys consolidated statements of operations for continuing operations and expresses for the periods indicated certain data as a percentage of net sales.



|                                                                          |  |       |   |  |       |   |  |       |  
|------------------------------------------------------------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                                                                          |  | Year  |  
|                                                                          |  | 2003  |   |  | 2002  |   |  | 2001  |  
|Net Sales                                                                 |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %
|                                                                          |  |       |   |  |       |   |  |       |  
|Gross profit                                                              |  | 15.3  |   |  | 13.8  |   |  | 17.5  |  
|Selling, general and administrative expenses                              |  | 12.7  |   |  | 12.9  |   |  | 14.2  |  
|Provision for impairment of fixed assets                                  |  |      |   |  | 1.2   |   |  |      |  
|Reversal of impairment of Knit business assets                            |  |      |   |  |      |   |  | (3.4  | )
|                                                                          |  |       |   |  |       |   |  |       |  
|Income (loss) from continuing operations before interest and income taxes |  | 2.6   |   |  | (0.3  | ) |  | 6.7   |  
|Interest expense (income), net                                            |  | 0.6   |   |  | 0.8   |   |  | 0.6   |  
|(Benefit) provision for income taxes                                      |  | (1.4  | ) |  | (19.8 | ) |  | 0.1   |  
|                                                                          |  |       |   |  |       |   |  |       |  
|Income from continuing operations                                         |  | 3.4   | % |  | 18.7  | % |  | 6.0   | %
|                                                                          |  |       |   |  |       |   |  |       |  



2003 compared to 2002



The sale of the Jordanian business and its related operating results have
been excluded from the results from continuing operations and is classified as a discontinued operation for all periods presented in accordance with the requirements of FAS 144 Accounting for Impairment or Disposal of Long-Lived Assets.



Net Sales



Net sales for 2003 were $27,082,000, an increase of $3,063,000 or 12.8%, from $24,019,000 in
2002.



The increase in sales for the year 2003 compared to the year
2002 resulted from an increase in sales to Lerner of $2,201,000, and sales to Jordache Enterprises of $2,196,000, offset by a decrease in sales to Dillards and to other customers of $1,019,000 and $315,000 respectively. The increase in sales
to Lerner for the year 2003 compared to the year 2002 was the result of the number and size of the programs that Lerner purchased from Cygne. Jordache Enterprises is a new customer in 2003. The elimination of the sales to Dillards was caused
by Dillards discontinuing the product category that it was purchasing from Cygne in April 2002.



Lerner accounted for 91% of Cygnes net sales for the year 2003 as compared to 93% of the net sales in year 2002.



14



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At January 31, 2004 the Company had unfilled confirmed customer orders of $4,600,000 compared to $6,700,000 at February
1, 2003. In general, the amount of unfilled orders at a particular time is affected by a number of factors, including the scheduling of manufacture and shipping of the product which, in some instances, depends on the customers demands.
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
do not materially reduce the amount of sales realized from its backlog. However, at this time, the variance between the unfilled customer orders at January 31, 2004 and February 1, 2003 could result in lower sales in the first quarter 2004 as
compared to the first quarter 2003. Lower sales could impact profits in the first quarter 2004.



Gross Profit



The gross profit
for the year 2003 was $4,150,000, an increase of $825,000 or 24.8% from the gross profit of $3,325,000 for the year 2002.



The increase in gross profit for the year 2003 compared to the year 2002 was attributable to an increase in sales in the year 2003 as compared to the year 2002, the
reduction of the year 2002 unabsorbed overhead at the Companys Guatemala facility and a slight increase in initial gross margin in the year 2003 as compared to the year 2002.



The maintained gross margin for the year 2003 was 15.3% compared to 13.8% for the year 2002. The increase in maintained gross margin was
attributable to a more favorable product mix in 2003 compared to 2002 and the reduction of the 2002 unabsorbed overhead at the Companys Guatemala manufacturing facility.



A decrease in sales in the first quarter 2004 as compared to the first quarter 2003 could cause higher unabsorbed overhead at the
Companys Guatemala manufacturing facility in the first quarter of 2004 than in the first quarter 2003. The increase in unabsorbed overhead could impact profits in the first quarter 2004



Selling, General, and Administrative Expenses



Selling, general, and administrative expenses for 2003 were $3,448,000, an increase of
349,000 or 11.2% from $3,099,000 in 2002.



The increase in expense in the year
2003 compared to the year 2002 was primarily the cost of the establishment of a sales and merchandising team for the new knit business, the increase in staff salaries and bonuses, and the increase in sales commissions offset by a reduction in
professional fees and insurance expense.



Provision for Impairment of
Fixed Assets



The provision of $282,000 for impairment of fixed assets
in 2002 represents the book value of obsolete sewing machines and pressing equipment located in the Companys Guatemalan factory. These machines have been discarded.



Interest



Interest expense includes factor fees and the amortization of the deferred financing cost.



15



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Interest expense for 2003 was $180,000, a decrease of $43,000 or 19.3% from $223,000 for 2002. The decrease in interest
expense is primarily attributable to the usage of factor fees.



Provision
(Benefit) for Income Taxes



The provision for income taxes for 2003
for minimum state income and foreign taxes was $26,000 as compared to $50,000 in 2002. The reduction in minimum taxes in 2003 over 2002 of $24,000 is due to a reduction in Guatemalan minimum income taxes. The 2003 provision was offset by a reversal
of $400,000 of a prior year tax provision for Guatemalan tax leaving a net benefit for the year 2003 of $374,000. The 2002 provision was offset by a reversal of $4,800,000 of a prior year U.S. tax provision, leaving a net benefit for the year 2002
of $4,750,000.



In March 2002, the U.S. Internal Revenue Service (the
IRS) concluded its audit of the U.S. Federal income tax returns filed by GJM (US) Inc., the Companys 100% owned subsidiary, for its taxable years ending December 31, 1989 through October 7, 1994. The IRS and the Company executed a
settlement agreement stating that no tax payment is due. As a result of this settlement, the Company in the first quarter of 2002 reversed its tax accrual of $4,800,000 established in connection with this audit.



Since 2001, the Guatemalan Internal Revenue Service has been conducting an audit of the
Guatemalan tax returns filed by JMB Internacional, S.A., the Companys 100% owned Guatemalan subsidiary, for its taxable years 1998, 1999, and 2000. At January 31, 2004, based upon its knowledge of the status of the issues of the audit, Cygne
management has decreased its original tax reserve for this audit by $400,000 and has shown this reduction as benefit for income taxes on the consolidated statement of operations for 2003.



Discontinued Operation



The sale of the Jordanian business in 2002 and its related operating results for years 2003, 2002 and 2001 have been excluded from the results from continuing operations
and are classified as a discontinued operation for all periods presented in accordance with the requirements of FAS 144 Accounting for Impairment or Disposal of Long-Lived Assets. The discontinued operation expense for 2003 of $528,000
is comprised of a reserve of $433,000 against the current arbitration, $46,000 of non-collectible Jordan custom security deposits, and $49,000 for legal and other professional fees incurred connection with Cygnes arbitration case against
Century Investment Group (CIG) for the collection of $433,000. This receivable was established in July 2002 as part of CIGs purchase of the Jordan business.



The first payment of $400,000 was received at the closing and the final payment of $433,000 was due on April 30, 2003. As Cygne has not
received the final payment of $433,000, it has submitted its claim for this payment to arbitration. As the outcome of this arbitration is uncertain, Cygnes management, at January 31, 2004, deemed it appropriate to provide a reserve of $433,000
against this receivable.



Cygne agreed not to compete with CIG for knit
business in Jordan for five years starting June 1, 2002 in consideration of $350,000 payable by February 5, 2006. In connection with the non-compete agreement, the Company recorded deferred income of $350,000 which it was amortizing to income over a
five-year period. At January 31, 2004, as a result of the uncertainty of the arbitration with CIG, Cygne has discontinued the amortization of remaining deferred income of $309,000, and has reserved the corresponding net receivable of $309,000 and
has written off the related deferred income. The impact of these transactions had no effect on the results of continuing operations.



16



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See also Overview under Item 7 of Managements Discussion and Analysis of Financial Condition and
Results of Operations.



2002 compared to 2001



The sale of the Jordanian business and its related operating results have been excluded from
the results from continuing operations and is classified as a discontinued operation for all periods presented in accordance with the requirements of FAS 144 Accounting for Impairment or Disposal of Long-Lived Assets.



Net Sales



Net sales for 2002 were $24,019,000, a decrease of $4,230,000 or 15%, from $28,249,000 in 2001.



The decrease in sales resulted from decreased sales to Dillards of $4,613,000 and to
other customers of $169,000 offset by an increased sales to Lerner of $552,000. Lerner accounted for 93% and 77% of Cygnes net sales for 2002 and 2001, respectively. The increase in sales to Lerner for the year 2002 compared to the year 2001
was the result of the number and size of the programs that Lerner purchased from Cygne. Dillards discontinued the product category that it was purchasing from Cygne in April 2002.



Gross Profit



The gross profit for 2002 was $3,325,000, a decrease of $1,613,000 or 32.7% from the gross profit of $4,938,000 for 2001. The decrease in gross profit was attributable to
the decrease in sales in 2002 as compared to 2001 and to the decrease in gross margin in 2002 as compared to 2001.



The gross margin for 2002 was 13.8% compared to the gross margin of 17.5% for 2001. The decrease in gross margin was attributable to a less favorable product mix in 2002
compared to 2001 margins, one-time favorable settlements in 2001 of prior years disputes, partially offset by less unabsorbed factory overhead at the Companys Guatemala facility in 2002 compared to 2001.



Selling, General, and Administrative Expenses



Selling, general, and administrative expenses for 2002 were $3,099,000, a decrease of
$909,000 or 22.7% from $4,008,000 in 2001.



The decrease in selling, general
and administrative expenses for 2002 compared to 2001 was attributable to the closing in 2001 of the Dallas sales office of $715,000 and a reduction in the New York marketing expenses in 2002 as compared to 2001 of $194,000.



Provision for Impairment of Fixed Assets



The provision of $282,000 for impairment of fixed assets in 2002 represents the book value
of obsolete sewing machines and pressing equipment located in the Companys Guatemalan factory. These machines have been discarded.



17



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Reversal of Impairment for Knit Business Assets



In 2001, the Company settled its remaining obligations related to its agreement to sell the
knits business, and reversed the balance of its unused provision for the impairment of Israeli knit business assets, which amounted to $959,000.



Interest



Interest expense includes factor fees and the amortization of the deferred financing costs.



Interest expense for 2002 was $223,000, an increase of $28,000 or 14.3% from $195,000 for 2001. The increase in expense was caused by an increase in fees for Cygnes
domestic credit facility.



Provision (Benefit) for Income Taxes



The provision for income taxes for 2002 for minimum state income and
foreign taxes was $50,000 as compared to $44,000 in 2001. The 2002 provision was offset by a reversal of $4,800,000 of a prior year tax provision leaving a net benefit for the year 2002 of $4,750,000.



In March 2002, the U.S. Internal Revenue Service (the IRS) concluded its audit of
the U.S. Federal income tax returns filed by GJM (US) Inc., the Companys 100% owned subsidiary, for its taxable years ending December 31, 1989 through October 7, 1994. The IRS and the Company executed a settlement agreement stating that no tax
payment is due. As a result of this settlement, the Company in the first quarter of 2002 reversed its tax accrual of $4,800,000 established in connection with this audit.



