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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, 1998.


                         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                         (I.R.S. Employer
     incorporation or organization)                       Identification Number)


   1372 BROADWAY, NEW YORK, NEW YORK                              10018
----------------------------------------                       ----------
(Address of principal executive offices)                       (Zip Code)


               Registrant's telephone number, including area code:
               ---------------------------------------------------
                                 (212) 354-6474


           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]

     Aggregate market value of the Registrant's Common Stock held by
non-affiliates at April 27, 1998 (based on the closing sale price for such
shares as reported by the National Association of Securities Dealers Automated
Quotation System): $2,168,059 Common Stock outstanding as of April 27, 1998:
12,438,038 shares.

     Documents incorporated by reference: Portions of the Registrant's
definitive proxy statement for its 1998 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. On April 6, 1994 the Company acquired
Fenn, Wright and Manson, Incorporated ("FWM") and on October 7, 1994 the Company
acquired from G.J.M. International Limited ("GJM International") the business
operations of GJM International ("GJM"). On April 7, 1995 Cygne sold the United
Kingdom subsidiary of FWM and certain brand name rights that had been acquired
in connection with the acquisition of FWM and thereafter discontinued the
remaining operations of FWM. On February 9, 1996, the Company sold substantially
all of the assets relating to its GJM operations (the "GJM Disposition"). On
September 20, 1996, the Company sold to AnnTaylor Stores Corporation (together
with its affiliates, "Ann Taylor") Cygne's 60% interest in CAT, Cygne's former
sourcing joint venture arrangement with Ann Taylor, and the assets of Cygne's
Ann Taylor Woven Division that were used in sourcing merchandise for Ann Taylor
(the "Ann Taylor Disposition"). Unless the context indicates otherwise, the
terms "Company" or "Cygne" includes 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 private label
merchandiser and manufacturer of women's apparel, serving principally The
Limited, Inc. The Company's products include woven and knit career and casual
women's apparel. 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 in the brand name apparel industry, marketing
expenses and 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 purchasing
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 has been dependent on its key customers (The Limited, Inc. and
Ann Taylor) and, with the loss of Ann Taylor as a customer as a result of the
Ann Taylor Disposition, a significant portion of the Company's sales are, and
are expected to continue to be, to various divisions of The Limited, Inc. In
1997, sales to divisions of The Limited, Inc. were $28.1 million or 65% of total
Company sales. Sales to The Limited, Inc. decreased in 1995, 1996 and 1997 and
the Company expects sales to The


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Limited, Inc. to continue to decrease. There can be no assurance that The
Limited, Inc. will continue to purchase merchandise from the Company in the
future, or that the Company will be able to attract new customers. The Company
believes that The Limited Inc., like other retailers, is increasing its sourcing
capabilities and reducing its reliance on outside vendors, including the
Company, for these services.

     The principal executive offices of the Company are located at 1372
Broadway, New York, New York 10018 and its telephone number is (212) 354-6474.

SIGNIFICANT FINANCIAL AND BUSINESS DEVELOPMENTS

     The weak retailing environment in women's apparel, retailers' diminishing
reliance upon outside design, merchandising and sourcing services, and liquidity
pressures all adversely affected the Company's operating results. In response
to these factors, the Company during 1997 continued the restructuring of its
operations that commenced in 1995 with the sale of the United Kingdom subsidiary
of FWM and the discontinuance of the remaining operations of FWM.

     In February 1996, the Company sold substantially all of the assets relating
to its GJM intimate apparel and sleepwear operations (the "GJM Business") to
Warnaco Inc. In the transaction, Warnaco paid Cygne $12.5 million in cash and
assumed certain liabilities of the GJM Business. The Company is obligated to
indemnify Warnaco for any claims for taxes arising out of the operation of the
GJM Business prior to the sale of the GJM Business to Warnaco. The Company
incurred a loss from the GJM Disposition of approximately $31 million in its
fiscal year ended February 3, 1996.

     In June 1992, the Company and certain of its stockholders formed CAT, a
joint venture arrangement with Ann Taylor to source products exclusively for Ann
Taylor. During 1992 and the first quarter of 1993, Ann Taylor owned a 20%
interest in CAT. Effective May 1, 1993, Ann Taylor's interest in CAT increased
to 40%. As a result of such change in ownership, Ann Taylor had, prior to the
consummation of the Ann Taylor Disposition, a 40% interest in the net income of
CAT, which interest was reflected in Cygne's consolidated statements of income
as "income attributable to minority interests."

     The Company completed the Ann Taylor Disposition on September 20, 1996. In
the transaction the Company sold to Ann Taylor Cygne's 60% interest in CAT and
the assets of Cygne's Ann Taylor Woven Division that were used in sourcing
merchandise for Ann Taylor. On the closing of the transaction, Cygne received
2,348,145 shares of Ann Taylor common stock, having a value of $36 million
(based on the average closing price of the Ann Taylor common stock during the
ten trading days prior to closing), and approximately $8.9 million (after
post-closing adjustments) in cash in respect of inventory (less related payables
and advances and certain other assumed liabilities), net fixed assets and
accounts receivable of the Division. Ann Taylor also assumed certain liabilities
of the acquired sourcing operations. As a result of the transaction, the Company
realized a pre-tax gain of $29.6 million. Between October 1996 and January 1997,
the Company sold all of the 2,348,145 


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shares of Ann Taylor common stock received upon the closing of the transaction
at various prices resulting in aggregate net proceeds of approximately $44.3
million. The Company realized a pre-tax gain of approximately $6.1 million as a
result of the sale of the shares of Ann Taylor common stock.

     Net sales to Ann Taylor during 1996 amounted to 67% of the Company's net
sales. Since the closing of the Ann Taylor Disposition, the Company has not had,
and does not anticipate that it will have, sales to Ann Taylor. If the Ann
Taylor Disposition had been consummated on February 4, 1996 (the first day of
the Company's 1996 fiscal year), the Company would have had pro forma net sales
of $84.8 million for 1996 and pro forma loss from operations would have been
$15.5 million. Pro forma net loss (excluding the gain on the Ann Taylor
Disposition and on the subsequent sale of the Ann Taylor common stock) for 1996
would have been $17.7 million and pro forma net loss per share for 1996 would
have been $1.42.

     In connection with the closing of the Ann Taylor Disposition, the Company
entered into two 3-year consulting agreements with Ann Taylor for the services
of Mr. Bernard Manuel, the Company's Chairman of the Board and Chief Executive
Officer, and Mr. Irving Benson, the Company's then President and a director, to
facilitate the integration of CAT and the Division into Ann Taylor's operations.
These agreements, which required an annual fee of $225,000 for the services of
each of Messrs. Benson and Manuel, provided for automatic assignment to the
consultant if his employment with the Company were terminated for any reason.
Mr. Benson's consulting agreement was assigned to him in connection with his
resignation as an officer and employee of the Company on November 29, 1996. Mr.
Benson, who founded the Company's predecessor in 1975 and continued to serve on
the Board of Directors of the Company, entered into a consulting agreement with
the Company in November 1996 pursuant to which he provided services to Cygne
with respect to design, development and merchandising matters and special
projects. The consulting agreement between Mr. Benson and the Company was
terminated in September 1997 and Mr. Benson resigned as a director of the
Company on September 4, 1997. During 1997 the Company, Ann Taylor and Mr. Manuel
agreed to the buyout of the consulting agreement with Ann Taylor for the
services of Mr. Manuel in consideration of the payment by Ann Taylor to the
Company of approximately $477,000.

     During 1995 and 1996, Ann Taylor accounted for 42.9% and 66.7% of Cygne's
net sales, respectively. The Limited, Inc. (consisting primarily of The Limited
Stores and Lerner) accounted for 34.1%, 24.6% and 64.8% of Cygne's net sales for
1995, 1996 and 1997, respectively.

     The Company used the cash proceeds received at the closings of the GJM
Disposition and the Ann Taylor Disposition, together with a substantial portion
of the cash proceeds from the sale of the shares of Ann Taylor common stock, to
pay off the outstanding indebtedness under its bank and trade credit facilities,
which facilities have been terminated. The Company has been using the balance of
the proceeds from the sale of the shares of Ann Taylor common stock for working
capital purposes, which included costs associated with the start-up of its
business to manufacture and distribute brand


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name apparel bearing the Kenzo Jeans and Kenzo Studio labels. This business was
terminated in June 1997.

     During 1996 the Company incurred a reorganization expense of $4.8 million
as a result of the downsizing of the Company and the redeployment of assets
necessary to meet changes in continuing customer needs. The major components of
this expense were costs in connection with early termination of leases for
excess space outside of New York, disposition of related fixed assets, and
severance costs related to Mr Benson's resignation as an officer and employee of
the Company.

     During 1997 the Company provided for lease termination expense of $4.0
million as a result of the Company's decision to relocate from its existing New
York office space and to seek substantially smaller New York office space.
Although the Company believes that the amount of this provision is adequate to
cover the financial effect of this relocation decision, no assurance can be
given in this regard. During 1997 the Company also discontinued its design
studio which had been engaged primarily in the design and development of private
label apparel collections for certain Japanese retailers.

     In December 1997, Mr. Manuel acquired 734,319 shares of Cygne stock from a
limited partnership controlled by The Limited, Inc. Upon the closing of the
transaction, The Limited, Inc. did not own any shares of Cygne stock.

     The Company anticipates that it will have a net loss for 1998. The extent
of the net loss will depend, among other things, on the amount of sales to The
Limited, Inc. The Company is continuing to review its business operations and
expects to continue to incur additional costs in the future associated with the
further restructuring or downsizing 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.

PRODUCTS

     The Company currently participates in three principal segments of the
women's apparel market: career sportswear, casual sportswear and dresses. During
1997 the Company's products included tops, jackets, skirts, pants and sweaters.
The Company believes that, as a result of the Ann Taylor Disposition and
declining sales to Limited Stores, knit products sourced from or manufactured by
the Company in the Middle East, particularly tops, will constitute a significant
portion of its private label product sales in 1998 and that its sales of private
label woven products will continue to decrease.


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SOURCING, MANUFACTURING AND SALES

     Cygne sources and manufactures products for its customers which have been
designed and developed by the customer. In the past the Company also developed
and designed products for its customers.

     Private label manufacturing usually operates on a tighter schedule than
brand name manufacturing because goods are not manufactured until purchase
orders are received and 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 1997 substantially all of the Company's products were manufactured
outside the United States, either by non-affiliated contract manufacturers or at
the Company's sewing facilities. Approximately 13% of the Company's net sales
resulted from products which were manufactured by Cygne in its sewing facilities
and approximately 87% resulted from products which were manufactured by
non-affiliated contract manufacturers. Cygne intends to continue to utilize
foreign contract manufacturers for a significant percentage of its manufacturing
requirements. The Company's contract manufacturers are located in several
countries in the Far East, the Middle East and Central America. In addition, the
Company owns and operates manufacturing facilities in Guatemala and leases and
operates manufacturing facilities in Israel. During 1997 products representing
approximately 36% of the Company's net sales were produced in the Far East,
approximately 53% in the Middle East, approximately 10% in Central America and
approximately 1% in the U.S. 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.
Further, revocation of "most favored nation" status for the People's Republic of
China could have a material adverse effect on the Company. 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
countries in which Cygne owns or leases and operates manufacturing facilities
could result in the impairment or loss of the Company's investment in such
countries. The loss of any one or more of its foreign manufacturers could have
an adverse effect on the Company's business until alternative supply
arrangements were secured.


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     The Company from time to time experiences difficulties in obtaining timely
delivery of products of acceptable quality which has resulted, in many cases, in
rejections or chargebacks by customers. During 1995 and 1996, the Company
experienced increased rejections or cancellations by customers with respect to
certain of its products. During 1997, the Company continued to experience
rejections but to a lesser extent than in 1996. The Company believes that in
some cases these difficulties resulted from not having sufficient access to and
control over the manufacturing process for such products as well as shortened
manufacturing times attributable to delays in obtaining required raw materials
due to the liquidity pressures faced by the Company. There can be no assurance
that the Company will not continue to experience such difficulties in the
future. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations--General."

     Cygne began operating its own sewing factories, all of which are located
outside the United States, during 1993. Operating manufacturing facilities
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 factories. All of the Company's manufacturing
operations are located outside the U.S. and, accordingly, the Company is subject
to many of the same risks as relying on foreign contract manufacturers. The
Company currently operates manufacturing facilities in Guatemala and Israel. See
"Item 2. Properties." In connection with the GJM Disposition, the manufacturing
facilities operated by the Company in the People's Republic of China, the
Philippines and Sri Lanka were sold or closed. The Company's Hong Kong sourcing
office was significantly downsized in 1996 and its operations were closed in
April 1997.

   Raw Materials

     Cygne generally supplies the raw materials to its domestic manufacturers
and frequently supplies the raw materials to foreign manufacturers. Otherwise,
the raw materials are purchased directly by the manufacturer in accordance with
the Company's specifications. Raw materials, 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 frequently
made on a letter of credit basis, while its domestic purchases are generally
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 employs
inspectors in its overseas offices and requires its overseas agents to employ
similarly qualified quality control personnel. Foreign 


                                      -7-



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manufactured fabric is usually inspected both prior to shipment by the Company's
overseas offices or 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. For example, The Limited, Inc., through its
sourcing subsidiary, Mast Industries, Inc., procures directly a substantial
portion of its product requirements. In addition, apparel divisions of The
Limited, Inc. have formed product development groups as well as added direct
sourcing departments.

     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

     The Company sources substantially all its products from a number of foreign
countries in the Far East, the Middle East and Central America. The Company's
ability to meet its customers' pricing requirements will depend, in large part,
on its ability to manufacture its products in countries where manufacturing
costs are low. However, because of quota limits, the Company's manufacturing
flexibility is reduced, increasing the risk that the Company will need to
manufacture more of its products in countries where manufacturing costs are
higher.

