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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 29, 2005.



Commission File Number 0-22102



CYGNE DESIGNS, INC.

(Exact name of
Registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 04-2843286                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|11 West 42ndStreet, New York, New
York                         |  | 10036                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             



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



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

None

(Title of class)



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



Common Stock, $.01 par value

(Title of class)



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



Yes  x    No ̈



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



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



Yes ̈No   x



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Based on the closing sale price as reported by the OTC Bulletin Board on July 31, 2004, the last business day of the
registrants most recently completed second fiscal quarter, the aggregate market value of the registrants Common Stock, par value $.01 per share, held by non-affiliates of the registrant was approximately $2,247,318*.



*For purposes of this calculation, the number of shares held by non-affiliates was determined
by aggregating the number of shares held by officers and directors of the registrant, and by others who, to the registrants knowledge, own more than 10% of the registrants Common Stock, and subtracting those shares from the total number
of shares outstanding. As of April 15, 2005, 12,438,038 shares of Common Stock of the registrant were outstanding.



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



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



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



General



Cygne Designs, Inc. (the Company or Cygne) is a manufacturer of private label womens career and casual apparel
with sales primarily to New York and Company, Inc. (Lerner New York changed its name to New York & Company, Inc. in May 2004). As a private label manufacturer, the Company produces apparel upon orders from its customers for sale under the
customers own labels, rather than producing its own inventory of apparel for sale under the Cygne name.



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



The Company historically has been dependent on one or more key customers. A significant
portion of the Companys sales has been and is expected to continue to be to New York and Company, Inc. (NY&C). Sales to NY&C accounted for approximately 82%, 91% and 93% respectively, of Cygnes net sales from
continuing operations for years 2004, 2003, and 2002. (See Item 1 Significant Financial and Business Developments).



Although Cygne has a long-established relationship with NY&C, its key customer, Cygne does not have long-term contracts with NY&C. The Companys future
success will be dependent upon its ability to attract new customers and to maintain its relationship with NY&C. During 2004, Cygne was able to attract one new customer. Cygne continues to maintain its positive working relationship with NY&C
by providing on-time deliveries of quality products.



There is no assurance
that NY&C 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 NY&C, NY&C
has the ability to exert significant control over the Companys business decisions, including prices.



On April 19, 2005, Cygne announced that it was in preliminary discussions to acquire the branded and private label denim clothing supply business of Commerce Clothing Company LLC, a privately-held company principally
owned by Hubert Guez. During 2004, Commerce Clothing re-entered the market after being dormant for several years, and is involved in the design, manufacture and sale of denim clothing. Commerce Clothing had unaudited net sales of $17.4 million for
the six months ended December 31, 2004 and $13.4 million for the first quarter of 2005, and was profitable in both periods. The preliminary proposed purchase price would be approximately 12 million shares of Cygne common stock and a promissory note
in the approximate amount of $40-$50 million. In addition, Cygne would enter into a supply agreement with a company controlled by the seller to manufacture denim products to be sold by



3



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Cygne. Mr. Guez would have the right to nominate three designees for election to Cygnes Board of Directors and may, under certain circumstances, be
deemed to be in control of Cygne. The discussions are at a preliminary stage and the terms of the acquisition could change materially. In addition, there can be no assurance that the transaction will be consummated.



The principal executive offices of the Company are located at 11 West 42ndStreet, New York, New York 10036 and its telephone number is 212-997-7767.



Significant Financial and Business Developments



On May 13, 2001, the Company acquired a knit business located in Jordan from Best Knits,
L.L.C. and the trade name Best Knits (Jordanian business). The Company accounted for this transaction as a purchase.



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



The first payment of $400,000 was received at the closing and the final
payment of $433,000 was due on April 30, 2003. As Cygne has not received the final payment of $433,000, it has submitted its claim for this payment to arbitration. As the outcome of this arbitration is uncertain, Cygne management, at January 31,
2004, deemed it appropriate to provide a reserve of $433,000 against this receivable. There have been no significant developments in the arbitration proceedings since January 31, 2004.



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



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



Effective January 1, 2005, the United States (USA) has discontinued textile
import quotas affecting the products sourced by the Company. As a result, the USA total imports from China during the first quarter of 2005 including the product categories manufactured by Cygne in Guatemala have increased substantially. USA is
considering introducing safeguards which will limit the increase in apparel imports from China, but as of April 15, 2005, no action has been taken. Cygne does not anticipate that the increase in imports from China will have a material affect on
Cygnes sales during its first quarter of 2005 as compared to its comparable 2004 period, although Cygne anticipates that its results of operations could be adversely affected for the balance of 2005 compared to 2004 on account of the increase
in imports from China.



The Central American countries, which include
Guatemala, and USA, have negotiated a Central America Free Trade Agreement (CAFTA). The Agreement will allow USA duty free imports from Guatemala if the woven fabric is manufactured using USA yarn. Cygne anticipates that this Agreement
could make



4



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Guatemala competitive with imports from China in the categories manufactured by Cygne in Guatemala. The USA Senate must ratify the Agreement in order for it
to become effective. There can be no assurance that the CAFTA agreement will be adopted by the United States.



Cygne believes that there could be downward pressure on gross margins for the year 2005 as a result of the competition from Chinese imports.



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



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



Products



The Company currently participates in one segment of the apparel market: womens career
and casual apparel. During 2004, the Companys products from continuing operations included woven jackets, skirts and pants and cut and sewn knit tops and bottoms.