Discontinued Operation



The sale of the Jordanian business and its related operating results have been excluded from the results from continuing operations for years 2001 and 2000 and is
classified as a discontinued operation for all periods presented in accordance with the requirements of FAS 144 Accounting for Impairment or Disposal of Long-Lived Assets.



Liquidity and Capital Resources



On May 11, 2001 the Company entered into a Revolving Credit and Security Agreement and a
Factoring Agreement with GMAC Commercial Credit LLC (GMAC ). The Agreements provided for a Revolving Facility of $8,000,000 (Facility), including a letter of credit sub-limit of $5,000,000, subject to a borrowing base
formula. Borrowings under this Facility bore a rate of interest of the lesser of (i) LIBOR (1.48% at December 31, 2002) plus 3% or (ii) the prime rate (4.25% at December 31, 2002) plus 0.5% and was secured by substantially all of the Companys
assets. In addition, the Facility was subject to various financial covenants. The Agreement was cancelled on December 31, 2002.



Effective January 1, 2003, the Company entered into an Amended and Restated Factoring Agreement with GMAC (Factor Agreement). The Factor Agreement, which
terminates on December 31, 2004, provides that the Company can borrow a percentage (under most conditions 50%) of the value of its factored customer invoices. Borrowings under this Factor Agreement bear interest at the prime rate (4.00% at January
31, 2004) plus 1.5% with a minimum interest rate of 6%. The factor fee is 0.5% of the customer invoice amount. Cygne guaranteed to GMAC its factor fee based on an annual sales volume of $20,000,000. The Factor Agreement is secured by substantially
all of the Companys assets. There were no outstanding loans at January 31, 2004. The Company did not have any borrowings during the year 2003.



18



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Net cash provided by operating activities for the year 2003 was $1,054,000 compared to net cash provided in for the year
2002 of $1,878,000.



Net cash used in operating activities for the year 2003
from the discontinued operation was $49,000. Net cash provided by operating activities in 2003 from continuing operations of $1,103,000 was comprised of funds provided by (i) a decrease in due from factor of $419,000, (ii) a decrease in other
receivables of $125,000, (iii) an increase in accrued expenses and income taxes payable of $355,000, and (iv) net income from continuing operations of $793,000 partially offset by the use of funds from (v) an increase in inventories of $267,000, and
(vi) a decrease in accounts payable of $322,000.



Net cash provided by
operating activities for the year 2002 from the discontinued operation was $1,205,000. Net cash provided by operating activities in 2002 from continuing operations of $673,000 was comprised of funds provided by (i) a decrease of inventories of
$441,000, and (ii) an increase in accounts payable of $399,000, (iii) a decrease in restricted cash and other assets of $151,000, and (iv) income from continuing operations of $226,000 partially offset by the use of funds from (v) an increase in due
from factor of $123,000, (vi) an increase in other receivables of $205,000, and (vii) an increase in accrued expenses and income taxes payable of $216,000.



Cash used in investing activities in 2003 was $319,000. The cash used by investing activities consisted of the purchase of sewing machines and other equipment for the
Guatemalan facility in the amount of $288,000 and the purchase of computer equipment for the New York office and the Guatemala facility in the amount of $31,000.



Cash provided by investing activities in 2002 was $37,000. The cash provided by investing activities was from the proceeds from the sale of
the discontinued operation of $400,000 offset by the use of cash to (i) purchase fixed assets for the discontinued operation in the amount of $43,000, (ii) purchase fixed assets for the continuing operations in the amount of $39,000, (iii) pay the
installment of $40,000 in connection with the original purchase of the discontinued operation, and (iv) purchase the marketable securities for $241,000.



There was no cash used in financing activities in 2003 as compared to cash used in 2002 for the discontinued operation of $1,863,000. The cash used in the financing
activities in 2002 was for the repayment of the discontinued operation working capital bank loan.



At January 31, 2004 and February 1, 2003, working capital was $5,742,000 and $5,323,000 respectively.



The Companys financial performance for 2004 will depend on a variety of factors, including the amount of sales to Lerner and the effect on the Cygne business on
account of the discontinued textile import quotas by the United States effective January 1, 2005. As a result of the discontinuance of textile import quotas the Companys customers may be able to secure the products currently being purchased
from the Company in other in other places at a lower price. If the Company has significant operating losses or if its ability to borrow under its credit facilities is limited or terminated, the Company could face severe liquidity pressures, which
would adversely affect the Companys financial condition and results of operations and cash flows. The Company is continuing to review its business operations and could incur additional costs in the future associated with the restructuring of
its operations.



19



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Contractual Obligations and Commercial Commitments



Leases



At January 31, 2004, the Company is the lessee under one operating lease through June 30, 2004. Future minimum payments under the operating lease are $110,000. The
Company is currently in negotiations for a new lease in both its present location and other locations.



Off-Balance Sheet Arrangements



The
Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating its business.



Recent Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires that a variable
interest entity be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entitys activities or entitled to receive a majority of the entitys residual returns or both. The
consolidation requirements apply to the first fiscal year or interim period ending after March 31, 2004. The adoption of FIN 46 has not and is not expected to have a material impact on the Companys financial condition, results of operations,
and cash flows.



In April 2003, the FASB issued SFAS No. 149, Amendment
of Statement No. 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies accounting for derivatives instruments, including certain derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. This statement is effective for contracts entered into or modified after June 30, 2003, except as for provisions that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to
June 15, 2003, which should continue to be applied in accordance with their respective dates. The adoption of SFAS No. 149 has not and is not expected to have a material impact on the Companys financial condition, results of operations, and
cash flows.



In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement requires that certain financial instruments that, under previous guidance, issuers could account for as equity be classified as liabilities in
statements of financial position. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 has not and is not expected to have a material impact on the Companys financial condition, results of operations, and cash flows.



Inflation



The Company does not believe that the relatively moderate rates of inflation which have been experienced in the U.S., where it competes, have had a significant effect on
its net sales or profitability.



20



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Critical Accounting Policies and Estimates



The preparation of our financial statements is in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates.



The policies with the greatest potential effect on the results of operations and financial
position include the Companys estimate of the collectibility of its trade accounts receivable, the recovery value of its inventory, the amount of income taxes that may be assessed by the taxing authorities upon audit of the Companys tax
returns, and the valuation allowance against the deferred tax asset.



For trade
accounts receivable (due from factor), the Company estimates the net collectibility, considering both historical and anticipated deductions taken by customers. For inventory, the Company values its inventory of seconds and of excess production at
the recovery value expected to be realized through sale in off-price channels. For amounts of additional income taxes that may be assessed by the various taxing authorities upon audit of the Companys tax returns, the Company estimates the
amount based upon its knowledge of the cases and upon the advice of its tax counsel.



For the valuation allowance against the deferred tax asset, the Company has recorded a valuation allowance against the entire deferred tax asset due to the Companys history of low profits. However, should the Company conclude that
future profitability is reasonably assured, the value of the deferred tax asset would be increased by eliminating some or all of the valuation allowance.



If the Company incorrectly anticipates these trends or unexpected events occur, its results of operations could be materially affected.



Some of the other items in our financial statements requiring significant estimates and
judgments are as follows:



Depreciation and Amortization



Depreciation of property and equipment is provided for by the
straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the term of the related lease.



Revenue Recognition



Revenues are recorded at the time of shipment of merchandise, provided that the price is fixed, title has been transferred, collection of the resulting receivable is
reasonably assured and the Company has no significant obligations remaining to be performed. The Company establishes reserves for sales returns and allowances. Such reserves amounted to $5,000 and $20,000 at January 31, 2004 and February 1, 2003,
respectively.



Foreign Currency Exchange



The Company negotiates substantially all its purchase orders with its foreign manufacturers
in U.S. dollars. Thus, notwithstanding any fluctuation in foreign currencies, the Companys cost for any purchase order is not subject to change after the time the order is placed. However, the weakening of the U.S. dollar against local
currencies could lead certain manufacturers to increase their U.S. dollar prices for products. The Company believes it would be able to compensate for any such price increase.



21



---

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the
accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles in the United States of America, with no need for managements judgment in their application. There are also areas in which
managements judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto which begin on page F-1 of this Annual Report on Form 10-K which
contain accounting policies and other disclosures required by accounting principles generally accepted in the United States of America.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



The Company does not believe it has a material exposure to market risk. The Companys earnings may be affected by changes in short-term interest rates as a result of
borrowings under it credit facility. At the Companys current borrowing levels; a two percent increase in interest rates affecting the Companys credit facility would not have a material effect on the Companys actual 2003 net
income.



|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------



|See | pages F-1 for a listing of the consolidated financial statements submitted as part of this annual report.
|--- | ---------------------------------------------------------------------------------------------------------



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



There were no disagreements with the accountants on accounting and financial disclosures during the last three years. On May 9, 2002, Ernst
& Young notified the Company that it had resigned as the Companys independent public accountants, effective immediately. For more information with respect to this matter, see the Companys report on Form 8-K dated May 9, 2002.



As recommended by the Companys audit committee, the Companys board
of directors on June 20, 2002 engaged Mahoney Cohen & Company, CPA P.C. to serve as the Companys independent public accountants.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



The Companys management with the participation of its chief executive officer and chief financial officer has evaluated the effectiveness of the Companys
disclosure controls and procedures as of January 31, 2004. Based on this evaluation, the Companys chief executive officer and chief financial officer, concluded that the Companys disclosure controls and procedures are effective in
alerting them on a timely basis to material information required to be included in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended. Such evaluation did not identify any change in the Companys
internal controls over financial reporting that occurred during the year ended January 31, 2004, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



22



---

PART III



|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | --------------------------------------------------



Directors



The section entitled Proposal No. 1- Election of Directors in the Companys Proxy Statement for the Annual Meeting of Stockholders in incorporated herein by reference.



Executive Officers of the Registrant



The executive officers of the Company are as follows:



|                  |  |     |  |                                                                        
|----------------- |  | --- |  | -----------------------------------------------------------------------
|Name              |  | Age |  | Position with the Company                                              
|Bernard M. Manuel |  | 56  |  | Director, Chairman of the Board and Chief Executive Officer            
|                  |  |    
|Roy E. Green      |  | 71  |  | Senior Vice President-Chief Financial Officer, Treasurer, and Secretary



Bernard M. Manuel has served as Chief
Executive Officer and a director of the Company, as well as in several additional executive positions, since he joined the Company in October 1988. He currently serves as the Chairman of the Board, Chief Executive Officer and a director. Mr. Manuel
is a director of several private companies in the U.S. and Europe. From 1983 until he joined the Company, Mr. Manuel was involved, through Amvent, a company he founded, in the transfer of technology between Europe and the U.S. and related venture
capital and merger and acquisition activities, as well as in the apparel industry. Mr. Manuel earned a Bachelors of Science in Mathematics and several graduate degrees in Mathematics and in Economics from the University of Paris, an M.S. in
Political Science from the Institute dEtudes Politiques in Paris and an M.B.A. with high honors (Baker Scholar) from the Harvard Business School, where he was awarded both the Loeb Rhodes Fellowship for excellence in finance and
the Melvin T. Copeland prize for top performance in marketing.