   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. Under the Uruguay
Round Agreements Act, the United States agreed to phase out these bilateral
quotas in three stages over a ten year period. The agreement became effective on
January 1, 1995 for the 124 member countries of the World Trade Organization
("WTO"). Those textile quotas in effect on December 31, 1994 will remain in
effect until they are "phased-out" during the ten-year period. 


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However, these quotas are subject to a growth formula which uses as a basis the
growth rate set forth in the bilateral textile agreements in effect as of
December 31, 1994 and provides for additional growth of 16%, 25% and 27% of the
base growth rate in the respective phase-out periods. It is believed that the
quotas affecting most of the products imported by the Company are not likely to
be phased out until the end of the third and final stage, i.e., 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. However, some form of global quota
is still possible after completion of the ten year phase-out period. Under
limited circumstances, a new quota (called a "transitional safeguard") may be
imposed during the ten-year phase out period if there is demonstrable evidence
of serious damage, or actual threat of serious damage, to a domestic industry
producing like or competitive products due to a sharp and substantial increase
in imports of a particular product. The United States may also counteract
illegal transshipping practices by imposing new quotas, issuing chargebacks
against existing quotas or imposing embargoes. Such action can be taken against
both the actual country of origin and countries through which such merchandise
was transshipped. While it is not possible to forecast the likelihood of such
occurrences, the imposition of new quotas and/or chargebacks could impact the
Company's ability to source imported merchandise.

     Textile and apparel imports from non-members of the WTO, such as the
People's Republic of China, will continue to be subject to bilateral textile
agreements negotiated under the MFA. Under these agreements, the United States
may impose quota restraints on importations of specific categories of
merchandise not presently subject to such quota restraints. The bilateral
textile agreement with The People's Republic of China expires on December 31,
2000. The People's Republic of China is seeking membership in the WTO. Should
its application be approved, imports from The People's Republic of China may
become subject to the quota phase-outs discussed above or modifications thereof.

   Duty Rates

     The products imported by the Company are subject to "Most Favored Nation
(MFN)" 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.

     On December 8, 1993, Congress adopted the North American Free Trade
Agreement ("NAFTA") under which originating apparel and other products from
Mexico and Canada are immediately exempt from quota restrictions and subject to
duty rates which are being reduced to zero over the next ten years. Similar
tariff rate preferences and quota exemptions are being phased in for certain
non-originating apparel products cut and sewn in Mexico and Canada. Negotiations
have begun to expand NAFTA to possibly include certain Central and South
American countries. Additionally, "NAFTA Parity" legislation may be introduced
to confer similar quota and duty benefits on countries subject to the Caribbean
Basin Economic Recovery Act (CBERA) including Guatemala.


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     Imports from the People's Republic of China receive MFN duty rates under a
waiver of the Jackson-Vanik Amendment to the Trade Act of 1974. Under this
statute, certain countries and non-market economies are prohibited from
receiving MFN rates of duties and other trade benefits unless an annual waiver
is issued by the President. The People's Republic of China has received a
Jackson-Vanik Waiver annually since 1979. In May 1997 President Clinton renewed
the waiver. Congress can pass legislation disapproving the one-year extension of
MFN to China, but did not do so in 1997. If MFN for China is discontinued, goods
from China will be subject to "column 2" rates of duty, which range up to 90% ad
valorem. However, current duty rates will remain in effect at least until June
3, 1998. The loss of MFN status for the People's Republic of China could
adversely affect the Company's ability to supply products to its customers.

   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 or sold may, from time to time, impose new quotas, duties, tariffs,
or other restrictions, including trade sanctions or revocation of "most favored
nation" 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 monitors duty, tariff and quota-related developments and
continually seeks to minimize its potential exposure to quota-related risks
through, among other measures, geographical diversification of its manufacturing
sources, the maintenance of overseas offices, allocation of production to
merchandise categories where more quota is available and shifts of production
among countries and manufacturers. The Company also from time to time purchases
quantities of temporary quota in certain countries.

     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.


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BACKLOG

     At January 31, 1998 the Company had unfilled confirmed customer orders of
$5.2 million compared with $6.9 million of such orders at February 1, 1997. 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.

EMPLOYEES

     At April 15, 1998, the Company had approximately 887 full-time employees,
including approximately 874 employees at its factories in Guatemala and Israel.
The Company considers its relations with its employees to be satisfactory.


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EXECUTIVE OFFICERS OF THE REGISTRANT

     The executive officers of the Company are as follows:

Name                               Age    Position with the Company
----                               ---    -------------------------
Bernard M. Manuel ............     50     Director, Chairman of the Board and 
                                            Chief Executive Officer
Roy E. Green .................     65     Senior Vice President-Chief Financial 
                                            Officer and Treasurer
Gary C. Smith ................     47     Senior Vice President-Manufacturing
Paul D. Baiocchi .............     50     Vice President, General Counsel 
                                            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 has been a director of
Designs, Inc., a retailer selling exclusively apparel and accessories
manufactured or licensed by Levi Strauss & Co., Inc., since 1990 and 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 "Institut 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 and Treasurer 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 & Cranstown. Mr. Green received a Bachelor's
degree in Business Administration from Rutgers University. Mr. Green is a
certified public accountant.

     Gary C. Smith served as Vice President-Manufacturing of the Company from
July 1991 until April 1993 when he was elected Senior Vice
President-Manufacturing. Mr. Smith is responsible for all phases of
manufacturing, shipment and quality control. From September 1990 until he joined
Cygne in July 1991, Mr. Smith worked for Ellen Tracy, responsible for production
and manufacturing. From September 1989 until August 1990 he was Vice President
of Production of Bonjour International. From 1986 until 1989, he was Vice
President-Manufacturing for Bernard Chaus. Mr. Smith received a Bachelor's
degree in Engineering from the Georgia Institute of Technology.


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     Paul D. Baiocchi has served as Vice President, General Counsel and
Secretary of the Company since March 1994. Prior to joining the Company, Mr.
Baiocchi was a partner of Fulbright & Jaworski L.L.P., counsel to the Company,
from January 1989 to November 1993 and of counsel to that firm from November
1993 to March 1994. From January 1982 to January 1989, he was a partner of
Reavis & McGrath, which merged with Fulbright & Jaworski effective January 1,
1989. Mr. Baiocchi received a Bachelor's degree from Dartmouth College and a
J.D. from Harvard Law School.

     The Company's business is dependent upon its ability to attract and retain
qualified employees. The Company is dependent to a significant degree on the
efforts of Bernard M. Manuel, Chairman of the Board and Chief Executive Officer.
Mr. Manuel has an employment agreement with the Company which includes
restrictions on competition by him in certain circumstances after termination of
employment, subject to certain conditions. See "Item 11. Executive
Compensation--Employment Agreements." The loss of the services of Mr. Manuel
could have an adverse effect on the Company's business.


                                      -13-



<PAGE>


ITEM 2. PROPERTIES

     The Company currently conducts its operations from a number of facilities
in the U.S. and abroad. The Company's executive and general offices are located
at 1372 Broadway, New York, New York. The Company occupies approximately 43,000
square feet at such premises in New York pursuant to a lease which expires in
2010 and its average annual rental expense (exclusive of escalation amounts) is
approximately $840,000. In connection with the Ann Taylor Disposition, Ann
Taylor subleased approximately 60,000 square feet of space formerly occupied by
the Company at this location. During 1997, the Company provided for lease
termination expense of $4.0 million as a result of the Company's decision to
relocate from its existing New York office space and to seek substantially
smaller New York office space. Although it is anticipated that the relocation
will take place in 1998, no assurance can be given in this regard, including
that the Company will be able to sublease its existing New York office space or
obtain an agreement terminating its lease obligations with respect thereto.

     The Company also leases an office and manufacturing facility in Israel. The
Company owns a sewing facility in Guatemala. During 1996 the Company sold an
office building previously owned by it in Italy and leased back a portion of the
space. The Company's Hong Kong sourcing office was significantly downsized in
1996 and its operations terminated in April 1997. The Company believes that its
existing facilities are well maintained and in good operating condition.

ITEM 3. LEGAL PROCEEDINGS

     On December 11, 1995, a shareholder class action complaint was filed
against the Company, certain of the Company's officers and directors, Ernst &
Young LLP, the underwriters of the Company's June 1994 secondary public offering
of stock and certain financial analysts who followed the Company, in the United
States District Court, Southern District of New York. The action was purportedly
filed on behalf of a class of purchasers of the Company's stock during the
period September 28, 1993 through April 28, 1995. The complaint sought
unspecified money damages and alleged that the Company and the other defendants
violated federal securities laws in connection with various public statements
made by the Company and certain of its officers and directors during the
putative class period.

     In January 1997, the Company and all defendants other than Ernst & Young
LLP tentatively settled the class action subject to judicial approval. On July
30, 1997 the Court approved the settlement, which provides for an aggregate
settlement amount of $5,750,000. The Company contributed approximately
$2,100,000 to the settlement, which amount was placed in an escrow account in
January 1997. The balance of the settlement fund came from insurance and from
other parties to the litigation. In May 1997, the Court granted Ernst & Young
LLP's motion to dismiss the complaint, and denied the plaintiff's request for
leave to file an amended complaint against Ernst & Young LLP.


                                      -14-



<PAGE>


     The Company is involved in various other 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 or results of operations.

   Tax Audits

     The U.S. Internal Revenue Service (the "IRS") is conducting an audit of the
U.S. Federal income tax returns filed by GJM (US) Inc. for its taxable years
ending December 31, 1990 through October 7, 1994 (the date GJM (US) Inc. was
acquired by the Company). To date, the IRS has informally proposed a Federal
income tax deficiency against GJM (US) Inc. of approximately $16 million
(including some penalties but not interest). The audit of GJM (US) Inc. is still
in its early stages and its outcome cannot be predicted at this time. Although
the Company intends to dispute the proposed adjustment and believes that it has
established appropriate accounting reserves with respect to this matter, an
adverse decision in this matter could have a material adverse impact on the
Company and its financial condition.

     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.

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

     None


                                      -15-



<PAGE>


                                     PART II


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

     The Company's Common Stock is quoted on The Nasdaq National Market under
the symbol "CYDS". However, as discussed below, the Company's Common Stock is
scheduled to be delisted from The Nasdaq National Market. 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 Nasdaq National Market.

                                                            HIGH          LOW
                                                            -----        -----
FISCAL YEAR ENDED FEBRUARY 1, 1997
  First Quarter .......................................     $3.00        $1.00
  Second Quarter ......................................     $1.63        $0.81
  Third Quarter .......................................     $1.75        $0.69
  Fourth Quarter ......................................     $1.13        $0.50

FISCAL YEAR ENDED JANUARY 31, 1998
  First Quarter .......................................     $1.13        $0.38
  Second Quarter ......................................     $0.63        $0.31
  Third Quarter .......................................     $0.50        $0.28
  Fourth Quarter ......................................     $0.50        $0.25


     The Nasdaq Stock Market, Inc. has informed the Company that its Common
Stock is scheduled for delisting from The Nasdaq National Market on May 29, 1998
because the Company does not meet certain continued listing requirements of The
Nasdaq National Market, including the maintenance of a minimum bid price of at
least $1 per share. The Company cannot predict what effect its delisting from
The Nasdaq National Market will have on the market price and liquidity of the
Company's Common Stock. The Company believes that after such delisting the
Company's Common Stock would be eligible for quotation on the OTC Bulletin
Board, although no assurance can be given that a market for the Company's Common
Stock on the OTC Bulletin Board will actually develop.

     The number of stockholders of record of Common Stock on April 27, 1998 was
approximately 93, and management estimates that there are over 800 beneficial
owners of the Common Stock. The closing sale price of the Company's Common Stock
on April 27, 1998 was $0.28 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 


                                      -16-



<PAGE>


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.


                                      -17-



<PAGE>


<TABLE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The following tables summarize certain selected financial information which 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 and notes thereto of the Company included elsewhere herein. The selected financial information
has been derived from the consolidated financial statements of the Company, which have been audited by independent
auditors. The acquisition of FWM in April 1994 and GJM in October 1994, the sale of FWM's United Kingdom subsidiary
and certain brand name rights in April 1995, the discontinuance of the remaining operations of FWM in 1995, the GJM
Disposition in February 1996 and the Ann Taylor Disposition in September 1996, materially affect the comparability of
the financial data reflected below. The Company anticipates that it will have a net loss for 1998.