Roy E. Green
has served as Chief Financial Officer of the Company, as well as in various additional executive capacities, since October 1987. He currently serves as Senior Vice President-Chief Financial Officer, Treasurer and Secretary of the Company. From 1974
until he joined the Company, Mr. Green was employed by Cluett Peabody & Co., first as the Chief Financial Officer of its Arrow Co. division until 1979, then as Vice President and Controller until 1985, and finally as Chief Financial Officer. He
has also worked as a certified public accountant for J. K. Lasser & Co. and Hurdman & Cranstoun. Mr. Green received a Bachelors degree in Business Administration from Rutgers University. Mr. Green is a certified public accountant.



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934 requires executive officers and
directors, and persons who beneficially own more than ten percent of our Common Stock to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission (the SEC). Executive officers,
directors, and greater than ten percent beneficial owners are required by the SEC to furnish us with copies of all Section 16(a) forms they file.



23



---

Based upon a review of the copies of such forms furnished to the Company and written representations from the
Companys executive officers and directors, we believe that during the fiscal year ended January 31, 2004, all Section 16(a) filing requirements applicable to the executive officers, directors and greater than ten percent beneficial owners were
complied with.



Audit Committee and Financial Reports



The board of directors has established an audit committee comprised of one of the
Companys directors, James G. Groninger, who is independent under the listing standards of the Nasdaq National Market, is financially literate, knowledgeable and qualified to review financial statements, and has been designated as the audit
committee financial expert. He has been President of the BaySouth Company since January 1995. From 1988 through 1994, he was Managing Director of PaineWebber Incorporation. Mr. Groninger is both a Chartered Financial Analyst and a Certified Public
Accountant.



Code of Ethics



The Company has adopted a code of ethics applicable to the Companys officers, who
include the Companys principal executive officer, principal financial officer and financial professionals. A copy of the Companys code of ethics is being filed with the Securities and Exchange as Exhibit 14.1 to this Annual Report on
Form 10-K. The Company undertakes to provide to any person without charge, upon request, a copy of the Companys code of ethics. Requests for such copy should be made in writing to the Company at its principal office, which is set forth on the
first page of this Form 10-K, attention Chief Financial Officer.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



The section entitled Executive Compensation in the Companys Proxy Statement for the Annual Meeting of Stockholders is incorporated herein by reference.



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



The sections entitled Beneficial Ownership of Common Stock and Equity Compensation Plans in the Companys Proxy
Statement for the Annual Meeting of Stockholders is incorporated herein by reference.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



The sections entitled Executive Compensation - Compensation Committee Interlocks and Insider Participation and Certain Transactions in the
Companys Proxy Statement for the Annual Meeting of Stockholders is incorporated herein by reference.



|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------



The following table sets forth the aggregate fees billed by the independent auditors for services rendered to the Company for the audit of the Companys financial
statements for the years ended January 31, 2004 (2003) and February 1, 2003 ( 2002). The services also included reviews of the financial statements included in the Companys Quarterly Reports on Form 10Q and for other
services rendered on behalf of our Company in those fiscal years. No services were performed by, or fees incurred to, Mahoney Cohen



24



---

& Company, CPA, P.C. in connection with the financial information services design and implementation projects during 2003 or 2002. The fees billed by
Mahoney Cohen & Company, CPA, P.C., our independent auditors, for audit and other professional services during 2003 and 2002 are summarized below. The audit committee has considered whether the provision of these services is compatible with
maintaining the principle accountants independence and has concluded that such services are compatible. All fees paid were reviewed and pre-approved by the audit committee.



|                   |  |      |        |      |   |       
|------------------ |  | ---- | ------ | ---- | - | ------
|                   |  | 2003 |        | 2002
|Audit fees         |  | $    | 90,803 |      | $ | 78,225
|Non-audit services |  |      | 0      |      |   | 2,435 
|                   |  |      |        |      |   |       
|Total fees         |  | $    | 90,803 |      | $ | 80,660



PART IV



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



|(a). | Financial Statements
|---- | --------------------



(1) and (2) See Index to Consolidated Financial Statements and Financial Statements Schedule on page F-1.



|(3). | Exhibits
|---- | --------



Certain exhibits presented below contain information that has been granted confidential treatment. Such information has been omitted from the exhibit numbers 10.1, 10.3, and 10.4 which are management contracts or
compensatory plans.



|            |  |                                                                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                           
|            | 
|2.1         |  | Amended and Restated Acquisition Agreement, dated as of August 1, 1999 by and among M.T.G.I. - Textile Manufacturers Group (Israel), Limited, MBS Company, AC Services Inc. and Jordache
Limited. *(1)
|            | 
|2.2         |  | Agreement dated May 9, 2001 between Cygne Designs, Inc. and Best Knits, LLC. *(8)                                                                                                                     
|            | 
|3.1         |  | Restated Certificate of Incorporation, as amended by Certificate of Amendment filed August 6, 1994 with the Secretary of State of the State of Delaware. *(2)                                         
|            | 
|3.2         |  | Certificate of Amendment to Restated Certificate of Incorporation. * (3)                                                                                                                              
|            | 
|3.3         |  | By-laws. *(4)                                                                                                                                                                                         
|            | 
|4.0         |  | Specimen Stock Certificate. *(4)                                                                                                                                                                      



25



---

|      |  |                                                                                                                                                                                                        
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.1  |  | Amended and Restated Employment Agreement, dated as of January 1, 1995, between the Company and Bernard M. Manuel. *(5)                                                                                
|      | 
|10.3  |  | 1993 stock option plan, as amended, through June 28, 1994. *(2).                                                                                                                                       
|      | 
|10.4  |  | Form of Stock Option Agreement. *(4)                                                                                                                                                                   
|      | 
|10.8  |  | Lease between the Company and L.H. Charney Associates, L.P. *(6)                                                                                                                                       
|      | 
|10.9  |  | Lease Extension and Modification between the Company and L.H. Charney Associates, L.P. amendments. * (7)                                                                                               
|      | 
|10.10 |  | Revolving Credit and Security agreement, dated as of May 11, 2001, between GMAC Commercial Credit LLC, as lender, and Cygne Designs. *(8)                                                              
|      | 
|10.12 |  | Credit agreement between Prosperity Textiles Ltd. and Egyptian Arab Land Bank. * (7)                                                                                                                   
|      | 
|10.13 |  | Asset Purchase Agreement dated June 9, 2002 between Cygne Designs, Inc. and Prosperity Textiles Ltd., and House and Garden Company and Century Investment Group *(9)                                   
|      | 
|10.14 |  | Amended and Restated Factoring Agreement dated January 1, 2003 between GMAC Commercial Credit LLC and Cygne Designs, Inc. * (10)                                                                       
|      | 
|10.15 |  | Amendment dated July 29, 2002 to Asset Purchase Agreement dated June 9, 2002 between Cygne Designs, Inc. and Prosperity Textiles Ltd. And House and Garden Company and Century Investment
Group. * (10)
|      | 
|14.1  |  | Code of Ethics for Companys Officers and Financial Professionals. Filed herein                                                                                                                        
|      | 
|21    |  | Subsidiaries of the Company                                                                                                                                                                            
|      | 
|23.1  |  | Consent of Mahoney Cohen & Company, CPA, P.C.                                                                                                                                                          
|      | 
|23.2  |  | Consent of Ernst & Young LLP.                                                                                                                                                                          
|      | 
|31.1  |  | Certificates of Principal Executive Officer                                                                                                                                                            
|      | 
|31.2  |  | Certificates of Principal Financial Officer                                                                                                                                                            
|      | 
|32.1  |  | Certifications of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002                                                                      
|      | 
|32.2  |  | Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002                                                              



26



---

|* | Previously filed with the Commission as Exhibits to, and incorporated herein by reference from the following documents:
|- | -----------------------------------------------------------------------------------------------------------------------



|     |  |                                                                                
|---- |  | -------------------------------------------------------------------------------
|(1)  |  | Companys Quarterly Report on Form 10-Q for the quarter ended July 31, 1999.   
|     | 
|(2)  |  | Companys Quarterly Report on Form 10-Q for the quarter ended July 30, 1994.   
|     | 
|(3)  |  | Companys Quarterly Report in Form 8-K dated December 5, 2000.                 
|     | 
|(4)  |  | Companys Registration Statement of Form S-1 (Registration No. 33-64358)       
|     | 
|(5)  |  | Companys Annual Report on Form 10-K for fiscal year ended January 28, 1995.   
|     | 
|(6)  |  | Companys Annual Report on Form 10-K for the fiscal year ended January 29, 2000
|     | 
|(7)  |  | Companys Annual Report on Form 10-K for the fiscal year ended February 3, 2001
|     | 
|(8)  |  | Companys Quarterly Report on Form 10-Q for the quarter ended May 5, 2001      
|     | 
|(9)  |  | Companys Quarterly Report on Form 10-Q for the quarter ended May 4, 2002      
|     | 
|(10) |  | Companys Annual Report on Form 10-K for the fiscal year ended February 1, 2003



Exhibits have been included in copies
of this Report filed with the Securities and Exchange Commission. Stockholders of the Company will be provided with copies of these exhibits upon written request to the Company.



|(b) | Reports on Form 8-K
|--- | -------------------



None



|(c) | Exhibits
|--- | --------



See (a) (3) above.



|(d) | Financial Statement Schedule
|--- | ----------------------------



See Index to Consolidated Financial Statements and Supplemental Schedule appearing on F-1. Schedules not included herein are omitted because
they are not applicable or the required information appears in the Consolidated Financial Statement or notes thereto.



27



---

SIGNATURES



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



Cygne Designs, Inc.(Registrant)By:

/s/ Bernard M. ManuelBernard M. Manuel(Chairman and Chief Executive Officer)




Date: April 30, 2004



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



|                                         |  |                                                                                                                          |  |               
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | --------------
|Signature                                |  | Title                                                                                                                    |  | Date          
|                                         |  |                                                                                                                         
|/s/ Bernard M. ManuelBernard M. Manuel   |  | Chairman of the Board of Directors, Chief Executive Officer and Director (principal executive officer)                   |  | April 30, 2004
|                                         |  |                                                                                                                         
|/s/ Roy E. GreenRoy E. Green             |  | Senior Vice President, Chief Financial Officer, and Treasurer (principal financial and accounting officer) and Secretary |  | April 30, 2004
|                                         |  |                                                                                                                         
|/s/ James G. GroningerJames G. Groninger |  | Director                                                                                                                 |  | April 30, 2004



28



---

Cygne Designs, Inc. and Subsidiaries



Consolidated Financial Statements



Index to Consolidated Financial Statements



|                                                                                                                 |  |     
|---------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                 |  | Page
|Reports of Independent Auditor                                                                                   |  | F-2 
|Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003                                          |  | F-4 
|Consolidated Statements of Operations for Each of the Three Years in the Period Ended January 31, 2004           |  | F-5 
|Consolidated Statements of Stockholders Equity For Each of the Three Years in the Period Ended January 31, 2004. |  | F-6 
|Consolidated Statements of Cash Flows for Each of the Three Years In the Period Ended January 31, 2004           |  | F-7 
|Notes to Consolidated Financial Statements                                                                       |  | F-8 
|Financial Schedule                                                                                               |  |     
|Schedule II                                                                                                      |  | F-25



F-1



---

Report of Independent Auditor



Board of Directors and
Stockholders

Cygne Designs, Inc.



We have audited the accompanying consolidated balance sheets of Cygne Designs, Inc. and Subsidiaries as of January 31, 2004 and February 1, 2003 and the related
consolidated statements of operations, stockholders equity and cash flows for the years then ended. Our audits also included the financial statement schedules listed in the Index on page F-1. 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 of America. Those standards require that we plan and perform the
audits 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 consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cygne Designs, Inc. and Subsidiaries as of January 31, 2004 and February 1, 2003 and the consolidated results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America. 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.



/s/ MAHONEY COHEN & COMPANY, CPA, P.C.



New
York, New York

April 9, 2004



F-2



---

Report of Independent Auditor



Board of Directors and Stockholders

Cygne
Designs, Inc.



We have audited the accompanying consolidated statement of
operations, stockholders equity and cash flows of Cygne Designs, Inc. and Subsidiaries for the year ended February 2, 2002. Our audit also included the financial statement schedule listed in the Index on page F-1. These financial statements
and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.



We conducted our audit in accordance with 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 audit provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations and cash flows of Cygne Designs, Inc. and Subsidiaries for the year ended February 2, 2002, 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.



/s/ ERNST & YOUNG LLP



New York, New York

April 2, 2002



F-3



---

Cygne Designs, Inc and Subsidiaries



Consolidated Balance Sheets



|                                                                                                     |  |                                                   |          |   |                  |   |          |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                     |  | January 31, 2004                                  |          |   | February 1, 2003 |  
|                                                                                                     |  | (In thousands, except shareand per share amounts) |         
|Assets                                                                                               |  |                                                   |          |   |                  |   |          |  
|Current Assets:                                                                                      |  |                                                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                            |  | $                                                 | 3,345    |   |                  | $ | 2,610    |  
|Due from factor                                                                                      |  |                                                   | 1,775    |   |                  |   | 2,194    |  
|Inventories                                                                                          |  |                                                   | 2,206    |   |                  |   | 1,939    |  
|Marketable securities                                                                                |  |                                                   | 163      |   |                  |   | 160      |  
|Other receivables and prepaid expenses                                                               |  |                                                   | 280      |   |                  |   | 884      |  
|                                                                                                     |  |                                                   |          |   |                  |   |          |  
|Total current assets                                                                                 |  |                                                   | 7,769    |   |                  |   | 7,787    |  
|Fixed assets, net                                                                                    |  |                                                   | 1,717    |   |                  |   | 1,679    |  
|Other assets                                                                                         |  |                                                   | 43       |   |                  |   | 352      |  
|                                                                                                     |  |                                                   |          |   |                  |   |          |  
|Total assets                                                                                         |  | $                                                 | 9,529    |   |                  | $ | 9,818    |  
|                                                                                                     |  |                                                   |          |   |                  |   |          |  
|Liabilities and Stockholders Equity                                                                 |  |                                                   |          |   |                  |   |          |  
|Current liabilities:                                                                                 |  |                                                   |          |   |                  |   |          |  
|Accounts payable                                                                                     |  | $                                                 | 623      |   |                  | $ | 945      |  
|Accrued expenses                                                                                     |  |                                                   | 814      |   |                  |   | 716      |  
|Income taxes payable                                                                                 |  |                                                   | 590      |   |                  |   | 733      |  
|Deferred income                                                                                      |  |                                                   |         |   |                  |   | 70       |  
|                                                                                                     |  |                                                   |          |   |                  |   |          |  
|Total current liabilities                                                                            |  |                                                   | 2,027    |   |                  |   | 2,464    |  
|                                                                                                     |  |                                                   |          |   |                  |   |          |  
|Long-term liabilities:                                                                               |  |                                                   |          |   |                  |   |          |  
|Deferred income                                                                                      |  |                                                   |         |   |                  |   | 239      |  
|Commitments and contingencies (note 8)                                                               |  |                                                   |          |   |                  |   |          |  
|Stockholders equity:                                                                                |  |                                                   |          |   |                  |   |          |  
|Preferred Stock, $0.01 par value; 1,000,000 shares authorized: none issued and outstanding           |  |                                                   |         |   |                  |   |         |  
|Common Sock, $0.01 par value; 25,000,000 shares authorized: 12,438,038 shares issued and outstanding |  |                                                   | 124      |   |                  |   | 124      |  
|Paid-in capital                                                                                      |  |                                                   | 120,918  |   |                  |   | 120,918  |  
|Accumulated other comprehensive loss                                                                 |  |                                                   | (78      | ) |                  |   | (81      | )
|Accumulated deficit                                                                                  |  |                                                   | (113,462 | ) |                  |   | (113,846 | )
|                                                                                                     |  |                                                   |          |   |                  |   |          |  
|Total stockholders equity                                                                           |  |                                                   | 7,502    |   |                  |   | 7,115    |  
|                                                                                                     |  |                                                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                           |  | $                                                 | 9,529    |   |                  | $ | 9,818    |  
|                                                                                                     |  |                                                   |          |   |                  |   |          |  



See accompanying notes.



F-4



---

Cygne Designs, Inc. and Subsidiaries



Consolidated Statements of Operations



|                                                                                                                                                                  |  |                                        |        |   |                  |   |        |                  |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ------ | - | ---------------- | - | ------ | ---------------- |  | - | ------ | -
|                                                                                                                                                                  |  | Year Ended                             |       
|                                                                                                                                                                  |  | January 31, 2004                       |        |   | February 1, 2003 |   |        | February 2, 2002 | 
|                                                                                                                                                                  |  | (In thousands except per shareamounts) |       
|Net sales                                                                                                                                                         |  | $                                      | 27,082 |   |                  | $ | 24,019 |                  |  | $ | 28,249 |  
|Cost of goods sold                                                                                                                                                |  |                                        | 22,932 |   |                  |   | 20,694 |                  |  |   | 23,311 |  
|                                                                                                                                                                  |  |                                        |        |   |                  |   |        |                  |  |   |        |  
|Gross profit                                                                                                                                                      |  |                                        | 4,150  |   |                  |   | 3,325  |                  |  |   | 4,938  |  
|Selling, general and administrative expenses                                                                                                                      |  |                                        | 3,448  |   |                  |   | 3,099  |                  |  |   | 4,008  |  
|Provision for impairment of fixed assets                                                                                                                          |  |                                        |       |   |                  |   | 282    |                  |  |   |       |  
|Reversal of impairment of Knit business assets                                                                                                                    |  |                                        |       |   |                  |   |       |                  |  |   | (959   | )
|                                                                                                                                                                  |  |                                        |        |   |                  |   |        |                  |  |   |        |  
|Income (loss) from continuing operations before interest and income taxes                                                                                         |  |                                        | 702    |   |                  |   | (56    | )                |  |   | 1,889  |  
|Interest income                                                                                                                                                   |  |                                        | (16    | ) |                  |   | (24    | )                |  |   | (34    | )
|Interest expense                                                                                                                                                  |  |                                        | 180    |   |                  |   | 223    |                  |  |   | 195    |  
|                                                                                                                                                                  |  |                                        |        |   |                  |   |        |                  |  |   |        |  
|Income (loss) from continuing operations before income taxes                                                                                                      |  |                                        | 538    |   |                  |   | (255   | )                |  |   | 1,728  |  
|(Benefit) provision for income taxes                                                                                                                              |  |                                        | (374   | ) |                  |   | (4,750 | )                |  |   | 44     |  
|                                                                                                                                                                  |  |                                        |        |   |                  |   |        |                  |  |   |        |  
|Income from continuing operations                                                                                                                                 |  |                                        | 912    |   |                  |   | 4,495  |                  |  |   | 1,684  |  
|(Loss) from discontinued operation, net (includes a (loss) gain on disposal of $(479) and $400 in year ended January 31, 2004 and February 1,
2003, respectively) |  |                                        | (528   | ) |                  |   | (2,410 | )                |  |   | (1,905 | )
|                                                                                                                                                                  |  |                                        |        |   |                  |   |        |                  |  |   |        |  
|Net income (loss)                                                                                                                                                 |  | $                                      | 384    |   |                  | $ | 2,085  |                  |  | $ | (221   | )
|                                                                                                                                                                  |  |                                        |        |   |                  |   |        |                  |  |   |        |  
|Income per share-basic and diluted from continuing operations                                                                                                     |  | $                                      | 0.07   |   |                  | $ | 0.36   |                  |  | $ | 0.13   |  
|(Loss) per share-basic and diluted from discontinued operation                                                                                                    |  |                                        | (0.04  | ) |                  |   | (0.19  | )                |  |   | (0.15  | )
|                                                                                                                                                                  |  |                                        |        |   |                  |   |        |                  |  |   |        |  
|Net income (loss) per share-basic and diluted                                                                                                                     |  | $                                      | 0.03   |   |                  | $ | 0.17   |                  |  | $ | (0.02  | )
|                                                                                                                                                                  |  |                                        |        |   |                  |   |        |                  |  |   |        |  
|Weighted average common shares outstanding:                                                                                                                       |  |                                        |        |   |                  |   |        |                  |  |   |        |  
|Basic                                                                                                                                                             |  |                                        | 12,438 |   |                  |   | 12,438 |                  |  |   | 12,438 |  
|                                                                                                                                                                  |  |                                        |        |   |                  |   |        |                  |  |   |        |  
|Diluted                                                                                                                                                           |  |                                        | 12,441 |   |                  |   | 12,439 |                  |  |   | 12,438 |  
|                                                                                                                                                                  |  |                                        |        |   |                  |   |        |                  |  |   |        |  



See accompanying notes.



F- 5



---

Cygne Designs, Inc. and Subsidiaries



Consolidated Statements of Stockholders Equity



For The Years Ended January 31, 2004, February 1, 2003 and February 2, 2002



|                                                                                     |  |                         |  |        |     |                 |   |                                              |  |   |                       |   |  |       |          |   |  |   |       |  
|------------------------------------------------------------------------------------ |  | ----------------------- |  | ------ | --- | --------------- | - | -------------------------------------------- |  | - | --------------------- | - |  | ----- | -------- | - |  | - | ----- | -
|                                                                                     |  | Number of Common Shares |  | Amount |     | Paid-In Capital |   | Accumulated OtherComprehensive Income (Loss) |  |   | (Accumulated Deficit) |   |  | Total |         
|                                                                                     |  | (In thousands)          |  |        |     |                 |   |                                              | 
|Balance at February 3, 2001                                                          |  | 12,438                  |  | $      | 124 |                 | $ | 120,918                                      |  | $ |                      |   |  | $     | (115,710 | ) |  | $ | 5,332 |  
|Net loss for year ended February 2, 2002                                             |  |                        |  |        |    |                 |   |                                             |  |   |                      |   |  |       | (221     | ) |  |   | (221  | )
|                                                                                     |  |                         |  |        |     |                 |   |                                              |  |   |                       |   |  |       |          |   |  |   |       |  
|Balance at February 2, 2002                                                          |  | 12,438                  |  |        | 124 |                 |   | 120,918                                      |  |   |                      |   |  |       | (115,931 | ) |  |   | 5,111 |  
|Net income for year ended February 1, 2003                                           |  |                        |  |        |    |                 |   |                                             |  |   |                      |   |  |       | 2,085    |   |  |   | 2,085 |  
|Unrealized loss on marketable securities, net of tax for year ended February 1, 2003 |  |                        |  |        |    |                 |   |                                             |  |   | (81                   | ) |  |       |         |   |  |   | (81   | )
|                                                                                     |  |                         |  |        |     |                 |   |                                              |  |   |                       |   |  |       |          |   |  |   |       |  
|Comprehensive income for year ended February 1, 2003                                 |  |                        |  |        |    |                 |   |                                             |  |   |                      |   |  |       |         |   |  |   | 2,004 |  
|                                                                                     |  |                         |  |        |     |                 |   |                                              |  |   |                       |   |  |       |          |   |  |   |       |  
|Balance at February 1, 2003                                                          |  | 12,438                  |  |        | 124 |                 |   | 120,918                                      |  |   | (81                   | ) |  |       | (113,846 | ) |  |   | 7,115 |  
|Net income for year ended January 31, 2004                                           |  |                        |  |        |    |                 |   |                                             |  |   |                      |   |  |       | 384      |   |  |   | 384   |  
|Unrealized gain on marketable securities, net of tax for year ended January 31, 2004 |  |                        |  |        |    |                 |   |                                             |  |   | 3                     |   |  |       |         |   |  |   | 3     |  
|                                                                                     |  |                         |  |        |     |                 |   |                                              |  |   |                       |   |  |       |          |   |  |   |       |  
|Comprehensive income for year ended January 31, 2004                                 |  |                        |  |        |    |                 |   |                                             |  |   |                      |   |  |       |         |   |  |   | 387   |  
|                                                                                     |  |                         |  |        |     |                 |   |                                              |  |   |                       |   |  |       |          |   |  |   |       |  
|Balance at January 31, 2004                                                          |  | 12,438                  |  | $      | 124 |                 | $ | 120,918                                      |  | $ | (78                   | ) |  | $     | (113,462 | ) |  | $ | 7,502 |  
|                                                                                     |  |                         |  |        |     |                 |   |                                              |  |   |                       |   |  |       |          |   |  |   |       |  