<CAPTION>
                                                                                     Year(1)
                                                            ---------------------------------------------------------
See notes on next page                                      1993(2)       1994         1995        1996        1997
                                                            --------    --------    ---------    --------    --------
                                                                    ($ in thousands except per share amounts)

<S>                                                         <C>         <C>         <C>          <C>         <C>     
INCOME STATEMENT DATA

Net sales ............................................      $220,201    $516,105    $ 540,063    $254,313    $ 43,379
Cost of goods sold ...................................       181,326     433,700      510,761     226,456      43,063
                                                            --------    --------    ---------    --------    --------
Gross profit .........................................        38,875      82,405       29,302      27,857         316
Selling, general and administrative expenses .........        23,794      54,261       72,182      27,251      10,331
Provision for lease termination expenses .............          --          --           --          --         3,964
Gain from sale of Ann Taylor Woven
             Division and CAT ........................          --          --           --       (29,588)       --
Gain from sale of subsidiary, net ....................          --          --         (4,742)       --          --
Loss from sale of GJM business, net ..................          --          --         31,239        --          --
Reorganization expense ...............................          --          --           --         4,813        --
Write-off of goodwill ................................          --          --         48,949        --          --
Amortization of intangibles ..........................           137       2,505        3,425         364         364
                                                            --------    --------    ---------    --------    --------
(Loss) income  from operations .......................        14,944      25,639     (121,751)     25,017     (14,343)
Other income(3) ......................................          --          --           --        (6,864)       --
Settlement of shareholder class
     action and related legal expenses ...............          --          --           --         2,627        --
Interest (income) expense, net .......................         4,272       7,620        8,813       3,260         (83)
                                                            --------    --------    ---------    --------    --------
(Loss) income before income taxes and
     minority interests ..............................        10,672      18,019     (130,564)     25,994     (14,260)
Provision (benefit) for income taxes .................         3,897       5,568       (6,216)      7,117         204
                                                            --------    --------    ---------    --------    --------
(Loss) income before minority interests ..............         6,775      12,451     (124,348)     18,877     (14,464)
Income attributable to minority interests ............           631       1,642        1,710         961        --
                                                            --------    --------    ---------    --------    --------
Net (loss) income ....................................      $  6,144    $ 10,809    $(126,058)   $ 17,916    $(14,464)
                                                            ========    ========    =========    ========    ========
Net (loss) income per share - basic(4) ...............      $   1.05    $   0.95    $  (10.04)   $   1.44    $  (1.16)
                                                            ========    ========    =========    ========    ========
Number of shares used in computation of net
     income (loss) per share - basic .................         6,474      11,352       12,550      12,438      12,438
                                                            ========    ========    =========    ========    ========
Net income (loss) per share - diluted(4) .............      $   0.92    $   0.93    $  (10.04)   $   1.44    $  (1.16)
                                                            ========    ========    =========    ========    ========
Number of shares used in computation of net
     income (loss) per share - diluted ...............         6,705      11,658       12,550      12,439      12,438
                                                            ========    ========    =========    ========    ========
</TABLE>


                                      -18-



<PAGE>


<TABLE>
<CAPTION>
                                                                                     Year(1)
                                                            ---------------------------------------------------------
                                                            1993(2)       1994         1995        1996        1997
                                                            --------    --------    ---------    --------    --------
                                                                                  ($ In thousands)

<S>                                                         <C>         <C>         <C>          <C>         <C>     

BALANCE SHEET DATA (as of end of period)

Cash .................................................      $  7,192    $  14,202   $    5,487   $  22,246    $ 10,926
Accounts receivable ..................................        28,495       64,921       35,117       7,239       6,012
Assets held for sale .................................          --           --         15,200        --          --
Inventory ............................................        14,311       57,570       29,999       5,109       4,012
Goodwill .............................................         3,577       76,659        2,790       2,426       2,062
Total assets .........................................        66,973      253,528      117,145      47,142      29,750
Long-term debt .......................................         1,273        1,460        1,562        --          --
Stockholders' equity .................................        34,497      141,692        9,046      26,959      12,379

--------------

(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 Company has never declared or paid cash dividends on its
     Common Stock.

(2)  The income statement data include the results of operations of CAT, which began operations in June 1992, and
     Cygne Knits Limited and Cygne Far East Limited, which began operations in February 1993, although these entities
     did not become subsidiaries of the Company until April 30, 1993.

(3)  Principally from the gain on the sale of shares of Ann Taylor common stock.

(4)  All income (loss) per share amounts have been presented and where appropriate, restated to conform to FASB 128.

</TABLE>


                                                         -19-



<PAGE>


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.

     On April 7, 1995, Cygne sold the United Kingdom subsidiary of FWM and
certain brand name rights which were acquired in the FWM Acquisition. On
February 9, 1996, the Company sold substantially all of the assets relating to
its GJM Business. On September 20, 1996, the Company sold its 60% interest in
its joint venture arrangement with Ann Taylor and the assets of Cygne's Ann
Taylor Woven Division. See "Item 1. Business - Significant Financial and
Business Developments."

     Since the consummation of the Ann Taylor Disposition, the Company has not
had and does not anticipate that it will have sales to Ann Taylor. The Company
is continuing in three principal segments of the women's apparel market: career
sportswear, casual sportswear and dresses. The Company has been dependent on its
key customers (The Limited, Inc. and Ann Taylor) and, with the loss of Ann
Taylor as a customer, its business is dependent upon maintaining its
relationship with The Limited, Inc. and its ability to attract new customers.
However, there can be no assurance that the Company will be able to do so. The
Company anticipates that it will have a net loss for 1998. The extent of the net
loss will depend, among other things, on the amount of sales to The Limited,
Inc.

     The acquisition of FWM in April 1994 and GJM in October 1994, the sale of
FWM's United Kingdom subsidiary and certain brand name rights in April 1995, the
discontinuance of the remaining operations of FWM in 1995, the GJM Disposition
in February 1996 and the Ann Taylor Disposition in September 1996, materially
affect the comparability of the Company's financial data for the past five
years.

     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 which could cause actual
results to differ materially from those stated in such statements. Such risks,
uncertainties and factors include, but are not limited to, 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 export quotas,
dependence on a key customer, risk of operations and suppliers in foreign
countries, competition, general economic conditions, 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.


                                      -20-



<PAGE>


GENERAL

     On April 6, 1994, Cygne acquired FWM for a purchase price of $44.0 million,
consisting of 2,000,000 unregistered shares of the Company's common stock and
$10,000 in cash. Additional costs related to this acquisition approximated $1.4
million. The excess of the purchase price over the fair value of the net assets
acquired of $47.8 million was recorded as goodwill and was being amortized over
a twenty-five year period. In April 1995, the Company sold FWM's U.K. subsidiary
to FWM N.V. for 600,000 shares of the Company's common stock. During 1995,
management took various actions to reverse a decline in FWM's business. However,
management determined that such actions were not having the desired results and
eliminated all of the operations of FWM. In connection with the elimination of
the FWM operations, the Company wrote-off the remaining $44.5 million of
goodwill in fiscal 1995.

     On October 7, 1994, Cygne acquired GJM for a purchase price of $15.2
million, consisting of 650,000 unregistered shares of common stock, $10,000 in
cash and the assumption of approximately $1.9 million of debt owed by GJM
International to The Limited, Inc., as well as non-compete payments aggregating
$3.2 million. Additional costs related to this acquisition approximated $1.7
million. The excess of the purchase price over the fair value of the net assets
acquired of approximately $27.7 million was recorded as goodwill and was being
amortized over a twenty-five year period.

     In February 1996, the Company sold the GJM Business to Warnaco. In the
transaction, Warnaco paid Cygne $12.5 million in cash and assumed certain
liabilities of the GJM Business. The Company is obligated to indemnify Warnaco
for any claims for taxes arising out of the operation of the GJM Business prior
to the sale of the GJM Business to Warnaco. The Company used all the proceeds of
the sale to repay outstanding senior bank indebtedness.

     In February 1995, Cygne acquired Tralee S.A. ("TSA"), a Uruguayan
corporation that sourced products in Brazil for export, primarily to the United
States. The purchase price for TSA was approximately $3.8 million, consisting of
53,038 unregistered shares of common stock and $3.1 million in cash. Additional
costs related to this acquisition approximated $730,000. The excess of the
purchase price over the fair value of the net assets acquired of approximately
$4.5 million was recorded as goodwill and was being amortized over a twenty-five
year period. In January 1996, the Company determined to close TSA. As a result,
the Company recorded a loss of approximately $6.4 million in fiscal 1995,
primarily resulting from the write-off of goodwill associated with the
acquisition. The Company terminated these operations during the third quarter of
1996.

     The acquisitions of FWM, GJM and TSA were accounted for under the purchase
method and, accordingly, the operating results of FWM, GJM and TSA were included
in the consolidated operating results since their respective dates of
acquisition.

     In June 1992, the Company and certain of its stockholders formed CAT, a
joint venture arrangement with Ann Taylor to source products exclusively for Ann
Taylor. During 1992 and the first quarter of 1993, Ann Taylor owned a 20%
interest in CAT. Effective May 1, 1993, Ann Taylor's interest in CAT 


                                      -21-



<PAGE>


increased to 40%. As a result of such change in ownership, Ann Taylor had, prior
to the consummation of the Ann Taylor Disposition, a 40% interest in the net
income of CAT, which interest was reflected in Cygne's consolidated statements
of income as "income attributable to minority interests."

     The Company completed the Ann Taylor Disposition on September 20, 1996. In
the transaction the Company sold to Ann Taylor Cygne's 60% interest in CAT and
the assets of Cygne's Ann Taylor Woven Division that were used in sourcing
merchandise for Ann Taylor. On the closing of the transaction, Cygne received
2,348,145 shares of Ann Taylor common stock, having a value of $36 million
(based on the average closing price of the Ann Taylor common stock during the
ten trading days prior to closing), and approximately $8.9 million (after
post-closing adjustments) in cash in respect of inventory (less related payables
and advances and certain other assumed liabilities), net fixed assets and
accounts receivable of the Ann Taylor Woven Division. Ann Taylor also assumed
certain liabilities of the acquired sourcing operations. As a result of the
transaction, the Company realized a pre-tax gain of $29.6 million. Between
October 1996 and January 1997, the Company sold all of the 2,348,145 shares of
Ann Taylor common stock received upon the closing of the transaction at various
prices resulting in aggregate net proceeds of approximately $44.3 million. The
Company realized a pre-tax gain of approximately $6.1 million as a result of the
sale of the shares of Ann Taylor common stock, which is reflected in "Other
income" in the Company's Consolidated Statements of Operations.

     In connection with the closing of the Ann Taylor Disposition, the Company
entered into two 3-year consulting agreements with Ann Taylor for the services
of Mr. Bernard Manuel, the Company's Chairman of the Board and Chief Executive
Officer, and Mr. Irving Benson, the Company's then President and a director, to
facilitate the integration of CAT and the Division into Ann Taylor's operations.
These agreements, which required an annual fee of $225,000 for the services of
each of Messrs. Benson and Manuel, provided for automatic assignment to the
consultant if his employment with the Company were terminated for any reason.
Mr. Benson's consulting agreement was assigned to him in connection with his
resignation as an officer and employee of the Company on November 29, 1996. Mr.
Benson, who founded the Company's predecessor in 1975 and continued to serve on
the Board of Directors of the Company, entered into a consulting agreement with
the Company in November 1996 pursuant to which he provided services to Cygne
with respect to design, development and merchandising matters and special
projects. The consulting agreement between Mr. Benson and the Company was
terminated in September 1997 and Mr. Benson resigned as a director of the
Company on September 4, 1997. During 1997 the consulting agreement with Ann
Taylor for the services of Mr. Manuel was bought out in consideration of the
payment by Ann Taylor to the Company of approximately $477,000.

     During 1995, 1996 and 1997, Ann Taylor accounted for 42.9%, 66.7% and 00.0%
of Cygne's net sales, respectively, and The Limited, Inc. (consisting primarily
of The Limited Stores and Lerner) accounted for 34.1%, 24.6% and 64.8% of
Cygne's net sales, respectively. Net sales in 1995 include sales to The Limited,
Inc. by the Company's FWM division, which operations were discontinued in 1995,
and by the GJM Business, which was sold in February 1996.

     If the Ann Taylor Disposition had been consummated on February 4, 1996 (the
first day of fiscal 1996), the Company would have had pro forma net sales for
1996 of $84.8 million. Pro forma gross profit for 1996 would have been $6.2
million. Pro forma loss from operations for 1996 would have been $15.5 million.
Pro forma net loss (excluding the gain on the Ann Taylor Disposition and on the
subsequent sale of the Ann Taylor common stock) for 1996 would have been $17.7
million. The pro forma net loss per share for 1996 would have been $1.42.


                                      -22-



<PAGE>


     In June 1997 the Company announced that the license agreements entered into
during the summer of 1996 with the Kenzo Group for the manufacture and
distribution in the United States, Canada and Mexico of the Kenzo Studio and
Kenzo Jeans ready-to-wear apparel lines had been terminated by mutual agreement.
In connection with the termination the Kenzo Group returned the $400,000 in
pre-paid minimum royalty payments made on the signing of the license agreements
and agreed to pay Cygne for certain raw materials related to the manufacture of
Kenzo products.

     Although Cygne has a long established relationship with The Limited, Inc.,
its key customer, Cygne does not have long-term contracts with any of its
customers, including The Limited, Inc. Since the consummation of the Ann Taylor
Disposition, the Company has not had and does not anticipate that it will have
sales to Ann Taylor. The Company has been dependent on its key customers and
with the loss of Ann Taylor as a customer, its future success will be dependent
upon its ability to attract new customers and to maintain its relationship with
The Limited, Inc. There can be no assurance that The Limited, Inc. 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 The Limited, Inc., particularly after
the Ann Taylor Disposition, The Limited, Inc. has the ability to exert
significant control over the Company's business decisions, including prices.
Furthermore, The Limited, Inc. procures directly a substantial portion of its
apparel product requirements through its sourcing subsidiary, and such
subsidiary will continue to be a major competitor of the Company with respect to
the Company's business with The Limited, Inc. In addition, the apparel divisions
of The Limited, Inc. have formed direct sourcing departments. In 1995, sales to
certain divisions of The Limited, Inc. decreased significantly and, in 1996 and
1997, sales to certain divisions of The Limited, Inc. with which the Company
continues to do business decreased. The Company expects sales to The Limited,
Inc. to continue to decrease. As previously announced, in December 1997 a
limited partnership controlled by The Limited, Inc. sold its 734,319 shares of
Cygne stock to Mr. Manuel, the Company's Chairman and Chief Executive Officer.
Upon the closing of the transaction, The Limited, Inc. did not own any shares of
Cygne stock.

     The Company anticipates that it will have a net loss for fiscal 1998
(ending January 30, 1999). The extent of the net loss will depend, among other
things, on the amount of sales to The Limited, Inc. The Company is continuing to
review its business operations and expects to incur additional costs in the
future associated with the further restructuring or downsizing 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. The
Company believes that the weakness in retail sales of women's apparel adversely
affected its operating results. The effect of these factors has been increased
competition and reduced operating margins for both the retailers and their
suppliers. Retailers, including customers of the Company, are increasingly
designing and sourcing private label products themselves rather than utilizing
outside vendors like the Company.


                                      -23-



<PAGE>


IMPACT OF THE YEAR 2000

     The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.