See accompanying notes



F- 6



---

Cygne Designs, Inc. and Subsidiaries



Consolidated Statements of Cash Flows



|                                                                                                  |  |                  |       |   |                 |   |        |                 |  |   |        |  
|------------------------------------------------------------------------------------------------- |  | ---------------- | ----- | - | --------------- | - | ------ | --------------- |  | - | ------ | -
|                                                                                                  |  | Year Ended       |      
|                                                                                                  |  | January 31, 2004 |       |   | February1, 2003 |   |        | February2, 2002 | 
|                                                                                                  |  | (In thousands)   |      
|Operating activities                                                                              |  |                  |       |   |                 |   |        |                 |  |   |        |  
|Net income (loss)                                                                                 |  | $                | 384   |   |                 | $ | 2,085  |                 |  | $ | (221   | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |  |                  |       |   |                 |   |        |                 |  |   |        |  
|Reversal of impairment of Knit business assets                                                    |  |                  |      |   |                 |   |       |                 |  |   | (959   | )
|Write off and amortization of goodwill                                                            |  |                  |      |   |                 |   |       |                 |  |   | 200    |  
|Write off and amortization of other intangibles                                                   |  |                  |      |   |                 |   | 255    |                 |  |   | 125    |  
|Reversal of income tax liability                                                                  |  |                  | (400  | ) |                 |   | (4,800 | )               |  |   |       |  
|Loss (gain) on sale of business                                                                   |  |                  | 479   |   |                 |   | (400   | )               |  |   |       |  
|Depreciation                                                                                      |  |                  | 281   |   |                 |   | 382    |                 |  |   | 380    |  
|Impairment of fixed assets                                                                        |  |                  |      |   |                 |   | 282    |                 |  |   |       |  
|Changes in operating assets and liabilities:                                                      |  |                  |       |   |                 |   |        |                 |  |   |        |  
|Restricted cash                                                                                   |  |                  |      |   |                 |   | 146    |                 |  |   | 854    |  
|Due from factor                                                                                   |  |                  | 419   |   |                 |   | 3,244  |                 |  |   | (1,839 | )
|Inventories                                                                                       |  |                  | (267  | ) |                 |   | 448    |                 |  |   | 1,492  |  
|Other receivables and prepaid expenses                                                            |  |                  | 125   |   |                 |   | 472    |                 |  |   | (491   | )
|Other assets                                                                                      |  |                  |      |   |                 |   | 5      |                 |  |   | (6     | )
|Accounts payable                                                                                  |  |                  | (322  | ) |                 |   | (25    | )               |  |   | (567   | )
|Accrued expenses                                                                                  |  |                  | 347   |   |                 |   | (194   | )               |  |   | (135   | )
|Income taxes payable                                                                              |  |                  | 8     |   |                 |   | (22    | )               |  |   | 13     |  
|                                                                                                  |  |                  |       |   |                 |   |        |                 |  |   |        |  
|Net cash provided by (used in) operating activities                                               |  |                  | 1,054 |   |                 |   | 1,878  |                 |  |   | (1,154 | )
|Investing activities                                                                              |  |                  |       |   |                 |   |        |                 |  |   |        |  
|Purchase of Jordanian business                                                                    |  |                  |      |   |                 |   | (40    | )               |  |   | (540   | )
|Purchase of fixed assets                                                                          |  |                  | (319  | ) |                 |   | (82    | )               |  |   | (386   | )
|Purchase of marketable securities                                                                 |  |                  |      |   |                 |   | (241   | )               |  |   |       |  
|Proceeds from sale of Jordanian business                                                          |  |                  |      |   |                 |   | 400    |                 |  |   |       |  
|                                                                                                  |  |                  |       |   |                 |   |        |                 |  |   |        |  
|Net cash (used in) provided by investing activities                                               |  |                  | (319  | ) |                 |   | 37     |                 |  |   | (926   | )
|Financing activities                                                                              |  |                  |       |   |                 |   |        |                 |  |   |        |  
|Short-term borrowings (repayments), net                                                           |  |                  |      |   |                 |   | (1,863 | )               |  |   | 2,260  |  
|                                                                                                  |  |                  |       |   |                 |   |        |                 |  |   |        |  
|Net cash (used in) provided by financing activities                                               |  |                  |      |   |                 |   | (1,863 | )               |  |   | 2,260  |  
|Net increase in cash and cash equivalents                                                         |  |                  | 735   |   |                 |   | 52     |                 |  |   | 180    |  
|Cash and cash equivalents at beginning of year                                                    |  |                  | 2,610 |   |                 |   | 2,558  |                 |  |   | 2,378  |  
|                                                                                                  |  |                  |       |   |                 |   |        |                 |  |   |        |  
|Cash and cash equivalents at end of year                                                          |  | $                | 3,345 |   |                 | $ | 2,610  |                 |  | $ | 2,558  |  
|                                                                                                  |  |                  |       |   |                 |   |        |                 |  |   |        |  
|Supplemental disclosures of cash flow activities                                                  |  |                  |       |   |                 |   |        |                 |  |   |        |  
|Income taxes paid                                                                                 |  | $                | 18    |   |                 | $ | 39     |                 |  | $ | 31     |  
|                                                                                                  |  |                  |       |   |                 |   |        |                 |  |   |        |  
|Interest paid                                                                                     |  | $                | 132   |   |                 | $ | 333    |                 |  | $ | 432    |  
|                                                                                                  |  |                  |       |   |                 |   |        |                 |  |   |        |  



See accompanying notes



F- 7



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements



1.
Significant Accounting Policies



Principal Business Activity



Cygne Designs, Inc. (Cygne) and its subsidiaries
(collectively, the Company) are engaged in the manufacturing of private label womens career and casual apparel with sales to retailers and wholesalers located in the United States.



Fiscal Year



The Companys fiscal year ends on the Saturday nearest to January 31. A year refers to the fiscal year of the Company commencing in
that calendar year and ending on the Saturday nearest January 31 of the following year. All fiscal years presented have 52 weeks.



Organization and Principles of Consolidation



The consolidated financial statements include the accounts of Cygne and its subsidiaries. All material inter-company balances and transactions were eliminated in
consolidation.



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



F- 8



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



1. Significant Accounting Policies (continued)



Cash and Cash Equivalents



The Company considers all highly liquid financial instruments with maturity of three months or less when purchased to be cash equivalents.



Marketable Securities



Marketable securities are stated at fair value as determined by quoted market price. The
Company has classified its securities as investments available for sale pursuant to Statement of Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and Equity Securities. Accordingly, any unrealized gain or
loss on the investments is reported as a component of accumulated other comprehensive income (loss). The Company had a gross unrealized gain of approximately $3,000 for the year ended January 31, 2004 and a gross unrealized loss of approximately
$81,000 for the year ended February 1, 2003. At January 31, 2004, the gross unrealized loss was approximately $78,000. Realized gains and losses and declines in value judged to be other-than-temporary on marketable securities are included in
investment income.



Inventories



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



Depreciation and Amortization



Depreciation of property and equipment is provided for by the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the lesser of the useful life or the term of the related lease.



Revenue Recognition



Revenues are recorded at the time of shipment of merchandise, provided that the price is fixed, title has been transferred, collection of the resulting receivable is
reasonably assured and the Company has no significant obligations remaining to be performed. The Company establishes reserves for sales returns and allowances. Such reserves amounted to $5,000, $20,000 and zero at January 31, 2004, February 1, 2003
and February 2, 2002, respectively.



F- 9



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



1. Significant Accounting Policies (continued)



Foreign Currency Translation



The functional currency for the Companys foreign operations is the U.S. Dollar. The translation from the applicable foreign currencies
to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period.



Net Income Per Share



The following is an analysis of the differences between basic and diluted outstanding shares in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share.



|                                                                         |  |                 |  |                 |  |                
|------------------------------------------------------------------------ |  | --------------- |  | --------------- |  | ---------------
|                                                                         |  | Year Ended     
|                                                                         |  | January 31,2004 |  | February 1,2003 |  | February 2,2002
|                                                                         |  | (In thousands) 
|Weighted average common shares outstanding                               |  | 12,438          |  | 12,438          |  | 12,438         
|Effect of dilutive securities: Stock Options                             |  | 3               |  | 1               |  |               
|                                                                         |  |                 |  |                 |  |                
|Weighted average common shares outstanding and common shares equivalents |  | 12,441          |  | 12,439          |  | 12,438         
|                                                                         |  |                 |  |                 |  |                



Comprehensive Income



Comprehensive income is comprised of net income or loss and unrealized
gain or loss on marketable securities, net of tax, for the years ended January 31, 2004, February 1, 2003 and February 2, 2002.



Stock Based Compensation



The Company accounts for its stock-based employee compensation plans under the recognition and measurements principles of APB Opinion No. 25, Accounting for Stock
Issued to Employees and related interpretations. No stock-based employee compensation cost is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the fair market value of the Common Stock on
the date of the grant. The following table details the effect on net income (loss) and earnings per share if the Company



F- 10



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



1. Significant Accounting Policies (continued)



had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, to stock-based
employee compensation using the Black-Scholes method of calculation.



|                                                                                                                 |  |                 |      |                 |   |                 |  |   |       |  
|---------------------------------------------------------------------------------------------------------------- |  | --------------- | ---- | --------------- | - | --------------- |  | - | ----- | -
|                                                                                                                 |  | Year Ended      |     
|                                                                                                                 |  | January 31,2004 |      | February 1,2003 |   | February 2,2002 | 
|Net income (loss), as reported                                                                                   |  | $               | 384  |                 | $ | 2,085           |  | $ | (221  | )
|Deduct: stock-based employee compensation expense determined under fair value method, net of related tax effects |  |                 |     |                 |   | 1               |  |   | 1     |  
|                                                                                                                 |  |                 |      |                 |   |                 |  |   |       |  
|Pro forma net income (loss)                                                                                      |  | $               | 384  |                 | $ | 2,084           |  | $ | (222  | )
|Net income (loss) per share:                                                                                     |  |                 |      |                 |   |                 |  |   |       |  
|Net income (loss) per share as reported- basic and diluted                                                       |  | $               | 0.03 |                 | $ | 0.17            |  | $ | (0.02 | )
|Net income (loss) per share pro-forma- basic and diluted                                                         |  | $               | 0.03 |                 | $ | 0.17            |  | $ | (0.02 | )



The weighted average fair value of
options, calculated using the Black-Scholes option-pricing model, granted during 2003, 2002, and 2001 is $0.18, $0.08 and $0.11, respectively.



The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate of
approximately 4% for the year ended January 31, 2004, and 5% for the years ended February 1, 2003 and February 2, 2002; volatility factor of the expected market price of the Companys common stock of 47.3% for January 31, 2004, 16.0% for
February 1, 2003 and 98.0% for February 2, 2002; expected life of six years; and a dividend yield of zero.



Recent Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires that a variable
interest entity be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entitys activities or entitled to receive a majority of the entitys residual returns or both. The
consolidation requirements apply to the first fiscal year or interim period ending after March 31, 2004. The adoption of FIN 46 has not and is not expected to have a material impact on the Companys financial condition, results of operations,
and cash flows.



F- 11



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



1. Significant Accounting Policies (continued)



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and
Hedging Activities. This statement amends and clarifies accounting for derivatives instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This statement is effective
for contracts entered into or modified after June 30, 2003, except as for provisions that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, which should continue to be
applied in accordance with their respective dates. The adoption of SFAS No. 149 has not and is not expected to have a material impact on the Companys financial condition, results of operations, and cash flows.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. This statement requires that certain financial instruments that, under previous guidance, issuers could account for as equity be classified as liabilities in statements of financial
position. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of
SFAS No. 150 has not and is not expected to have a material impact on the Companys financial condition, results of operations, and cash flows.



2. Acquisition and Disposition of Companies



Jordanian business



On May 13, 2001, the Company acquired from Best Knits, L.L.C (Best Knits) the rights and obligation of all the customer purchase orders held by Best Knits and
the trade name Best Knits (Jordanian business). Best Knits, located in Irbid, Jordan, was a manufacturer of private label womens knit tops for sale to retailers located in the United States. The Company (i) assumed all outstanding
vendor purchase orders issued by Best Knits directly related to the acquired customer purchase orders, (ii) purchased from Best Knits all raw materials on hand directly related to acquired customer purchase orders, (iii) entered into a lease in
Irbid, Jordan with Best Knits for the eighteen month period starting May 1, 2001 for (a) its 66,000 square feet of manufacturing and office space, (b) its approximately 550 sewing machines, (c) its cutting and pressing equipment and (d) its office
furniture and equipment, (iv) hired substantially all of its approximately 650 employees, and (v) agreed to purchase from Best Knits for $500,000 its trade name and customer relationships of which $200,000 was paid in cash at the closing and the
remaining $300,000 was paid through the issuance of a non-interest bearing note payable in fifteen monthly installments of $20,000 commencing August 1, 2001.



F- 12



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



2. Acquisition and Disposition of Companies (continued)



Cygne has paid nine installments of $20,000, and since it does not anticipate making the remaining six installments,
it has reversed its liability for these unpaid installments. In addition, Cygne has paid fourteen monthly rent payments of $44,000, and since it does not anticipate making the remaining six rent payments, it has not accrued any additional
rent.



The Company accounted for this transaction as a purchase. The
Company recorded $200,000 in goodwill during the third quarter of 2001.The resulting goodwill and other intangible assets were being amortized over their estimated useful life of three years. The unamortized goodwill of $180,000 was impaired
and was written off at February 2, 2002. This amount has been included in discontinued operations. The Jordanian business was sold as of May 31, 2002 and the unamortized other intangible assets of $213,000 were written off. This amount has been
included in discontinued operations.



Pursuant to an agreement dated June 10,
2002 modified by an amendment dated July 29, 2002, the Company sold its Jordanian business to Century Investment Group (CIG) for $833,000 plus the assumption of all outstanding liabilities of the Jordanian company of approximately
$943,000. The agreement also stated that any disputes between the parties must be submitted to arbitration in Jordan.



The first payment of $400,000 was received at the closing and the final payment of $433,000 was due on April 30, 2003. As Cygne has not received the final payment of
$433,000, it has submitted its claim for this payment to arbitration. As the outcome of this arbitration is uncertain, Cygnes management, at January 31, 2004, deemed it appropriate to provide a reserve of $433,000 against this receivable.



Cygne agreed not to compete with CIG for knit business in Jordan for five
years starting June 1, 2002 in consideration of $350,000 payable by February 5, 2006. In connection with the non-compete agreement, the Company recorded deferred income of $350,000 which it was amortizing to income over a five-year period. At
January 31, 2004, as a result of the uncertainty of the arbitration with CIG, Cygne has discontinued the amortization of remaining deferred income of $309,000, and has reserved the corresponding net receivable of $309,000 and has written off the
related deferred income. The impact of these transactions had no effect on the results of continuing operations.



The sale of the Jordanian business and its related operating results have been excluded from the results from continuing operations and is classified as a discontinued
operation for all periods presented in accordance with the requirements of FAS 144 Accounting for Impairment or Disposal of Long-Lived Assets.



F- 13



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



2. Acquisition and Disposition of Companies (continued)



The Company decided to sell the Jordanian business as a result of the political uncertainty in the region that
adversely affected the profitability of the business.



The summary of the
operating results of the discontinued operation is as follows:



|                                                             |  |                 |      |   |                 |   |        |                 |  |   |        |  
|------------------------------------------------------------ |  | --------------- | ---- | - | --------------- | - | ------ | --------------- |  | - | ------ | -
|                                                             |  | Year Ended      |     
|                                                             |  | January 31,2004 |      |   | February 1,2003 |   |        | February 2,2002 | 
|                                                             |  | (In thousands)  |     
|Net sales                                                    |  |                 |     |   |                 | $ | 2,598  |                 |  | $ | 12,928 |  
|Cost of goods sold                                           |  |                 |     |   |                 |   | 4,699  |                 |  |   | 13,885 |  
|                                                             |  |                 |      |   |                 |   |        |                 |  |   |        |  
|Gross (loss)                                                 |  |                 |     |   |                 |   | (2,101 | )               |  |   | (957   | )
|Selling, general and administrative                          |  | $               | 49   |   |                 |   | 299    |                 |  |   | 386    |  
|Write off and amortization of goodwill and other intangibles |  |                 |     |   |                 |   | 255    |                 |  |   | 325    |  
|Loss (gain) on sale of business, net                         |  |                 | 479  |   |                 |   | (400   | )               |  |   |       |  
|                                                             |  |                 |      |   |                 |   |        |                 |  |   |        |  
|(Loss) from operations                                       |  |                 |      |   |                 |   | (2,255 | )               |  |   | (1,668 | )
|Interest expense                                             |  |                 |     |   |                 |   | 155    |                 |  |   | 237    |  
|                                                             |  |                 |      |   |                 |   |        |                 |  |   |        |  
|Net (loss)                                                   |  | $               | (528 | ) |                 | $ | (2,410 | )               |  | $ | (1,905 | )
|                                                             |  |                 |      |   |                 |   |        |                 |  |   |        |  



In August 2001, the Jordanian company
entered into a credit facility arrangement with the Egyptian Arab Land Bank. The agreement provided for a credit facility of $2,800,000, subject to a borrowing base formula. The security for this facility was the customers letters of credit.
The Jordanian company was notified on May 13, 2002 that no additional borrowings or letters of credit would be permitted and that the facility would be terminated as soon as the balances outstanding were repaid. All outstanding balances have been
repaid and the facility was closed in July 2002.



Israeli knit business



On November 15, 1999, the Company
consummated the sale of its Israeli Knit business to Jordache Limited. The assets transferred to Jordache consisted of substantially all of the assets used by the Knit business in the manufacture of womens knit clothing.



The Company recorded an impairment of Knit business assets of $2,564,000 in 1998 and
$1,625,000 in 1999. However, the Companys actual expense was $3,230,000 and the excess $959,000 for the provision for impairment of Knits business assets was reversed in 2001.



F- 14



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Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



3. Inventories



Inventories consist of the following:



|                                 |  |                 |       |                 |   |      
|-------------------------------- |  | --------------- | ----- | --------------- | - | -----
|                                 |  | January 31,2004 |       | February 1,2003
|                                 |  | (In thousands) 
|Raw material and Work-in-Process |  | $               | 2,094 |                 | $ | 1,939
|Finished goods                   |  |                 | 112   |                 |   | 0    
|                                 |  |                 |       |                 |   |      
|                                 |  | $               | 2,206 |                 | $ | 1,939
|                                 |  |                 |       |                 |   |      



4. Fixed Assets



Fixed assets are stated at cost, less accumulated depreciation and amortization and are
summarized below together with estimated useful lives used in computing depreciation and amortization:



|                                               |  |                 |       |                 |   |                       |  |           
|---------------------------------------------- |  | --------------- | ----- | --------------- | - | --------------------- |  | ----------
|                                               |  | January 31,2004 |       | February 1,2003 |   | EstimatedUseful Lives
|                                               |  | (In thousands) 
|Land                                           |  | $               | 258   |                 | $ | 258                   |  |           
|Building                                       |  |                 | 1,569 |                 |   | 1,569                 |  | 20 years  
|Equipment, furniture, and fixtures             |  |                 | 1,459 |                 |   | 1,225                 |  | 2-10 years
|Vehicles                                       |  |                 | 29    |                 |   | 25                    |  | 5 years   
|                                               |  |                 |       |                 |   |                       |  |           
|                                               |  |                 | 3,315 |                 |   | 3,077                 |  |           
|Less accumulated depreciation and amortization |  |                 | 1,598 |                 |   | 1,398                 |  |           
|                                               |  |                 |       |                 |   |                       |  |           
|                                               |  | $               | 1,717 |                 | $ | 1,679                 |  |           
|                                               |  |                 |       |                 |   |                       |  |           



On February 1, 2003, the Company
established a provision for impairment of fixed assets of $282,000 for obsolete sewing machines and pressing equipment. These machines have been discarded. The gross assets and accumulated reserve for depreciation and amortization have been reduced
to reflect the results of this provision.



F- 15



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Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



5. Credit Facilities



On May 11, 2001 the Company entered into a Revolving Credit and Security Agreement and a Factoring Agreement with GMAC Commercial Credit LLC (GMAC ). The
Agreements provided for a Revolving Facility of $8,000,000 (Facility), including a letter of credit sub-limit of $5,000,000, subject to a borrowing base formula. Borrowings under this Facility bore a rate of interest of the lesser of (i)
LIBOR (1.48% at December 31, 2002) plus 3% or (ii) the prime rate (4.25% at December 31, 2002) plus 0.5% and was secured by substantially all of the Companys assets. In addition, the Facility was subject to various financial covenants. The
Agreement was cancelled on December 31, 2002.



Effective January 1, 2003, the
Company entered into an Amended and Restated Factoring Agreement with GMAC Commercial Credit LLC (Factor Agreement). The Factor Agreement, which terminates on December 31, 2004, provides that the Company can borrow a percentage (under
most conditions 50%) of the value of its factored customer invoices. Borrowings under this Factor Agreement bear interest at the prime rate (4.00% at January 31, 2004) plus 1.5% with a minimum interest rate of 6%. The factor fee is 0.5% of the
customer invoice amount. Cygne guaranteed to GMAC its factor fee based on an annual sales volume of $20,000,000. The Factor Agreement is secured by substantially all of the Companys assets. There were no outstanding loans at January 31, 2004.
The Company did not have any borrowings during 2003.