     The Company has determined that it will be required to replace portions of
its software so that its computer systems will function properly with respect to
dates in the Year 2000 and thereafter. The Company also has initiated
communications with its significant suppliers and large customers to determine
the extent to which the Company's interface systems are vulnerable to those
third parties' failure to remediate their own Year 2000 issues. The Company
presently believes that with modifications to existing software and conversions
to new software, the cost of which is not expected to be material to the
Company's results of operation or financial position, the Year 2000 will not
pose significant operations problems for its computer systems. The Company will
use both internal and external resources to reprogram, or replace, and test the
software for Year 2000 modifications. The Company anticipates completing the
Year 2000 project prior to any anticipated impact on its operating systems.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 issue could have a material adverse effect on
the operations of the Company. Likewise, there can be no assurance that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have a material adverse effect on the Company's systems.


                                      -24-



<PAGE>


RESULTS OF OPERATIONS

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

                                                       Percentage of Net Sales
                                                    ----------------------------
                                                              Year (1)
                                                    ----------------------------
                                                     1997       1996       1995
                                                    ------     ------     ------
Net sales .....................................     100.0%     100.0%     100.0%
                                                    =====      =====      =====
Gross profit ..................................       0.7       11.0        5.4
Selling, general and administrative
  expenses ....................................      23.8       10.7       13.4
Provision for lease termination expense .......       9.1        --         --
Gain from sale of Ann Taylor
  Woven Division and CAT ......................       --       (11.5)       --

Gain from sale of subsidiary, net .............       --         --        (0.9)
Loss on sale of GJM business, net .............       --         --         5.8
Reorganization expense ........................       --         1.9        --
Write-off of goodwill .........................       --         --         9.0
Amortization of intangibles ...................       0.8        0.1        0.6
                                                    -----      -----      -----
(Loss) income from operations .................     (33.0)       9.8      (22.5)
Other income ..................................       --        (2.7)       --
Settlement of shareholder class action
  and related legal expenses ..................       --         1.0        --
Interest (income) expense, net ................      (0.2)       1.3        1.6
Provision (benefit) for income taxes ..........       0.5        2.8       (1.1)
                                                    -----      -----      -----
(Loss) income before minority
  interest ....................................     (33.3)       7.4      (23.0)
Income attributable to minority
  interests ...................................       --         0.4        0.3
                                                    -----      -----      -----
Net (loss) income .............................     (33.3)       7.0      (23.3)
                                                    =====      =====      =====
----------

(1)  Each of the years indicated includes 52 weeks except for 1995 which
     includes 53 weeks.


                                      -25-



<PAGE>


1997 COMPARED TO 1996

   Net Sales

     Net sales for 1997 were $43.4 million, a decrease of $210.9 million or
82.9% from $254.3 million in 1996. The decrease in net sales for 1997 compared
to 1996 was primarily attributable to a decrease in sales to Ann Taylor of
$169.6 million as a result of the Ann Taylor Disposition and to discontinued
customers and product lines which generated sales of $22.4 million, offset in
part by increases in sales to customers other than The Limited, Inc. and Ann
Taylor of $5.9 million. In addition, sales to those divisions of The Limited,
Inc. with which the Company continues to do business decreased by $24.8 million
from 1997 to 1996. The Company anticipates that sales to The Limited, Inc. will
continue to decrease during 1998 as compared to comparable periods in 1997.

   Gross Profit

     Gross profit for 1997 was $316,000, a decrease of $27.5 million or 98.9%
from $27.9 million in 1996. The decrease in gross profit for 1997 compared to
1996 was primarily attributable to operations sold in the Ann Taylor
Disposition, which had gross profit of $21.7 million, lower sales and lower
gross margins on the remaining sales in 1997 compared to 1996, and a $500,000
markdown on fabric purchased for the Kenzo Jeans and Kenzo Studio brand name
products which were discontinued in 1997.

   Selling, General and Administrative Expenses

     Selling, general and administrative expenses for 1997 were $10.3 million, a
decrease of $16.9 million or 62.1% from the $27.3 million in 1996. The decrease
for 1997 compared to 1996 was primarily attributable to a decrease in expenses
of $10.8 million as a result of the Ann Taylor Disposition, and a decrease in
all other expenses of $10.1 million as a result of downsizing the Company,
offset in part by expenses of $2.9 million, related to the Kenzo Jeans and Kenzo
Studio brand name products and their discontinuance (including severance costs)
and other severance costs of $1.1 million.

   Provision for Lease Termination Expense

     During 1997 the Company provided for lease termination expense of $4.0
million as a result of the Company's decision to relocate from its existing New
York office space and to seek substantially smaller New York office space.
Although the Company believes that the amount of this provision is adequate to
cover the financial effect of this relocation decision, no assurance can be
given in this regard.

   Reorganization Expense

     The reorganization expense of $4.8 million during 1996 was the result of
the downsizing of the Company and the redeployment of assets necessary to meet
changes in continuing customer needs. The major components of this expense were:
costs in connection with early termination of leases outside New York for excess
space, disposition of related fixed assets, and severance costs related to the
Company's then President's resignation as an officer and employee of the
Company.


                                      -26-



<PAGE>


   Interest

     Net interest income for 1997 was $83,000 compared to net interest expense
of $3.3 million in 1996. The decrease in interest expense for 1997 compared to
1996 was primarily attributable to the repayment of the Company's debt with the
proceeds from the Ann Taylor Disposition and the sale of the Ann Taylor common
stock received in connection therewith.

   Provision for Income Taxes

     The provision for income taxes in 1997 primarily represents provision for
minimum state and local income taxes. At January 31, 1998, the Company had
Federal net operating loss carryforwards of approximately $90.0 million, which
may be used to offset future taxable income.

1996 COMPARED TO 1995

   Net Sales

     Net sales for 1996 were $254.3 million, a decrease of $285.8 million or
52.9% from 1995. The decrease in net sales for 1996 compared to 1995 was
primarily attributable to the sale of the GJM Business on February 9, 1996,
which generated sales of $105.1 million, discontinued customers and product
lines, which generated sales of $110.9 million in 1995, and a decrease in sales
to Ann Taylor of $61.9 million from 1995 as a result of the Ann Taylor
Disposition on September 20, 1996. In addition, sales to those divisions of The
Limited, Inc. with which the Company continues to do business decreased by $14.0
million, offset in part by increases in sales to other customers. The Company
anticipates that sales to The Limited, Inc. will continue to decrease.

     For 1996, CAT and the Ann Taylor Woven Division had combined net sales to
Ann Taylor of $169.6 million, representing 66.7% of the Company's net sales, and
Cygne's share of the combined net income from CAT and the Ann Taylor Woven
Division for 1996 was $5.5 million. Since the consummation of the Ann Taylor
Disposition, the Company has not had and does not anticipate that it will have
sales to Ann Taylor.

   Gross Profit

     Gross profit for 1996 was $27.9 million, a decrease of $1.4 million or 4.9%
from 1995. Gross margin, which is gross profit as a percentage of net sales,
increased to 11% for 1996 from 5.4% in 1995 due to lower margins on sales to
discontinued and GJM customers in 1995. Certain of the Company's products
inherently carry lower gross margins than its woven products. The Company
expects that gross profit as a percentage of net sales will vary from period to
period depending on the mix of products sold.

   Selling, General and Administrative Expenses

     Selling, general and administrative expenses for 1996 were $27.3 million,
representing a decrease of 62.2% from 1995. The decrease in these expenses was
primarily attributable to reductions in the Company's overhead as well as the
elimination in 1995 of the FWM operations, the disposition of the GJM Business
and the Ann Taylor Disposition, offset in part by the expenses associated with
the start-up of the Kenzo division. In 1996, the selling, general and
administrative expenses related to the Ann Taylor Woven Division and CAT were
approximately $11.0 million.


                                      -27-



<PAGE>


   Gain from Sale of Ann Taylor Woven Division and CAT

     The Company realized a pretax gain from the sale of the Ann Taylor Woven
Division and CAT of $29.6 million after transaction costs.

   Reorganization Expense

     The reorganization expense of $4.8 million was the result of the downsizing
of the Company and the redeployment of assets necessary to meet changes in
continuing customer needs. The major components of this expense were costs in
connection with early termination of leases for excess space, disposition of
related fixed assets, and severance costs related to Irving Benson's resignation
as an officer and employee of the Company.

   Amortization of Intangibles

     The amortization of intangibles for 1996 was $364,000, a decrease of $3.1
million from 1995. The decrease was primarily attributable to the sale of the
GJM Business and to the write-off in 1995 of intangibles recorded in connection
with the FWM Acquisition.

   Other Income

     Other income is primarily the gain on the sale of the Ann Taylor common
stock received in connection with the Ann Taylor Disposition.

   Settlement of Shareholder Class Action

     On January 14, 1997, the Company agreed to settle a shareholder class
action, subject to judicial approval. This settlement, which was approved by the
Court in July 1997, provided for an aggregate settlement of $5.75 million. The
Company contributed approximately $2.1 million to the settlement, which amount
was placed in an escrow account in January 1997. The balance of the settlement
fund came from insurance and from other parties to the litigation. The Company
also incurred legal fees of approximately $500,000 in connection with the
action.

   Interest Expense

     Interest expense for 1996 was $3.3 million, a decrease of $5.6 million or
63% compared to 1995. The decrease in interest expense is primarily attributable
to the reduction in bank borrowings as a result of the GJM Disposition and the
Ann Taylor Disposition.

   Provision for Income Taxes

     The provision for income taxes for 1996 primarily represents tax on CAT's
income before the Ann Taylor Disposition and the utilization of the net deferred
tax assets in connection with the Ann Taylor Disposition. At February 1, 1997
the Company had provided a full valuation allowance for its net deferred tax
assets as the realization of such assets is uncertain. At February 1, 1997, the
Company had net operating loss carryforwards of approximately $90 million, which
may be used to offset future taxable income.


                                      -28-



<PAGE>


   Net Income (Loss)

     The Company reported net income for 1996 of $17.9 million, which included a
$29.6 million pre-tax gain on the Ann Taylor Disposition and a $6.1 million
pre-tax gain on the sale of stock received in the Ann Taylor Disposition. If the
Ann Taylor Disposition had been consummated on February 4, 1996, the Company
would have a pro forma net loss for 1996 of $17.7 million (excluding the gain on
the Ann Taylor Disposition and on the subsequent sale of the Ann Taylor common
stock).

LIQUIDITY AND CAPITAL RESOURCES

     The Company has historically financed its operations primarily through
financing from lending institutions, financing from customers and third party
trade credit facilities, cash from operations and the issuance of debt and
equity securities.

     Since February 1, 1997, the Company has not had a domestic credit facility.
Since the expiration of its prior bank domestic credit facility, Cygne has
obtained letters of credit issued from domestic banks secured by a cash deposit
from the Company. At January 31, 1998 the Company had restricted cash at banks
of $1.1 million as collateral for letters of credit.

     In June 1997 an Israeli bank made available to one of the Company's Israeli
subsidiaries a credit facility, which may be terminated by the bank at any time
as to future borrowings, with the following limitations: borrowings against
trade accounts receivable not to exceed $3,000,000; letters of credit not to
exceed $3,000,000; overdraft facility not to exceed $500,000; borrowings against
refundable Israeli VAT taxes not to exceed $450,000; and bank guarantee for
Israeli custom duties not to exceed $500,000. Borrowings under this facility
generally bear interest at 1.5% over the prime rate, except that borrowings
against trade accounts receivable bear interest at 1.25% over the LIBOR rate.
Borrowings under this facility are subject to certain borrowing base
limitations, are due on the earlier of demand or the maturity date specified by
the bank for each borrowing, and are secured by a lien on substantially all of
the assets of the Israeli subsidiary. There can be no assurance that the bank
will continue to make this facility available. At January 31, 1998, outstanding
loans under this facility were $1,319,000 and letters of credit aggregating
$508,000 had been issued.

     The Company had mortgages relating to a foreign office building which bore
interest at LIBOR plus 2%. In January 1997, this building was sold and the
mortgages of $842,000 at February 1, 1997 were converted to short term debt
which was repaid on April 30, 1997.

     Net cash used in operating activities for 1997 was $9.0 million compared to
net cash provided by operations of $1.6 million in 1996. Cash used in operating
activities for 1997 was principally due to the loss for 1997.

     Prior to the GJM Disposition and the Ann Taylor Disposition the Company
experienced liquidity pressures primarily as a result of the negative cash flow
caused by the Company's operating losses. The Company believes that the
remaining proceeds from the Ann Taylor Disposition have alleviated on a near
term basis the liquidity pressures faced by the Company. However, the Company
continues to have losses from operations and no assurances can be given that the
Company will not experience liquidity pressures again in the future. The


                                      -29-



<PAGE>


Company is continuing to review its business operations and expects to continue
to incur additional costs in the future associated with the restructuring or
downsizing of its operations.

CONTINUING LOSSES AND LACK OF COMPARABILITY OF PRIOR OPERATING RESULTS

     The Company anticipates that it will have a net loss for 1998. The extent
of the net loss will depend, among other things, on the amount of sales to The
Limited, Inc. The acquisition of FWM in April 1994 and GJM in October 1994, the
sale of FWM's United Kingdom subsidiary and certain brand name rights in April
1995, the discontinuance of the remaining operations of FWM in 1995, the GJM
Disposition in February 1996 and the Ann Taylor Disposition in September 1996,
materially affect the comparability of the Company's financial data for the past
five years.

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.

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.

QUARTERLY OPERATING RESULTS

     The following table sets forth selected unaudited quarterly financial data
for the most recent eight quarters. The quarterly financial data reflects, in
the opinion of the Company, all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the results of operations for
such periods. Results of any one or more quarters are not necessarily indicative
of annual results or continuing trends. The acquisition of FWM in April 1994 and
GJM in October 1994, the sale of FWM's United Kingdom subsidiary and certain
brand name rights in April 1995, the discontinuance of the remaining operations
of FWM in 1995, the GJM Disposition in February 1996 and the Ann Taylor
Disposition in September 1996, materially affect the comparability of the
Company's financial data for these quarterly periods.


                                      -30-



<PAGE>


<TABLE>
<CAPTION>
                                                               1997                                      1996
                                             ----------------------------------------    ---------------------------------------
                                             Qtr. 1     Qtr. 2     Qtr. 3     Qtr. 4     Qtr. 1    Qtr. 2     Qtr 3(1)  Qtr 4(2)
                                             -------    -------    -------    -------    -------   -------    -------   -------
                                                                  ($ In thousands except per share amounts)

<S>                                          <C>        <C>        <C>        <C>        <C>       <C>        <C>       <C>    
Net sales ................................   $ 7,637    $11,003    $15,729    $ 9,010    $83,756   $75,886    $80,709   $13,962
Gross (loss) profit ......................      (659)        96      1,703       (824)    10,712     9,674      8,696    (1,225)
Operating (loss) income ..................    (4,626)    (2,808)    (4,250)    (2,659)     1,462     1,405     26,814    (4,664)
Net (loss) income ........................    (4,582)    (2,805)    (4,289)    (2,788)        31       (88)    19,971    (1,998)
Net (loss) income per share -- basic .....     (0.37)     (0.23)     (0.34)     (0.22)      0.00     (0.01)      1.61     (0.16)
Weighted average number of
  common shares outstanding ..............    12,438     12,438     12,438     12,438     12,438    12,438     12,438    12,438
Net (loss) income per share
  assuming dilution ......................     (0.37)     (0.23)     (0.34)     (0.22)      0.00     (0.01)      1.61     (0.16)
Weighted average number of
  shares and dilutive securities .........    12,438     12,438     12,438     12,438     12,438    12,438     12,442    12,438

----------

(1) Includes gain from sale of Ann Taylor Woven Division and CAT of $29,588,000. Includes reorganization expense 
    of $4,813,000.

(2) Includes gain on sale of Ann Taylor stock of $6,134,000.

</TABLE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements are included herein commencing on page F-1.


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

     None.


                                      -31-
<PAGE>


                                    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 is incorporated
herein by reference.

   Executive Officers

     See PART I -- Executive Officers of the Registrant.


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

     The section entitled "Beneficial Ownership of Common Stock" 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.


                                      -32-



<PAGE>


                                     PART IV


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

  (a) Financial Statements

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

      (3) Exhibits

          Certain exhibits presented below contain information that has been
          granted or is subject to a request for confidential treatment. Such
          information has been omitted from the exhibit. Exhibit Nos. 10.2,
          10.3, 10.4, 10.5, 10.6, 10.8, 10.9, 10.23, 10.29 and 10.31 are
          management contracts, compensatory plans or arrangements.


          Exhibit No.                        Description
          -----------                        -----------

              3.1     Restated Certificate of Incorporation, as amended by
                      Certificate of Amendment filed August 5, 1994 with the
                      Secretary of State of the State of Delaware.*(1)

              3.2     By-laws.*(2)

              4       Specimen Stock Certificate.*(2)

              10.1    Agreement, dated as of April 30, 1993, among the
                      Company, Bernard Manuel, Irving Benson, CIL, Belton
                      Limited and certain other parties.*(2)

              10.2    Amended and Restated Employment Agreement, dated as of
                      January 1, 1995, between the Company and Bernard M.
                      Manuel.*(7)

              10.3    Consulting and Severance Agreement dated as of November
                      27, 1996 between the Company and Irving Benson.*(8)

              10.4    Employment Agreement, dated as of May 1, 1993, between
                      the Company and Roy Green.*(2)

              10.5    Employment Agreement, dated as of May 1, 1993, between
                      the Company and Gary Smith.*(2)


                                      -33-



<PAGE>


          Exhibit No.                        Description
          -----------                        -----------

              10.6    Consulting Agreement, dated as of September 20, 1996,
                      between AnnTaylor Stores Corporation, AnnTaylor, Inc.,
                      Cygne Designs, Inc. and Mr. Bernard M. Manuel.*(8)

              10.7    Consulting Agreement, dated as of September 20, 1996,
                      between AnnTaylor Stores Corporation, AnnTaylor, Inc.,
                      Cygne Designs, Inc. and Mr. Irving Benson.*(8)

              10.8    Employment Agreement, dated April 4, 1994, between the
                      Company and Paul D. Baiocchi.*(3)

              10.9    Employment Agreement, dated as of April 7, 1994, among
                      the Company, Fenn, Wright and Manson, Incorporated, and
                      Trevor J. Wright.*(3)

              10.10   Purchase Agreement, dated as of October 7, 1994, by and
                      among Cygne Designs, Inc., G.J.M. Manufacturing Limited,
                      G.J.M. Purchasing Limited, G.J.M. Sales Limited, G.J.M.
                      (Sales), Inc. and G.J.M. International Limited.*(6)

              10.11   Registration Rights Agreement, dated as of April 6,
                      1994, between the Company and Fenn Wright and Manson
                      (Antilles) N.V.*(3)

              10.12   Agreement, dated as of March 24, 1995, by and among
                      Cygne Designs, Inc., Fenn Wright and Manson (Antilles)
                      N.V., Fenn, Wright and Manson Incorporated and Colin
                      Fenn.*(7)

              10.13   Financing Contract in Value with Personal Mortgage
                      Guarantees, dated January 21, 1994.*(3)

              10.14   Agreement, dated as of September 30, 1993, among
                      Jonathan Kafri, Simona Kafri, Cygne Designs F.E.
                      Limited, T. Wear Company S.r.l. and Cygne Designs,
                      Inc.*(4)

              10.15   Agreement, dated as of September 30, 1993, among
                      Lancaster Enterprises Limited, Jonathan Kafri, Simona
                      Kafri, Cygne Designs F.E. Limited, M.T.G.I. Textile
                      Manufacturers Group (Israel) Limited, Cygne TW Inc. and
                      Cygne Designs, Inc.*(4)


                                      -34-



<PAGE>


          Exhibit No.                        Description
          -----------                        -----------

              10.16   Stock and Asset Purchase Agreement, dated as of June 7,
                      1996, as amended as of August 27, 1996, by and between
                      Cygne Designs, Inc., Cygne Group (F.E.) Limited,
                      AnnTaylor Stores Corporation and AnnTaylor, Inc.*(9)

              10.17   License Agreement, dated as of July 26, 1996, by and
                      between Cygne Designs, Inc. and Kenzo S.A. pertaining to
                      the KENZO STUDIO license.*(9)

              10.18   License Agreement, dated as of July 26, 1996, by and
                      between Cygne Designs, Inc. and Kenzo S.A. pertaining to
                      the KENZO JEANS license.*(9)

              10.19   Form of Indemnification Agreement.*(2)

              10.20   Assumption Agreement, dated October 7, 1994, by and
                      between G.J.M. International Limited and Cygne Designs,
                      Inc.*(5)

              10.21   Registration Rights Agreement, dated as of October 7,
                      1994, by and between Cygne Designs, Inc. and G.J.M.
                      International Limited.*(5)

              10.22   Amendment No. 1 to the Registration Rights Agreement,
                      dated as of October 6, 1994, amending the registration
                      rights agreement, dated as of July 29, 1993 between
                      Cygne Designs, Inc. and Limited Direct Associates,
                      L.P.*(5)

              10.23   Employment Agreement, dated as of February 3, 1997,
                      between the Company and Jonathan Kafri.

              10.24   Agreement of Lease, dated August 7, 1991, between the
                      Company and Nineteen New York Properties Limited
                      Partnership, as amended by the First Amendment of Lease,
                      dated as of January 1, 1993.*(2)

              10.25   Second Amendment of Lease, dated May 31, 1993, between
                      Nineteen New York Properties Limited Partnership and the
                      Company.*(2)

              10.26   Third Amendment of Lease, dated as of December 1, 1993,
                      between Nineteen New York Properties Limited Partnership
                      and the Company.*(3)


                                     -35-



<PAGE>


          Exhibit No.                        Description
          -----------                        -----------

              10.27   Amended and Restated Credit Agreement, dated as of
                      September 20, 1996, by and between Cygne Designs, Inc.
                      and The Hongkong and Shanghai Banking Corporation
                      Limited.*(8)

              10.28   Amended and Restated Security Agreement, dated as of
                      September 20, 1996, between Cygne Designs, Inc. and The
                      Hongkong and Shanghai Banking Corporation Limited.*(8)

              10.29   1993 Stock Option Plan, as amended, through June 28,
                      1994.*(1)

              10.30   Form of Stock Option Agreement.*(2)

              10.31   Stock Option Plan for Non-Employee Directors.*(2)

              10.32   Form of Registration Rights Agreement between the
                      Company and Limited Direct Associates, L.P.*(2)

              10.33   Memorandum of Understanding, dated as of June 1, 1993,
                      among the Company, Cygne Knits Limited, T. Wear Company
                      S.r.l. and certain other parties.*(2)

              21      Subsidiaries of the Company. 

              23      Consent of Ernst & Young LLP. 

              27      Financial Data Schedule (for SEC use only).

----------

 *   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 30,
     1994.

(2)  Company's Registration Statement on Form S-1 (Registration No. 33-64358).

(3)  Company's Annual Report on Form 10-K for the fiscal year ended January 29,
     1994.

(4)  Company's Quarterly Report on Form 10-Q for the quarter ended October 30,
     1993.

(5)  Company's Quarterly Report on Form 10-Q for the quarter ended October 29,
     1994.

(6)  Company's Current Report on Form 8-K dated October 7, 1994.

(7)  Company's Annual Report on Form 10-K for the fiscal year ended January 28,
     1995.


                                      -36-



<PAGE>


(8)  Company's Quarterly Report on Form 10-Q for the quarter ended November 2,
     1996.

(9)  Company's Quarterly Report on Form 10-Q for the quarter ended August 3,
     1996.

     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 page F-1. Schedules not included herein are omitted because they
are not applicable or the required information appears in the Consolidated
Financial Statements or notes thereto.


                                      -37-



<PAGE>


                                   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. MANUEL
                                          --------------------------------------
                                          Bernard M. Manuel
                                          (Chairman and Chief Executive Officer)

Date: April 30, 1998


     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. MANUEL     Chairman of the Board of Directors,     April 30, 1998
-----------------------   Chief Executive Officer and Director
    Bernard M. Manuel     (principal executive officer)


/s/ ROY E. GREEN          Senior Vice President, Chief Financial  April 30, 1998
-----------------------   Officer, and Treasurer (principal
    Roy E. Green          financial and accounting officer)


/s/ JAMES G. GRONINGER    Director                                April 30, 1998
-----------------------  
    James G. Groninger 


/s/ STUART B. KATZ        Director                                April 30, 1998
-----------------------  
    Stuart B. Katz           


                                      -38-


<PAGE>

<TABLE>

<CAPTION>

                      Cygne Designs, Inc. and Subsidiaries

                        Consolidated Financial Statements


                   Index to Consolidated Financial Statements


<S>                                                                                              <C>
Consolidated Financial Statements

Report of Independent Auditors ...................................................................F-2

Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997 ..........................F-3
Consolidated Statements of Operations for Each of the Three
 Years in the Period Ended January 31, 1998 ......................................................F-4
Consolidated Statements of Stockholders' Equity
  for Each of the Three Years in the Period Ended January 31, 1998 ...............................F-5
Consolidated  Statements of Cash Flows for Each of the Three Years in the Period
  Ended January 31, 1998 .........................................................................F-6
Notes to Consolidated Financial Statements .......................................................F-8


Schedule

Schedule II - Valuation and Qualifying Accounts .................................................F-26
</TABLE>


                                      F-1
<PAGE>




                         Report of Independent Auditors



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, 1998 and February 1, 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended January 31, 1998. Our
audit also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cygne
Designs, Inc. and Subsidiaries at January 31, 1998 and February 1, 1997 and the
consolidated results of their operations, changes in their stockholders' equity
and their cash flows for each of the three years in the period ended January 31,
1998, in conformity with generally accepted accounting principles. 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.



                                                 ERNST & YOUNG LLP
New York, New York
April 6, 1998


                                      F-2
<PAGE>

<TABLE>

<CAPTION>




                                       Cygne Designs, Inc. and Subsidiaries

                                            Consolidated Balance Sheets


                                                                                                  January     February
                                                                                                  31, 1998     1, 1997
                                                                                                  --------    --------
                                                                                           ($ In thousands, except share and
                                                                                                   per share amounts)
<S>                                                                                              <C>          <C>
Assets 
Current assets:
    Cash (includes restricted cash of $1,098 and $2,526
       at January 31, 1998 and February 1, 1997, respectively) ...............................   $  10,926    $  22,246
    Trade accounts receivable, net ...........................................................       6,012        7,239
    Inventory ................................................................................       4,012        5,109
    Other receivables and prepaid expenses ...................................................       1,979        3,795
                                                                                                 ---------    ---------
Total current assets .........................................................................      22,929       38,389

Fixed assets, net ............................................................................       3,972        6,041
Other assets .................................................................................         787          286
Goodwill, net ................................................................................       2,062        2,426
                                                                                                 ---------    ---------
Total assets .................................................................................   $  29,750    $  47,142
                                                                                                 =========    =========

Liabilities and stockholders' equity 
 Current liabilities:
  Short-term borrowings ......................................................................   $   1,319    $   1,382
  Accounts payable ...........................................................................       3,348        4,382
  Accrued expenses ...........................................................................       6,636        6,816
  Income taxes payable .......................................................................       6,068        5,984
  Current portion of long-term debt ..........................................................        --            842
                                                                                                 ---------    ---------
Total current liabilities ....................................................................      17,371       19,406

Deferred rent credits ........................................................................        --            777
                                                                                                 ---------    ---------
Total liabilities ............................................................................      17,371       20,183

Stockholders' equity:
  Preferred Stock, $0.01 par value; 4,000,000
    shares authorized:  none issued and outstanding ..........................................        --           --
  Common Stock, $0.01 par value; 75,000,000 shares
    authorized:  12,438,038 shares issued and
    outstanding ..............................................................................         124          124
  Paid-in capital ............................................................................     120,918      120,918
  Accumulated deficit ........................................................................    (108,547)     (94,083)
  Foreign currency translation adjustment ....................................................        (116)        --
                                                                                                 ---------    ---------
Total stockholders' equity ...................................................................      12,379       26,959
                                                                                                 ---------    ---------
Total liabilities and stockholders' equity ...................................................   $  29,750    $  47,142
                                                                                                 =========    =========
</TABLE>


See accompanying notes.