Interest expense on the
accompanying Consolidated Statements of Operations includes factor fees and the amortization of the deferred financing costs.



6. Stock Options



Pursuant to an employee Stock Option Plan, as amended, the Company was able to grant to eligible individuals incentive stock options as defined in the Internal Revenue Code (IRC) and non-qualified stock
options. This plan expired on April 15, 2003. An aggregate of 1,700,000 shares of common stock have been reserved for issuance under the Plan. The exercise price for incentive options may not be less than 100% (110% for holders of 10% or more of the
Companys outstanding shares) of the fair market value of the shares on the date of grant, and at least par value of the common stock with respect to the non-qualified stock options, have a ten-year term (five years for holders of 10% or more
of the Companys outstanding shares in the case of incentive stock options) and vest at the discretion of the board of directors.



F- 16



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



6. Stock Options (continued)



Pursuant to a Stock Option Plan for Non-Employee Directors adopted on April 15, 1993, the Company was able to
automatically grant to eligible non-employee directors options to purchase 10,000 shares of Common Stock upon the directors initial appointment to the Board of Directors and options to purchase 2,000 shares of Common Stock on each individual
directors anniversary date from initial appointment. Options granted under the Directors Plan do not qualify as incentive stock options under the IRC. The options have an exercise price of 100% of fair market value on the date of grant,
have a ten-year term and vest, pro-rata, over four years. This plan expired on April 15, 2003.



F- 17



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Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



6. Stock Option (continued) 



The stock option transactions are summarized for the periods shown below:



|                                        |  |                 |                     |  |                              |             |                |                     |      |                              |         |                |                    |                                        |                              |                      |   |      |  |        |  |   |      |  |   |      |  |          |  
|--------------------------------------- |  | --------------- | ------------------- |  | ---------------------------- | ----------- | -------------- | ------------------- | ---- | ---------------------------- | ------- | -------------- | ------------------ | -------------------------------------- | ---------------------------- | -------------------- | - | ---- |  | ------ |  | - | ---- |  | - | ---- |  | -------- | -
|                                        |  | Numberof Shares |                     |  | Employee Stock OptionPlan    |             | NumberofShares |                     |      | Non-Employee DirectorsPlan   |         | NumberofShares |                    | Other EmployeeStock OptionArrangements |                              | TotalNumberof Shares |  
|                                        |  |                 | Exercise PriceRange |  | WeightedAverageExercisePrice |             |                | Exercise PriceRange |      | WeightedAverageExercisePrice |         |                | ExercisePriceRange |                                        | WeightedAverageExercisePrice |                     
|Options outstanding at February 3, 2001 |  | 288,000         |                     |  | $                            | 0.31-$13.88 |                | $                   | 2.71 |                              | 24,000  |                |                    | $                                      | 0.16-$23.50                  |                      | $ | 4.72 |  | 60,000 |  | $ | 2.00 |  | $ | 2.00 |  | 372,000  |  
|Options granted in 2001                 |  |                |                     |  |                              |             |                |                     |      |                              | 2,000   |                |                    | $                                      | 0.14                         |                      | $ | 0.14 |  |       |  |   |      |  |   |      |  | 2,000    |  
|Options canceled in 2001                |  | (40,000         | )                   |  | $                            | 1.00        |                | $                   | 1.00 |                              |        |                |                    |                                        |                              |                      |   |      |  |       |  |   |      |  |   |      |  | (40,000  | )
|                                        |  |                 |                     |  |                              |             |                |                     |      |                              |         |                |                    |                                        |                              |                      |   |      |  |        |  |   |      |  |   |      |  |          |  
|Options outstanding at February 2, 2002 |  | 248,000         |                     |  | $                            | 0.31-$13.88 |                | $                   | 2.99 |                              | 26,000  |                |                    | $                                      | 0.14-$23.50                  |                      | $ | 4.37 |  | 60,000 |  | $ | 2.00 |  | $ | 2.00 |  | 334,000  |  
|Options granted in 2002                 |  |                |                     |  |                              |             |                |                     |      |                              | 2,000   |                |                    | $                                      | 0.08                         |                      | $ | 0.08 |  |       |  |   |      |  |   |      |  | 2,000    |  
|                                        |  |                 |                     |  |                              |             |                |                     |      |                              |         |                |                    |                                        |                              |                      |   |      |  |        |  |   |      |  |   |      |  |          |  
|Options outstanding at February 1, 2003 |  | 248,000         |                     |  | $                            | 0.31-$13.88 |                | $                   | 2.99 |                              | 28,000  |                |                    | $                                      | 0.08-$23.50                  |                      | $ | 4.06 |  | 60,000 |  | $ | 2.00 |  | $ | 2.00 |  | 336,000  |  
|Options granted in 2003                 |  |                |                     |  |                              |             |                |                     |      |                              | 2,000   |                |                    | $                                      | 0.13                         |                      | $ | 0.13 |  |       |  |   |      |  |   |      |  | 2,000    |  
|Options canceled in 2003                |  | (153,000        | )                   |  | $                            | 2.00-$4.00  |                | $                   | 3.61 |                              | (10,000 | )              |                    | $                                      | 4.00                         |                      | $ | 4.00 |  |       |  |   |      |  |   |      |  | (163,000 | )
|                                        |  |                 |                     |  |                              |             |                |                     |      |                              |         |                |                    |                                        |                              |                      |   |      |  |        |  |   |      |  |   |      |  |          |  
|Options outstanding at January 31, 2004 |  | 95,000          |                     |  | $                            | 0.31-$13.88 |                | $                   | 2.00 |                              | 20,000  |                |                    | $                                      | 0.08-$23.50                  |                      | $ | 3.70 |  | 60,000 |  | $ | 2.00 |  | $ | 2.00 |  | 175,000  |  
|                                        |  |                 |                     |  |                              |             |                |                     |      |                              |         |                |                    |                                        |                              |                      |   |      |  |        |  |   |      |  |   |      |  |          |  
|At January 31, 2004 options exercisable |  | 95,000          |                     |  |                              |             |                |                     |      |                              | 15,000  |                |                    |                                        |                              |                      |   |      |  | 60,000 |  |   |      |  |   |      |  | 170,000  |  
|                                        |  |                 |                     |  |                              |             |                |                     |      |                              |         |                |                    |                                        |                              |                      |   |      |  |        |  |   |      |  |   |      |  |          |  



Exercise prices for options issued
from February 3, 2001 through January 31, 2004 ranged from $0.08 to $0.14.



The
weighted average remaining contractual life of these options is 1.6 years.



The
Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of APB No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an exercise price equal to the fair market value of the Common Stock on the date of grant.



F- 18



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Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



7. Concentrations of Risk



For the years ended January 31, 2004, February 1, 2003 and February 2, 2002, sales to Lerner New York (Lerner) accounted for 91%
and 93% and 77%, respectively, of Cygnes net sales from continuing operations. For year ended February 2, 2002, sales to Dillards accounted for 20% of Cygnes net sales from continuing operations.



Foreign manufacturing is subject to a number of risks, including work stoppages,
transportation delays and interruptions, political instability, foreign currency fluctuations, economic disruptions, expropriation, nationalization, the imposition of tariffs and import and export controls, changes in governmental policies
(including U.S. policy toward these countries). The occurrence of certain of these factors in Guatemala in which Cygne owns a manufacturing facility could result in the impairment or loss of the Companys investment located in this
country.



8. Leases, Commitments and Litigation



Leases



At January 31, 2004, the Company is the lessee under one operating lease through June 30,
2004. Future minimum payments under the operating lease are $110,000. The Company is currently in negotiations for a new lease in both its present location and other locations.



Total rent expense under the operating leases from continuing operations for the years ended January 31, 2004, February 1, 2003, and
February 2, 2002, amounted to approximately $287,000, $264,000, and $328,000, respectively.



Commitments



The Company has employment
agreements with its two officers through 2005. Future minimum aggregate annual payments under these agreements amount to approximately $972,000 in 2004 and $245,000 in 2005. The officers and employees may receive additional compensation based upon
the income, as defined, of the Company or one or more of its subsidiaries.



F- 19



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Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



8. Leases, Commitments and Litigation (continued)



Litigation



Pursuant to an agreement dated June 10, 2002 modified by an amendment dated July 29, 2002, the Company sold its Jordanian business to Century Investment Group for
$833,000 plus the assumption of all outstanding liabilities of the Jordanian company of approximately $943,000. The agreement also stated that any disputes between the parties must be submitted to arbitration in Jordan.



The first payment of $400,000 was received at the closing and the final payment of $433,000
was due on April 30, 2003. As Cygne has not received the final payment of $433,000, it has submitted its claim for this payment to arbitration. As the outcome of this arbitration is uncertain, Cygne management, at January 31, 2004, deemed it
appropriate to provide a reserve of $433,000 against this receivable. See note 2 to the Consolidated Financial Statements for additional information.



The Company is involved in other various legal proceedings that are incidental to the conduct of its business, none of which the Company believes could reasonably be
expected to have a material adverse effect on the Companys financial condition, results of operations and cash flows



9. Income Taxes



Deferred income taxes are provided using the liability method. Under this method, deferred income taxes reflect tax carry forwards and the net tax effects of temporary differences between the carrying amount of assets
and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. Significant components of the
Companys deferred tax assets are as follows.



|                                  |  |                 |         |   |                 |   |         |  
|--------------------------------- |  | --------------- | ------- | - | --------------- | - | ------- | -
|                                  |  | Year Ended      |        
|                                  |  | January 31,2004 |         |   | February 1,2003 |  
|                                  |  | (In thousands)  |        
|Deferred tax assets:              |  |                 |         |   |                 |   |         |  
|Net operating loss carry forwards |  | $               | 40,000  |   |                 | $ | 40,000  |  
|Valuation allowances              |  |                 | (40,000 | ) |                 |   | (40,000 | )
|                                  |  |                 |         |   |                 |   |         |  
|Net deferred tax assets           |  | $               | 0       |   |                 | $ | 0       |  
|                                  |  |                 |         |   |                 |   |         |  



F- 20



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



9. Income Taxes (continued)



For financial reporting purposes, income (loss) before income taxes includes the following components



|                     |  |                 |     |   |                 |   |        |                 |  |   |      |  
|-------------------- |  | --------------- | --- | - | --------------- | - | ------ | --------------- |  | - | ---- | -
|                     |  | Year Ended      |    
|                     |  | January 31,2004 |     |   | February 1,2003 |   |        | February 2,2002 | 
|                     |  | (In thousands)  |    
|Pretax income (loss) |  |                 |     |   |                 |   |        |                 |  |   |      |  
|United States        |  | $               | 69  |   |                 | $ | (131   | )               |  | $ | (154 | )
|Foreign              |  |                 | (59 | ) |                 |   | (2,534 | )               |  |   | (23  | )
|                     |  |                 |     |   |                 |   |        |                 |  |   |      |  
|Total                |  | $               | 10  |   |                 | $ | (2,665 | )               |  | $ | (177 | )
|                     |  |                 |     |   |                 |   |        |                 |  |   |      |  