                                      F-3
<PAGE>

<TABLE>

<CAPTION>

                      Cygne Designs, Inc. and Subsidiaries

                      Consolidated Statements of Operations


                                                             Year ended
                                                 ----------------------------------
                                                  January     February     February
                                                 31, 1998     1, 1997       3, 1996
                                                 --------     --------     --------
                                              ($ In thousands, except per share amounts)
<S>                                             <C>          <C>         <C>
Net sales ...................................   $  43,379    $ 254,313   $ 540,063
Cost of goods sold ..........................      43,063      226,456     510,761
                                                ---------    ---------   ---------
Gross profit ................................         316       27,857      29,302
Selling, general and administrative
   expenses .................................      10,331       27,251      72,182
Provision for lease termination expenses ....       3,964         --          --
Gain from sale of Ann Taylor Woven
   Division and CAT .........................        --        (29,588)       --
Gain from sale of subsidiary, net ...........        --           --        (4,742)
Loss from sale of GJM business, net .........        --           --        31,239
Reorganization expense ......................        --          4,813        --
Write-off of goodwill .......................        --           --        48,949
Amortization of intangibles .................         364          364       3,425
                                                ---------    ---------   ---------
(Loss) income from operations ...............     (14,343)      25,017    (121,751)
Other income, principally from the gain on
   sale of Ann Taylor common stock ..........        --         (6,864)       --
Settlement of shareholder class
   action and related legal expenses ........        --          2,627        --
Interest (income) expense, net ..............         (83)       3,260       8,813
                                                ---------    ---------   ---------
(Loss) income before income taxes and
   minority interests .......................     (14,260)      25,994    (130,564)
Provision (benefit) for income taxes ........         204        7,117      (6,216)
                                                ---------    ---------   ---------
(Loss) income before minority interests .....     (14,464)      18,877    (124,348)
Income attributable to minority interests ...        --            961       1,710
                                                ---------    ---------   ---------
Net (loss) income ...........................   $ (14,464)   $  17,916   $(126,058)
                                                =========    =========   =========
Net (loss) income per share - basic .........   $   (1.16)   $    1.44   $  (10.04)
                                                =========    =========   =========
Weighted average number of common shares
   outstanding ..............................      12,438       12,438      12,550
                                                =========    =========   =========
Net (loss) income per share assuming dilution   $   (1.16)   $    1.44   $  (10.04)
                                                =========    =========   =========
Weighted average number of common shares
   and dilutive securities ..................      12,438       12,439      12,550
                                                =========    =========   =========
</TABLE>

See accompanying notes.


                                      F-4
<PAGE>

<TABLE>

<CAPTION>




                      Cygne Designs, Inc. and Subsidiaries
                Consolidated Statements of Stockholders' Equity
                

                                                    Common Stock                      Foreign       Retained
                                                ------------------                   Currency       Earnings
                                                Number of                Paid-In    Translation   (Accumulated
                                                 Shares     Amount       Capital     Adjustment      Deficit)      Total
                                                --------    ------       -------    -----------      -------       -----
<S>                                              <C>       <C>          <C>          <C>            <C>          <C>      
Balance at January 28, 1995 ...............      12,980    $     130    $ 127,716    $    (213)     $  14,059    $ 141,692
   Receipt and retirement of Common Stock
    from sale of subsidiary ...............        (600)          (6)      (7,494)        --             --         (7,500)
   Issuance of Common Stock for purchases
    of companies ..........................          53         --            675         --             --            675
   Issuance of Common Stock upon exercise
    of stock options ......................           5         --             21         --             --             21
   Foreign currency translation adjustment         --           --           --            216           --            216
   Net loss for year ended February 3, 1996        --           --           --           --         (126,058)    (126,058)
                                                 ------    ---------    ---------    ---------      ---------    ---------
Balance at February 3, 1996 ...............      12,438          124      120,918            3       (111,999)       9,046
   Foreign currency translation adjustment         --           --           --             (3)          --             (3)
   Net income for year ended
    February 1, 1997 ......................        --           --           --           --           17,916       17,916
                                                 ------    ---------    ---------    ---------      ---------    ---------
Balance at February 1, 1997 ...............      12,438          124      120,918         --          (94,083)      26,959
   Foreign currency translation adjustment         --           --           --           (116)          --           (116)
   Net loss for year ended January 31, 1998        --           --           --           --          (14,464)     (14,464)
                                                 ------    ---------    ---------    ---------      ---------    ---------
Balance at January 31, 1998 ...............      12,438    $     124    $ 120,918    $    (116)     $(108,547)   $  12,379
                                                 ======    =========    =========    =========      =========    =========


</TABLE>


See accompanying notes

                                       F-5

                                      
<PAGE>

<TABLE>

<CAPTION>


                                       Cygne Designs, Inc. and Subsidiaries
                                       Consolidated Statements of Cash Flows

                                                                                                   Year Ended
                                                                                       -----------------------------------
                                                                                       January       February     February
                                                                                       31, 1998      1, 1997      3, 1996
                                                                                       --------     ----------    --------
                                                                                               ($ in thousands)
<S>                                                                                    <C>          <C>          <C>
Operating activities
Net (loss) income ..................................................................   $ (14,464)   $  17,916    $(126,058)
Adjustments to reconcile net (loss) income to net cash
  (used in) provided by operating activities:
     Net gain from sale of Ann Taylor Woven
        Division and CAT ...........................................................        --        (29,588)        --
     Net gain from sale of subsidiary ..............................................        --           --         (4,742)
     Net loss from sale of GJM business ............................................        --           --         31,239
     Gain from sale of Ann Taylor Common Stock .....................................        --         (6,134)        --
     Write-off of goodwill .........................................................        --           --         48,949
     Depreciation and amortization .................................................       1,330        2,079        7,922
     Write-off of fixed assets .....................................................       1,857        1,359         --
     Provision for lease termination expense .......................................       2,107         --           --
     Rent expense not currently payable ............................................          57          190          751
     Bad debt expense ..............................................................        --           --          2,147
     Deferred income taxes .........................................................        --          6,154       (2,583)
     Income attributable to minority interests .....................................        --            961        1,710
     Changes in operating assets and liabilities:
       Trade accounts receivable ...................................................       1,227        6,605       14,883
       Inventory ...................................................................       1,097       17,462        9,589
       Other receivables and prepaid expenses ......................................       1,816        4,194        9,580
       Accounts payable ............................................................      (1,034)     (16,301)       2,474
       Accrued expenses ............................................................      (3,121)      (5,486)       4,579
       Income taxes payable ........................................................          84        2,145       (1,508)
                                                                                       ---------    ---------    ---------
Net cash (used in) provided by operating activities ................................      (9,044)       1,556       (1,068)

Investing activities
Purchase of fixed assets ...........................................................        (754)      (1,186)      (7,915)
Sale of fixed assets ...............................................................        --          2,089         --
Other assets .......................................................................        (501)         164           28
Cash proceeds from sale of Ann Taylor
   Woven Division and CAT ..........................................................        --          3,162         --
Proceeds from sale of Ann Taylor Common Stock ......................................        --         44,291         --
Sale of subsidiary, net ............................................................        --         12,500         (464)
Purchase of businesses, net of cash acquired .......................................        --           --         (3,830)
                                                                                       ---------    ---------    ---------
Net cash (used in) provided by investing activities ................................      (1,255)      61,020      (12,181)

Financing activities
Short-term borrowings, net .........................................................         (63)     (34,455)      (1,436)
Credit facility outstanding, net ...................................................        --         (8,945)       5,383
(Decrease) increase in long-term debt, net .........................................        (842)      (2,117)         315
Net proceeds from issuance of common stock .........................................        --           --             24
Investment by shareholder in subsidiary ............................................        --           --             32
                                                                                       ---------    ---------    ---------
Net cash (used in) provided by financing activities ................................        (905)     (45,517)       4,318

Effect of exchange rate changes on cash ............................................        (116)        (300)         216
                                                                                       ---------    ---------    ---------
Net (decrease) increase in cash ....................................................     (11,320)      16,759       (8,715)
Cash at beginning of period ........................................................      22,246        5,487       14,202
                                                                                       ---------    ---------    ---------
Cash at end of period ..............................................................   $  10,926    $  22,246    $   5,487
                                                                                       =========    =========    =========
</TABLE>

                                      F-6
<PAGE>

<TABLE>

<CAPTION>

                                       Cygne Designs, Inc. and Subsidiaries

                                 Consolidated Statements of Cash Flows (continued)


                                                                                           Year ended
                                                                               ------------------------------------
                                                                               January       February      February
                                                                               31, 1998       1, 1997      3, 1996
                                                                               --------      --------      --------
                                                                                        ($ in thousands)
<S>                                                                              <C>          <C>          <C>
Supplemental disclosures
Income taxes paid ............................................................   $  120       $  307       $2,335
Interest paid ................................................................     --          3,678        4,220
Exchange of Company common stock for acquisitions ............................     --           --            675
Receipt of Company common stock from sale of subsidiary ......................     --           --          7,500
</TABLE>


See accompanying notes.


                                      F-7
<PAGE>

                      Cygne Designs, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                                January 31, 1998




1.   SIGNIFICANT ACCOUNTING POLICIES

PRINCIPAL BUSINESS ACTIVITY

Cygne Designs, Inc. ("Cygne") and its subsidiaries (collectively, the "Company")
are engaged in private label merchandising and manufacturing of woven and knit
career and casual clothing for women.

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.

ORGANIZATION AND PRINCIPLES OF COMBINATION AND CONSOLIDATION

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

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the 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.

INVENTORY

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


                                      F-8
<PAGE>






                      Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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. The Company
establishes reserves for sales returns and allowances. Such reserves amounted to
$109,381 and $1,542,000 at January 31, 1998 and February 1, 1997, respectively.

FOREIGN CURRENCY TRANSLATION

The functional currency for the Company's foreign operations is the applicable
foreign currency of the country in which it operates except for Hong Kong and
Israel for which the functional currency 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. The gains and losses from the changes in exchange rates from
year to year have been reported separately as a component of stockholders'
equity.

FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of short-term debt and long-term variable rate debt
approximates fair value.

NET INCOME (LOSS) PER SHARE

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share". SFAS No. 128 replaced the calculation of primary and fully
diluted income per share with basic and diluted income per share. Unlike primary
income per share, basic income per share excludes any dilutive effects of
options, warrants and convertible securities. All income (loss) per share
amounts for all periods have been presented and, where appropriate, restated to
conform to SFAS No. 128 requirements. In computing dilutive loss per share for
the years ended January 31, 1998 and February 3, 1996, no effect has been given
to outstanding options since the exercise of any of these items would have an
antidilutive effect on net loss per share. For the year ended February 1, 1997,
the dilutive effect of options outstanding using the treasury stock method
increased the

                                      F-9
<PAGE>
                     Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

number of shares used in the calculation of income per share assuming dilution
by 1,000 shares.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. This new standard requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 requires that a
company (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. This new standard will be
effective in the Company's 1998 fiscal year. The Company has not determined the
effects, if any, that SFAS No. 130 will have on its consolidated financial
statements.

In June 1997 the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 established standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
established standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997 and, therefore,
the Company will adopt the new requirements retroactively in 1998. Management
has not completed its review of SFAS 131, but the adoption of this Statement may
increase the number of reported segments.

GOODWILL

Goodwill includes the excess of cost over fair value of net assets acquired. The
remaining goodwill is being amortized on a straight-line basis over 10 years.
Accumulated amortization at January 31, 1998 was approximately $1,584,000 and at
February 1,1997 was approximately $1,220,000.

The Company assesses the recoverability of its intangible assets by determining
whether amortization over the remaining lives can be recovered through
undiscounted future operating cash flows of the acquired operation and other
considerations. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds.


                                      F-10
<PAGE>
                     Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



2.   PURCHASES AND DISPOSITIONS OF COMPANIES

In April 1994, the Company acquired Fenn, Wright and Manson, Incorporated
("FWM"), a designer, merchandiser and manufacturer principally of private label
women's and men's apparel primarily serving prominent specialty retail store
chains and department stores in the U.S. and the United Kingdom (the "FWM
Acquisition"). The purchase price for FWM was $44,000,000, consisting of
2,000,000 unregistered shares of the Company's common stock and $10,000 in cash.
Additional costs related to this acquisition approximated $1,400,000. The excess
of the purchase price over the fair value of the net assets acquired of
approximately $47,848,000 was recorded as goodwill, and was being amortized over
a 25 year period.

On April 7, 1995, the Company sold the United Kingdom subsidiary of FWM and
certain brand name rights to Fenn Wright and Manson (Antilles) N.V. (a group led
by Colin Fenn) in exchange for 600,000 shares of Cygne common stock previously
issued. In connection with this transaction, Mr. Fenn resigned his positions as
Director and Vice Chairman of the Company, and as President of FWM. In the
quarter ended April 29, 1995, Cygne recorded a gain of $4,742,000 on the sale,
which is net of certain restructuring expenses of $2,800,000 (consisting
primarily of severance to former FWM employees and costs associated with closing
certain of FWM's facilities) pertaining to the related integration of FWM's
operations with the Company's.

During fiscal 1995, management also took various actions to reverse a decline in
FWM's remaining business. However, management determined that such actions were
not having the desired results and eliminated all of the operations of FWM. The
unamortized goodwill recorded in connection with the acquisition of FWM
($44,530,000) exceeded the undiscounted anticipated future operating cash flows
over the remaining goodwill amortization period. Therefore, the FWM goodwill was
written off.