Significant components of the
(benefit) provision for income taxes are as follows:



|                |  |                 |      |   |                 |   |        |                 |  |   |   
|--------------- |  | --------------- | ---- | - | --------------- | - | ------ | --------------- |  | - | --
|                |  | Year Ended     
|                |  | January 31,2004 |      |   | February 1,2003 |   |        | February 2,2002
|                |  | (In thousands) 
|Current:        |  |                 |      |   |                 |   |        |                 |  |   |   
|Federal         |  | $               | 0    |   |                 | $ | (4,800 | )               |  | $ | 0 
|Foreign         |  |                 | (389 | ) |                 |   | 35     |                 |  |   | 24
|State and local |  |                 | 15   |   |                 |   | 15     |                 |  |   | 20
|                |  |                 |      |   |                 |   |        |                 |  |   |   
|Total           |  | $               | (374 | ) |                 | $ | (4,750 | )               |  | $ | 44
|                |  |                 |      |   |                 |   |        |                 |  |   |   



The reconciliation of income tax at
U.S. federal statutory tax rates to income tax expense is as follows:



|                                                 |  |                  |      |   |                  |          |    |                  |   |        |   |  |        |    |  |   |      |   |  |       |   
|------------------------------------------------ |  | ---------------- | ---- | - | ---------------- | -------- | -- | ---------------- | - | ------ | - |  | ------ | -- |  | - | ---- | - |  | ----- | --
|                                                 |  | Year Ended       |     
|                                                 |  | January 31, 2004 |      |   | February 1, 2003 |          |    | February 2, 2002 |  
|                                                 |  | (In thousands)   |     
|Tax at U.S statutory rates                       |  | $                | 3    |   |                  | 34.0     | %  |                  | $ | (906   | ) |  | (34.0  | %) |  | $ | (129 | ) |  | (34.0 | %)
|Loss, no benefit provided                        |  |                  | 20   |   |                  | 200.0    |    |                  |   | 906    |   |  | 34.0   |    |  |   | 129  |   |  | 34.0  |   
|Utilization of net operating loss carry forwards |  |                  | (23  | ) |                  | (234.0   | )  |                  |   |       |   |  |       |    |  |   |     |   |  |      |   
|Reversal of tax accrual                          |  |                  | (400 | ) |                  | (4,000.0 | )  |                  |   | (4,800 | ) |  | (180.1 | )  |  |   |     |   |  |      |   
|Foreign and state income taxes                   |  |                  | 26   |   |                  | 260.0    |    |                  |   | 50     |   |  | 1.9    |    |  |   | 44   |   |  | 24.9  |   
|                                                 |  |                  |      |   |                  |          |    |                  |   |        |   |  |        |    |  |   |      |   |  |       |   
|                                                 |  | $                | (374 | ) |                  | (3,740.0 | )% |                  | $ | (4,750 | ) |  | (178.2 | )% |  | $ | 44   |   |  | 24.9  | % 
|                                                 |  |                  |      |   |                  |          |    |                  |   |        |   |  |        |    |  |   |      |   |  |       |   



F- 21



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Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



9. Income Taxes (continued)



As of January 31, 2004, based upon tax returns filed and to be filed, the Company expects to report a net operating
loss carry forward for U.S. Federal income tax purposes of approximately $107,000,000. If unused, these loss carry forwards will expire in the Companys taxable years ending in 2005 through 2023. Under Section 382 of the U.S. Internal Revenue
Code, if there is a more than 50% ownership change (as defined therein) with respect to the Companys stock, the Companys loss carry forwards for U.S. Federal and New York State and City tax purposes would be virtually eliminated.
Approximately $78,000,000 of the net loss carry forwards will expire in the taxable year ended in 2011.



As of January 31, 2004, based upon tax returns filed and to be filed, the Company expects to report net operating loss carry forwards for New York State and City tax purposes (on a separate company basis) of
approximately $67,000,000. If unused, these loss carry forwards will expire in the Companys taxable years ending in 2005 through 2023. Approximately $35,000,000 of the net operating loss carry forwards for New York State and City (on a
separate company basis) will expire in the taxable year ended in 2011.



Tax Audits



In 2002, the U.S. Internal Revenue
Service (the IRS) has concluded its audit of the U.S. Federal income tax returns filed by GJM (US) Inc., the Companys 100% owned subsidiary, for its taxable years ending December 31, 1989 through October 7, 1994. The IRS and the
Company have executed a settlement agreement stating that no tax payment is due. As a result of this settlement, the Company has reversed a tax accrual of $4,800,000 established in connection with this audit.



On October 31, 1999, the date of sale of the Companys Israeli Knit business, the
Companys wholly-owned subsidiary, M.T.G.I.Textile Manufacturers Group (Israel) Ltd. (MTGI) had its Israeli tax-free status terminated retroactive to January 1, 1994. In June 2001, MTGI paid the Israeli Tax Authority
assessment, including interest, of approximately $412,000 due on account of the termination of its tax-free status for the years ended December 31, 1994 through December 31, 1997.



Since 2001, the Guatemalan Internal Revenue Service has been conducting an audit of the Guatemalan tax returns filed by JMB Internacional,
S.A. the Companys 100% owned Guatemalan subsidiary, for its taxable years 1998, 1999, and 2000. At January 31, 2004, based upon its knowledge of the status of the issues of the audit, Cygnes management has decreased its original tax
reserve for this audit by $400,000 and has shown this reduction as benefit for income taxes on the consolidated statements of operations for January 31, 2004.



F- 22



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



9. Income Taxes (continued)



The Company is subject to other ongoing tax audits in several jurisdictions. Although there can be no assurances, the
Company believes any adjustments that may arise as a result of these other audits will not have a material adverse effect on the Companys financial position, results of operations, and cash flows.



10. Segment Information



Based on the criteria in SFAS No.131, the Company operates in one segment of the apparel market-womens career and causal apparel



11. Employee Benefit Plans



The Company does not provide any post employment or post retirement benefits to its current
or former employees. The Company implemented a 401(k) plan for domestic employees on February 2, 1997. The Company did match 33% of the employees contributions up to 3% of the employees voluntary contribution. Total contributions for the
years ended January 31, 2004, February 1, 2003 and February 2, 2002 amounted to approximately $1,000, $10,000 and $10,000, respectively. The Companys 401(k) plan was terminated on March 28, 2003.



F- 23



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



12. Quarterly Financial Data (Unaudited)



The following table sets forth the quarterly financial data for the year ended January 31, 2004 and February 1, 2003.



The sale of the Jordanian business and its related operating results have been
excluded from the results from continuing operations and is classified as a discontinued operation for all periods presented in accordance with the requirements of FAS 144 Accounting for Impairment or Disposal of Long-Lived Assets.



|                                                                          |  |                                         |       |       |      |       |       |  |   |       |   |  |       |       |   |       |   |        |       |  |   |       |   |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------- |  | --------------------------------------- | ----- | ----- | ---- | ----- | ----- |  | - | ----- | - |  | ----- | ----- | - | ----- | - | ------ | ----- |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                                                          |  | (In thousands except per share amounts) |      
|                                                                          |  | 2003                                    |       |       | 2002 |      
|                                                                          |  | Qtr.1                                   |       | Qtr.2 |      |       | Qtr.3 |  |   | Qtr.4 |   |  | Qtr.1 |       |   | Qtr.2 |   |        | Qtr.3 |  |   | Qtr.4 |  
|Net sales                                                                 |  | $                                       | 6,064 |       | $    | 5,789 |       |  | $ | 9,117 |   |  | $     | 6,112 |   |       | $ | 5,207  |       |  | $ | 6,212 |   |  | $ | 5,366 |   |  | $ | 7,234 |  
|Gross profit                                                              |  |                                         | 1,020 |       |      | 915   |       |  |   | 1,161 |   |  |       | 1,054 |   |       |   | 219    |       |  |   | 955   |   |  |   | 665   |   |  |   | 1,486 |  
|Provision for impairment of fixed assets                                  |  |                                         |      |       |      |      |       |  |   |      |   |  |       |      |   |       |   |       |       |  |   |      |   |  |   |      |   |  |   | 282   |  
|Income (loss) from continuing operations before interest and income taxes |  |                                         | 209   |       |      | 137   |       |  |   | 242   |   |  |       | 114   |   |       |   | (581   | )     |  |   | 237   |   |  |   | (159  | ) |  |   | 447   |  
|Income (loss) from continuing operations                                  |  |                                         | 161   |       |      | 95    |       |  |   | 178   |   |  |       | 478   |   |       |   | 4,159  |       |  |   | 184   |   |  |   | (206  | ) |  |   | 358   |  
|(Loss) from discontinued operation                                        |  |                                         | 0     |       |      | 0     |       |  |   | (72   | ) |  |       | (456  | ) |       |   | (1,905 | )     |  |   | (391  | ) |  |   |      |   |  |   | (114  | )
|Net income (loss)                                                         |  |                                         | 161   |       |      | 95    |       |  |   | 106   |   |  |       | 22    |   |       |   | 2,254  |       |  |   | (207  | ) |  |   | (206  | ) |  |   | 244   |  
|Income (loss) per share-basic and diluted from continuing operations      |  | $                                       | 0.01  |       | $    | 0.01  |       |  | $ | 0.02  |   |  | $     | 0.03  |   |       | $ | 0.33   |       |  | $ | 0.01  |   |  | $ | (0.02 | ) |  | $ | 0.04  |  
|(Loss) per share-basic and diluted from discontinued operation            |  |                                         | 0.00  |       |      | (0.00 | )     |  |   | (0.01 | ) |  |       | (0.03 | ) |       |   | (0.15  | )     |  |   | (0.03 | ) |  |   | 0.00  |   |  |   | (0.01 | )
|                                                                          |  |                                         |       |       |      |       |       |  |   |       |   |  |       |       |   |       |   |        |       |  |   |       |   |  |   |       |   |  |   |       |  
|Net income (loss) per share-basic and diluted                             |  | $                                       | 0.01  |       | $    | 0.01  |       |  | $ | 0.01  |   |  | $     | 0.00  |   |       | $ | 0.18   |       |  | $ | (0.02 | ) |  | $ | (0.02 | ) |  | $ | 0.03  |  
|                                                                          |  |                                         |       |       |      |       |       |  |   |       |   |  |       |       |   |       |   |        |       |  |   |       |   |  |   |       |   |  |   |       |  



F- 24



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Cygne Designs, Inc. and Subsidiaries



Schedule II- Valuation and Qualifying Accounts



|                                     |  |                                |     |                           |   |                                |  |                         |     |  |   |    
|------------------------------------ |  | ------------------------------ | --- | ------------------------- | - | ------------------------------ |  | ----------------------- | --- |  | - | ---
|Description                          |  | Balance at Beginning of Period |     | Chargedto CostandExpenses |   | AllowancesProvided toCustomers |  | Balance at End ofPeriod
|                                     |  | (In thousands)                
|Reserves for returns and allowances: |  |                                |     |                           |   |                                |  |                         |     |  |   |    
|Year ended February 2, 2002          |  | $                              | 289 |                           | $ | 188                            |  | $                       | 477 |  | $ | 0  
|Year ended February 1, 2003          |  |                                | 0   |                           |   | 42                             |  |                         | 22  |  |   | 20 
|Year ended January 31, 2004          |  |                                | 20  |                           |   | 56                             |  |                         | 71  |  |   | 5  
|Reserve for other receivables:       |  |                                |     |                           |   |                                |  |                         |     |  |   |    
|Year ended January 31, 2004          |  | $                              | 0   |                           | $ | 433                            |  | $                       | 0   |  | $ | 433



F- 25