In October 1994, Cygne acquired the business operations of G.J.M. International
Limited ("GJM"), a Hong Kong-based designer, merchandiser and manufacturer of
women's intimate apparel, from G.J.M. International Limited, a company
wholly-owned by Mr. W. Glynn Manson (the "GJM Acquisition"). The purchase price
for GJM was $15,200,000, consisting of 650,000 unregistered shares of the
Company's common stock, $10,000 in cash and the assumption of approximately
$1,900,000 of indebtedness owed by GJM International Limited to The Limited,
Inc. Additional costs related to this acquisition approximated $1,700,000. The
excess of the purchase price over the fair value of the net assets acquired of
approximately $27,659,000 was recorded as goodwill and was being amortized over
a 25 year period.

                                      F-11
<PAGE>


                      Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




2.   PURCHASES AND DISPOSITIONS OF COMPANIES (CONTINUED)

In connection with the GJM Acquisition the Company also paid $3,200,000 to two
key executives of GJM for non-compete agreements of fifteen years and four
years, respectively, and issued options vesting over four years to certain key
personnel of GJM to purchase an aggregate of 165,000 shares of the Company's
common stock at a purchase price of $20.50 per share, which option purchase
price as to 125,000 of such shares was subsequently reduced to $2.00 per share
along with other employees of this class.

In February 1996, the Company sold substantially all of the assets of its GJM
intimate apparel and sleepwear business (the "GJM Business") to Warnaco Inc.
(the "GJM Disposition"). In the transaction, Warnaco paid Cygne $12,500,000 in
cash and assumed certain liabilities of the GJM Business. The Company is
obligated to indemnify Warnaco for any claims for taxes arising out of the
operation of the GJM Business prior to the sale of the GJM Business to Warnaco.
GJM accounted for approximately 19.4% of the Company's net sales for the year
ended February 3, 1996.

In February 1995, Cygne acquired Tralee S.A. ("TSA"), a Uruguayan corporation
that sourced products in Brazil for export, primarily to the U.S. The purchase
price for TSA was approximately $3,800,000, consisting of 53,038 unregistered
shares of the Company's common stock and $3,100,000 in cash (the "TSA
Acquisition"). Additional costs related to this acquisition approximated
$730,000. The excess of the purchase price over the fair value of the net assets
acquired of approximately $4,500,000 was recorded as goodwill and was being
amortized over a twenty-five year period. Cygne also issued options to purchase
an aggregate of 55,000 shares of the Company's common stock to the two former
shareholders of TSA in connection with their entering into consulting agreements
with TSA. In January 1996, the Company determined to close TSA. As a result, the
Company recorded a loss of approximately $6,400,000 in fiscal 1995, primarily
resulting from the write-off of goodwill associated with the acquisition. The
Company terminated these operations during the third quarter of 1996.

The FWM Acquisition, the GJM Acquisition and the TSA Acquisition were accounted
for under the purchase method and, accordingly, the operating results of FWM,
GJM and TSA were included in the consolidated operating results since their
respective dates of acquisition.

CAT US, Inc. and C.A.T. (Far East) Limited, collectively "CAT," began operations
in June 1992. Effective April 30, 1993, CAT became a 60% owned subsidiary of
Cygne with AnnTaylor, Inc. owning the remaining 40% interest.


                                      F-12
<PAGE>

                      Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




2.   PURCHASES AND DISPOSITIONS OF COMPANIES (CONTINUED)

The Company completed the Ann Taylor Disposition on September 20, 1996. In the
transaction the Company sold to Ann Taylor Cygne's 60% interest in CAT, Cygne's
former sourcing joint venture arrangement with Ann Taylor, and the assets of
Cygne's Ann Taylor Woven Division that were used in sourcing merchandise for Ann
Taylor. On the closing of the transaction, Cygne received 2,348,145 shares of
Ann Taylor common stock, having a value of $36,000,000 (based on the average
closing price of the Ann Taylor common stock during the ten trading days prior
to closing), and approximately $8,900,000 (after post-closing adjustments) in
cash in respect of inventory (less related payables and advances and certain
other assumed liabilities), net fixed assets and accounts receivable of the Ann
Taylor Woven Division. Ann Taylor also assumed certain liabilities of the
acquired sourcing operations. As a result of the transaction, the Company
realized a pre-tax gain of $29,600,000. Between October 1996 and January 1997,
the Company sold all of the 2,348,145 shares of Ann Taylor common stock received
upon the closing of the transaction at various prices resulting in aggregate net
proceeds of approximately $44,300,000. The Company realized a pre-tax gain of
$6,100,000 in connection with the sale of the Ann Taylor common stock.

In connection with the closing of the Ann Taylor Disposition, the Company
entered into two 3-year consulting agreements with Ann Taylor for the services
of Mr. Bernard Manuel, the Company's Chairman of the Board and Chief Executive
Officer, and Mr. Irving Benson, the Company's then President and a director, to
facilitate the integration of CAT and the Division into Ann Taylor's operations.
These agreements, which required an annual fee of $225,000 for the services of
each of Messrs. Benson and Manuel, provided for automatic assignment to the
consultant if his employment with the Company were terminated for any reason.
Mr. Benson's consulting agreement was assigned to him in connection with his
resignation as an officer and employee of the Company on November 29, 1996. Mr.
Benson, who founded the Company's predecessor in 1975 and continued to serve on
the Board of Directors of the Company, entered into a consulting agreement with
the Company in November 1996 pursuant to which he provided services to Cygne
with respect to design, development and merchandising matters and special
projects. The consulting agreement between Mr. Benson and the Company was
terminated in September 1997 and Mr. Benson resigned as a director of the
Company on September 4, 1997. During 1997 the consulting agreement with Ann
Taylor for the services of Mr. Manuel was bought out in consideration of the
payment by Ann Taylor to the Company of approximately $477,000.

CAT and the Ann Taylor Woven Division accounted for approximately 67% and 43% of
the Company's net sales for the years ended February 1, 1997 and February 3,
1996, respectively. If the sale of CAT and the Ann Taylor Woven Division had
been consummated on February 4, 1996,


                                      F-13
<PAGE>

                     Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



2.   PURCHASES AND DISPOSITIONS OF COMPANIES (CONTINUED)

the Company would have had pro forma net sales of $84,756,000 for the year ended
February 1, 1997. Pro forma gross profit for that year would have been
$6,189,000. Pro forma loss from operations for that year would have been
$15,503,000. Pro forma net loss for that year (excluding the gain on the Ann
Taylor Disposition and on the subsequent sale of the Ann Taylor common stock)
would have been $17,660,000. The pro forma net loss per share for that year
would have been $1.42.

3.   REORGANIZATION EXPENSE

The reorganization expense in fiscal 1996 of $4,813,000 was the result of the
downsizing of the Company and the redeployment of assets necessary to meet
changes in continuing customer needs. The major components of this expense were
costs in connection with early termination of leases for excess space outside of
New York, disposition of related fixed assets, and severance costs related to
the Company's then President's resignation as an officer and employee of the
Company. All of such costs were paid prior to January 31, 1998.

4.   PROVISION FOR LEASE TERMINATION EXPENSES

In fiscal 1997, the Company provided for lease termination expenses of
$3,964,000 as a result of the Company's decision to relocate from its existing
New York Office and to seek substantially smaller New York office space. At
January 31, 1998, $2,719,000 of this provision has not been paid.

5.   INVENTORY

Inventory consists of the following:
                                                          January    February
                                                         31, 1998    1, 1997
                                                         --------    --------
                                                           ($ In thousands)

Raw materials and Work-in-Process .....................   $3,593     $4,094
Finished goods ........................................      419      1,015
                                                          ------     ------
                                                          $4,012     $5,109
                                                          ======     ======

                                      F-14
<PAGE>

                     Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



6.   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   February    Estimated
                                             31, 1998   1, 1997    Useful Lives
                                             --------   -------    ------------

                                                     ($ In thousands)

Land and building ......................     $  902     $  900     20-30 years
Equipment, furniture, and fixtures .....      3,042      4,938     3-10 years
Leasehold improvements .................      1,088      2,329     Term of lease
Vehicles ...............................        194        230     3-5 years
                                             ------     ------  
                                              5,226      8,397
Less accumulated depreciation
and amortization .......................      1,254      2,356
                                             ------     ------  
                                             $3,972     $6,041
                                             ======     ======


7.   CREDIT FACILITIES

Since January 31, 1997 the Company has obtained letters of credit from domestic
banks secured by a cash deposit from the Company. At January 31, 1998 and
February 1, 1997 the Company had restricted cash at a bank of $1,098,000 and
$2,526,000,respectively, to secure letters of credit.

In June 1997 an Israeli bank made available to one of the Company's Israeli
subsidiaries a credit facility, which may be terminated by the bank at any time
as to future borrowings, with the following limitations: borrowings against
trade accounts receivable not to exceed $3,000,000; letters of credit not to
exceed $3,000,000; overdraft facility not to exceed $500,000; borrowings against
refundable Israeli VAT taxes not to exceed $450,000; and bank guarantee for
Israeli custom duties not to exceed $500,000. Borrowings under this facility
generally bear interest at 1.5% over the prime rate, except that borrowings
against trade accounts receivable bear interest at 1.25% over the LIBOR rate.
Borrowings under this facility are subject to certain base limitations, are due
on the earlier of demand or the maturity date specified by the bank for each
borrowing and are secured by a lien on substantially all of the assets of the
Israeli subsidiary. There can be no assurance that the bank will continue to
make this facility available. At January 31, 1998, outstanding loans under this
facility were $1,319,000 and letters of credit aggregating $508,000 had been
issued.

During years 1996 and 1995 the Company had Credit Agreements with The Hongkong
and Shanghai Banking Corporation Limited New York Branch ("HS Bank"). The HS
Bank facilities were cross

                                      F-15
<PAGE>
                     Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



7.   CREDIT FACILITIES (CONTINUED)

guaranteed by Cygne and certain of its subsidiaries and were secured by a first
lien on substantially all assets of the Company.

The Company had mortgages relating to a foreign office building which bore
interest at LIBOR plus 2%. In January 1997, this building was sold and the
mortgages of $842,000 at February 1, 1997 were converted to short-term debt
which was repaid on April 30, 1997.

During fiscal 1996 the Company repaid the entire outstanding balance of
$8,900,000 under its former trade credit facility which has been terminated.

8.   STOCK OPTIONS

Pursuant to an employee Stock Option Plan, as amended, the Company may grant to
eligible individuals incentive stock options as defined in the Internal Revenue
Code ("IRC") and non-qualified stock options. 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.

Pursuant to a Stock Option Plan for Non-Employee Directors adopted on April 15,
1993, the Company will 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.

In addition, the consummation of the Ann Taylor Disposition constituted a
"change in control of the Company" for purposes of the Company's stock option
plans. As a result, all then outstanding stock options became immediately
exercisable.

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options

                                      F-16
<PAGE>
                     Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



8.   STOCK OPTIONS (CONTINUED)

equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

Had compensation cost been determined based upon the fair value at the grant
date for awards consistent with the methodology prescribed by SFAS No. 123, for
the year ended January 31, 1998 the Company's net loss and net loss per share
would have increased by $1,000 or $0.00 per share. For the year ended February
1, 1997 the Company's net income would have decreased by $322,000 or $0.03 per
share. For the year ended February 3, 1996, net loss and net loss per share
would have increased by $309,000 or $0.03 per share.

The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for 1997, 1996
and 1995: risk-free interest rate of 6%; volatility factor of the expected
market price of the Company's common stock of 0.76 for January 31, 1998 and 0.82
for February 1, 1997 and February 3, 1996; expected life of 6 years; and a
dividend yield of zero.

As any options  granted in the future will also be subject to the fair value pro
forma calculations, the pro forma adjustments for fiscal years 1997, 1996 and
1995 may not be indicative of future years.

The weighted average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 1997, 1996 and 1995 is $0.34, $0.77 and
$1.50, respectively.

Exercise prices for options issued between January 29, 1995 through January 31,
1998 ranged from $0.28 to $10. The weighted-average remaining contractual life
of those options is 4.1 years.


                                      F-17
<PAGE>

<TABLE>

<CAPTION>

                      Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



8.    STOCK OPTIONS (CONTINUED)

The following summarizes stock option transactions:


                                                      Employee Stock                                     Non-Employee         
                                                       Option Plan                                      Directors Plan        
                                               -----------------------------                      --------------------------
                                                                                      Weighted                                
                                                                                       Average                                
                                                 Number           Exercise            Exercise      Number         Exercise   
                                               of Shares         Price Range            Price     of Shares       Price Range 
                                               ---------         -----------            -----     ---------       ----------- 
<S>                                           <C>                <C>                   <C>         <C>            <C>
Options outstanding at January 28, 1995 ....    937,750          $2.00-$22.75                       48,000        $4.00-$23.50
Options granted in fiscal 1995 .............    589,500          $2.00-$10.00           $3.06        6,000        $3.25-$10.00
Options canceled in fiscal 1995 ............   (329,500)         $2/00-$22.75          $10.69      (20,500)       $4.00-$23.50
Options exercised in fiscal 1995 ...........     (5,250)         $4.00                  $4.00           --                    
                                              ---------                                            -------                    
Options outstanding at February 3, 1996 ....  1,192,500          $2.00-$22.75                       33,500        $3.25-$23.50
Options granted in fiscal 1996 .............     40,000          $1.00                  $1.00        4,000        $1.13-$1.75 
Options canceled in fiscal 1996 ............   (512,000)         $2.00-$18.00           $5.50       (5,500)       $4.00-$22.50
                                              ---------                                            -------                    
Options outstanding at February 1, 1997 ....    720,500          $1.00-$22.75                       32,000        $1.13-$23.50
Options granted in fiscal 1997 .............         --                                              4,000        $0.28-$0.69 
Options canceled in fiscal 1997 ............   (215,250)         $2.00-$22.75           $4.07           --                    
                                              ---------                                            -------                    
Options outstanding at January 31, 1998 ....    505,250          $1.00-$13.38                       36,000        $0.28-$23.50
                                              =========                                            =======                    
At January 31, 1998 options exercisable ....    505,250                                             30,500                    
                                              =========                                            =======                    

<CAPTION>

                                                                    Other Stock Option
                                                                       Arrangements
                                                             ------------------------------
                                                Weighted                                          Weighted
                                                Average                                            Average         Total
                                                Exercise       Number            Exercise         Exercise         Number
                                                 Price       of Shares          Price Range         Price         of Shares
                                                ------       ---------          -----------        -------        ---------
Options outstanding at January 28, 1995 ....                  165,000           $2.00-$22.50                     1,150,750
Options granted in fiscal 1995 .............     $7.75         67,500           $2.00               $2.00          663,000
Options canceled in fiscal 1995 ............    $17.81         (2,250)          $2.00-$22.50        $2.50         (352,250)
Options exercised in fiscal 1995 ...........                       --                     --                        (5,250)
                                                            ---------           ------------                     ---------
Options outstanding at February 3, 1996 ....                  230,250           $2.00-$22.50                     1,456,250
Options granted in fiscal 1996 .............     $1.44             --                                               44,000
Options canceled in fiscal 1996 ............     $7.64       (105,250)          $2.00               $2.00         (622,750)
                                                            ---------                                            ---------
Options outstanding at February 1, 1997 ....                  125,000           $2.00-$22.50                       877,500
Options granted in fiscal 1997 .............     $0.49             --                                                4,000
Options canceled in fiscal 1997 ............                       --                                             (215,250)
                                                            ---------                                            ---------
Options outstanding at January 31, 1998 ....                  125,000           $2.00-$22.50                       666,250
                                                            =========                                            =========
At January 31, 1998 options exercisable ....                  125,000                                              660,750
                                                            =========                                            =========
</TABLE>


                                      F-18
<PAGE>



                      Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




9.   CONCENTRATIONS OF RISK

For the year ended January 31, 1998, The Limited, Inc. accounted for 65% of the
Company's net sales and 65% of trade receivables at January 31, 1998. The
Company expects sales to this customer to decrease in fiscal 1998.

For the year ended February 1, 1997, two customers (Ann Taylor and The Limited
Inc.) accounted for 67% and 25% of the Company's net sales, respectively. The
Limited Inc. accounted for approximately 84% of trade accounts receivable at
February 1, 1997. Since the consummation of the Ann Taylor Disposition, the
Company has not had and does not anticipate that it will have sales to Ann
Taylor.

For the year ended February 3, 1996, two customers (AnnTaylor and The Limited,
Inc.) accounted for 43% and 34% of the Company's net sales.

10.  LEASES, COMMITMENTS AND LITIGATION

LEASES

The Company leases manufacturing and office facilities under operating lease
agreements which expire through 2010. Future minimum lease payments under
noncancellable operating leases are as follows: 

                                                      ($ In thousands)
              Year ended:
                1998 ...................................  $   956 
                1999 ...................................      880 
                2000 ...................................      844 
                2001 ...................................      844 
                2002 ...................................      982 
                Thereafter .............................    7,449
                                                          -------  
                Total future minimum lease payments ....  $11,955
                                                          =======

Certain of the leases contain provisions for additional rent based upon
increases in the operating costs of the premises, as defined.

Total rent expense under the operating leases for the years ended January 31,
1998, February 1, 1997 and February 3, 1996 amounted to approximately
$1,036,000, $2,220,000 and $2,752,000, respectively.


                                      F-19
<PAGE>



                      Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


10.  LEASES, COMMITMENTS AND LITIGATION (CONTINUED)

For leases which contain free-rent periods and predetermined fixed escalations
of the minimum rentals, the Company recognizes the related rental expense on a
straight-line basis and includes the difference between the expense charged to
income and amounts payable under the leases on the balance sheets in deferred
rent credits.

The Company also has a contingent liability on leases assumed by Ann Taylor.
Future minimum lease payments on these leases are as follows:

                                                              ($ In thousands)
   Year ended:
     1998 ......................................................  $ 1,171
     1999 ......................................................    1,176
     2000 ......................................................    1,221
     2001 ......................................................    1,267
     2002 ......................................................    1,267
     Thereafter ................................................   10,119
                                                                  -------
    Total future minimum lease payments ........................  $16,221
                                                                  =======

COMMITMENTS

The Company has employment agreements with certain officers and key employees
through 1999. Future minimum aggregate annual payments under these agreements
amount to approximately $1,466,000 in 1998 and $367,000 in 1999. As a result of
the Ann Taylor Disposition, which constituted a "change in control" under
certain of these agreements, certain officers are entitled to additional
severance benefits if the Company fails to renew the employment agreement of
such executive. In addition, certain of the officers and employees may receive
additional compensation based upon the income, as defined, of the Company or one
or more of its subsidiaries.

LITIGATION

On December 11, 1995, a shareholder class action complaint was filed against the
Company, certain of the Company's officers and directors, Ernst & Young LLP, the
underwriters of the Company's June 1994 secondary public offering of stock and
certain financial analysts who followed the Company, in the United States
District Court, Southern District of New York. The action was purportedly filed
on behalf of a class of purchasers of that Company's stock during the period
September 18, 1993 through April 28, 1995. The complaint sought unspecified
money damages and alleged that the Company and the other defendants violated
federal securities laws in connection with various public statements made by the
Company and certain of

                                      F-20
<PAGE>

                     Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



10.  LEASES, COMMITMENTS AND LITIGATION (CONTINUED)

its officers and directors during the putative class period.

In January 1997, the Company and all defendants other than Ernst & Young LLP
tentatively settled the class action subject to judicial approval. On July 30,
1997 the Court approved the settlement, which provided for an aggregate
settlement amount of $5,750,000. The Company contributed approximately
$2,100,000 to the settlement, which amount was placed in an escrow account in
January 1997. The balance of the settlement fund came from insurance and from
other parties to the litigation. The Company also incurred legal fees of
approximately $500,000 in connection with this lawsuit. In May 1997, the Court
granted Ernst & Young LLP's motion to dismiss the amended complaint, and denied
the plaintiff's request for leave to file an amended complaint against Ernst &
Young LLP.

The Company is involved in various other 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 or results of operations. See Note 11 for information
regarding tax audits.

11.  INCOME TAXES

Income taxes are provided using the liability method. Under this method,
deferred income taxes reflect tax carryforwards 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    February
                                                     31, 1998    1, 1997
                                                     --------    -------
                                                       ($ In thousands)
Deferred tax assets:
     Capitalization of expenses ..................   $     51    $    102
     Inventory reserve ...........................       --           115
     Other reserves ..............................        924       2,105
     Net operating loss carryforwards ............     33,800      32,900
                                                     --------    --------
Subtotal .........................................     34,775      35,222
     Valuation allowance .........................    (34,775)    (35,222)
                                                     --------    --------
Total deferred tax assets ........................   $   --      $   --
                                                     ========    ========

                                      F-21
<PAGE>

                     Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)



11.  INCOME TAXES (CONTINUED)

For  financial  reporting  purposes,  income  before  income taxes  includes the
following components:

                                              Year Ended
                             ------------------------------------------------
                             January           February              February
                             31, 1998           1, 1997              3, 1996
                             --------         ----------             --------
                                           ($ In thousands)
Pretax income:
  United States .........   $(13,901)          $  16,928            $ (126,384)
  Foreign ...............       (359)              9,066                (4,180)
                           ----------        -----------            ----------
                            $(14,260)          $  25,994            $ (130,564)
                            =========          =========            ==========


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

                                                       Year ended
                                           ------------------------------------
                                            January     February       February
                                           31, 1998      1, 1997        3, 1996
                                           --------    ----------      --------
                                                    ($ In thousands)
Current:
     Federal .......................       $    --       $   682        $(3,875)
     Foreign .......................            --           224            345
     State .........................           204           343           (103)
                                           -------       -------        -------
Total current ......................           204         1,249         (3,633)
                                           -------       -------        -------

Deferred:
     Federal .......................           --          4,367        (2,315)
     Foreign .......................           --            311             4
     State .........................           --          1,190          (272)
                                           -------       -------        -------
Total deferred .....................           --          5,868        (2,583)
                                           -------       -------        -------

Tax provision (benefit) ............       $   204       $ 7,117        $(6,216)
                                           =======       =======        =======

                                      F-22
<PAGE>

<TABLE>

<CAPTION>




                     Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




11.  INCOME TAXES (CONTINUED)

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

                                                                             Year Ended
                                              ---------------------------------------------------------------------------
                                                    January                    February                    February
                                                   31, 1998                     1, 1997                     3, 1996
                                              ------------------          -------------------        --------------------
                                                                          ($ In thousands)
<S>                                           <C>          <C>            <C>            <C>         <C>            <C>    
Tax at U.S. statutory rates ................  $4,848       (34.0)%        $ 8,838        34.0%       $(44,392)      (34.0)%
Benefit of operating loss
    carryforward ...........................      --          --           (2,922)      (10.5)             --          --
Loss, no benefit provided ..................   4,848        34.0               --          --          15,916        12.2
State income taxes, net of
   federal tax benefit .....................     204         1.4            1,142         4.4            (248)       (0.2)
Lower effective income tax
   rates of foreign jurisdictions ..........      --          --             (235)       (0.9)          1,770         1.4
Amortization of intangibles ................      --          --              124         0.5           1,080         0.8
Goodwill written-off .......................      --          --               --          --          21,032          --
Other ......................................      --          --              170         0.7          (1,374)       (1.1)
                                              ------        ----          -------       -----        --------       -----
                                              $  204         1.4%         $ 7,117        28.2%       $ (6,216)       (4.8)%
                                              ======        ====          =======       =====        ========       =====
</TABLE>


As of January 31, 1998, based upon tax returns filed and to be filed the Company
expects to report a net operating loss carryforward for U.S. Federal income tax
purposes of approximately $90,000,000. If unused, these loss carryforwards will
expire in the Company's taxable years ending in 2011 through 2013.

As of January 31, 1998, based upon tax returns filed and to be filed the Company
expects to report net operating loss carryforwards for New York State and City
tax purposes (on a separate company basis) of approximately $60,000,000. If
unused, these loss carryforwards will expire in the Company's taxable years
ending in 2011 through 2013.

Tax Audits

The U.S. Internal Revenue Service (the "IRS") is conducting an audit of the U.S.
Federal income tax returns filed by GJM (US) Inc. for its taxable years ending
December 31, 1990 through October 7, 1994 (the date GJM (US) Inc. was acquired
by the Company). To date, the IRS has informally proposed a Federal income tax
deficiency against GJM (US) Inc. of approximately $16 million (including some
penalties but not interest). The audit of GJM (US) Inc. is still in its early
stages and its outcome cannot be predicted at this time. Although the Company
intends to dispute the proposed adjustment and believes that it has established
appropriate accounting reserves with respect to this matter, an adverse decision
in this matter could have a material adverse impact on the Company and its
financial condition.

                                      F-23
<PAGE>
                     Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




11.  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.

12.  GEOGRAPHIC SEGMENT INFORMATION

The Company operates primarily in one industry segment which includes the
development, manufacturing and sales of women's apparel.

Net sales to unaffiliated customers and identifiable assets classified by
geographic area, which was determined by where sales originated from and where
identifiable assets were held, were as follows:

<TABLE>

<CAPTION>


                                             Total              Total            Intersegment
                                              U.S.             Foreign           Eliminations                Total
                                             -----             -------           ------------                -----
                                                                    ($ In thousands)
<S>                                         <C>                <C>                 <C>                      <C>
YEAR ENDED JANUARY 31, 1998
Net sales ................................ $ 17,383            $27,497              $(1,501)                $ 43,379
Operating profit .........................  (14,270)               (73)                  --                  (14,343)
Identifiable assets ......................   20,145             13,558               (3,953)                  29,750

YEAR ENDED FEBRUARY 1, 1997
Net sales ................................ $228,461            $30,889              $(5,037)                $254,313
Operating profit .........................   16,137              8,880                   --                   25,017
Identifiable assets ......................   35,146             16,817               (4,821)                  47,142

YEAR ENDED FEBRUARY 3, 1996
Net sales ................................ $492,497            $55,349              $(7,783)                $540,063
Operating loss ........................... (120,668)            (1,083)                  --                 (121,751)
Identifiable assets ......................  107,465             24,221              (14,541)                 117,145
</TABLE>


(a)  Net sales in the U.S. are primarily from imported goods.

(b)  The intangible assets recognized in connection with acquisitions are
     included in identifiable assets in the U.S.

(c)  Total foreign amounts principally represent the Company's Asian operations.


                                      F-24
<PAGE>

                     Cygne Designs, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)




13.  EMPLOYEE BENEFIT PLANS

The Company did not provide any post employment or post retirement benefits to
its current or former employees. The Company also terminated all of its 401(k)
plans and its foreign defined benefit plans. The Company implemented a new
401(k) plan for domestic employees on February 2, 1997. The Company will match
33% of the employee's contributions up to 3% of the employee's voluntary
contribution.

14. RELATED PARTY TRANSACTIONS

During the years ended January 31, 1998 and February 1, 1997, a company
controlled by a shareholder paid the Company $292,000 and $793,000,
respectively, for design fees and commissions.


                                      F-25
<PAGE>

<TABLE>

<CAPTION>


                      Cygne Designs, Inc. and Subsidiaries

                Schedule II - Valuation and Qualifying Accounts


                                                  Balance at     Charged to
                                                 Beginning of     Costs and         Deductions          Balance at
            Description                            Period         Expenses          (Describe)*       End of Period
            -----------                          ------------    ----------         -----------       -------------
                                                                        ($ in thousands)
<S>                                               <C>             <C>                 <C>                 <C>
Reserves for returns and allowances:

     Year ended February 3, 1996 .............    $6,553          $23,293             $27,663             $2,183

     Year ended February 1, 1997 .............     2,183            8,896               9,537              1,542

     Year ended January 31, 1998 .............     1,542            1,526               2,959                109
</TABLE>


* Sales returns and write-off of uncollectible amounts







                                      F-26