Sourcing, Manufacturing and Sales



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



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



During 2004, all of the Companys products for its
continuing business were manufactured outside the United States, either by non-affiliated contract manufacturers or at the Companys manufacturing facilities located in Guatemala. 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,



5



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



In 2004, Cygne operated a
manufacturing facility for its continuing operations in Guatemala. Operating a manufacturing facility rather than contracting with independent manufacturers requires the Company to maintain a higher level of working capital. In addition, reduced
sales have an even greater adverse impact on the Companys results in light of the fixed costs needed to own and operate its own factory. Because the Companys manufacturing operations are located outside the USA, the Company is subject to
many of the same risks as relying on foreign contract manufacturers. See Item 2. Properties.



Raw Materials



Cygne usually supplies
the raw materials to its manufacturers. Otherwise, the raw materials are purchased directly by the manufacturer in accordance with the Companys specifications. Raw materials, 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 made on an open account basis. The Company does not have formal long-term arrangements with any of its
suppliers. The Company has experienced little difficulty in satisfying its raw material requirements and considers its sources of supply adequate.



Quality Assurance



The Companys quality assurance program is designed to ensure that its products meet the quality standards of its customers. The Company requires its vendors employ qualified quality control personnel. Fabric is
inspected upon arrival at its manufacturing destination.



Competition



The private label apparel industry is highly fragmented, and the Company
faces intense competition, including competition from its own customers who have 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 who have the know-how and internal resources to develop and source directly a portion of their requirements constitute its major competition.



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



6



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Import Restrictions



During 2004, the Company sourced for its continuing operations all of its products from Guatemala.



Textile Agreements



Prior to January 1, 1995, apparel imports from most countries were subject to bilateral textile agreements under the Multifiber Arrangement of the General Agreement on
Tariffs and Trade (GATT) which allowed the imposition of visa and quota restrictions on certain apparel and textile articles including a significant portion of those currently sold by the Company. The member countries of the World Trade
Organization have agreed that quotas on textiles and apparel products will be phased out globally on January 1, 2005. Once phased-out, quotas cannot be imposed except in accordance with GATT rules. These rules generally forbid bilateral
quota agreements and other discriminatory, country-specific restraints. While it is not possible to forecast the total impact to the Company of the discontinuance of textile import quotas, this change could cause the Company to face severe liquidity
pressures, which would adversely affect the Companys financial condition and results of operations and cash flows.



Duty Rates



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



The United States is actively pursuing free trade agreements with countries throughout the world. In this regard, the United States has announced its intention to
implement a free trade agreement with Central America (CAFTA). Once adopted, originating apparel and other products from certain Central American countries, including Guatemala, will be eligible for duty free status when imported into
the United States. There can be no assurance that the CAFTA agreement will be adopted by the United States.



Additional Restrictions



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



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



Backlog



At January 29, 2005 the Company had unfilled confirmed customer orders of $4,800,000 compared to $4,600,000 at January 31, 2004. In general,
the amount of unfilled orders at a particular time is affected by



7



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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, 2005, the Company had approximately
812 full-time employees. Approximately 803 employees were located at its facilities in Guatemala and 9 employees at its facilities in New York. The Company considers its relations with its employees to be satisfactory.



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



The Companys executive and general offices are located at 11 West 42ndStreet,
New York, New York. The Company rents 7,435 square feet pursuant to a lease which expires on October 31, 2008 with an annual rental expense of approximately $135,000.



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



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



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



The first payment of $400,000 was received at the closing and the final payment of $433,000 was due on April 30, 2003. As Cygne has not
received the final payment of $433,000, it has submitted its claim for this payment to arbitration. As the outcome of this arbitration is uncertain, Cygne management, at January 31, 2004, deemed it appropriate to provide a reserve of $433,000
against this receivable. There have been no significant developments in the arbitration proceedings since January 31, 2004.



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



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



|a. | The annual meeting of stockholders of Cygne Designs, Inc. was held on December 2, 2004.
|-- | ---------------------------------------------------------------------------------------



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



|                  |  |            |  |         
|----------------- |  | ---------- |  | --------
|Name              |  | In Favor   |  | Withheld
|James Groninger   |  | 11,876,431 |  | 145,555 
|Bernard M. Manuel |  | 11,867,376 |  | 154,610 



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PART II



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



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



|                                   |  |      |      |     |   |     
|---------------------------------- |  | ---- | ---- | --- | - | ----
|                                   |  | High |      | Low
|Fiscal Year Ended January 31, 2004 |  |      |      |     |   |     
|First Quarter                      |  | $    | 0.14 |     | $ | 0.13
|Second Quarter                     |  | $    | 0.30 |     | $ | 0.13
|Third Quarter                      |  | $    | 0.30 |     | $ | 0.20
|Fourth Quarter                     |  | $    | 0.50 |     | $ | 0.23
|                                   |  |     
|Fiscal Year Ended January 29, 2005 |  |      |      |     |   |     
|First Quarter                      |  | $    | 0.45 |     | $ | 0.30
|Second Quarter                     |  | $    | 0.35 |     | $ | 0.25
|Third Quarter                      |  | $    | 0.36 |     | $ | 0.25
|Fourth Quarter                     |  | $    | 0.40 |     | $ | 0.26



The number of stockholders of record
of Common Stock on April 15, 2005 was approximately 97. The closing sale price of the Companys Common Stock on April 26, 2005 was $4.69 per share.



On April 19, 2005, Cygne announced that it was in preliminary discussions to acquire the branded and private label denim clothing supply business of Commerce Clothing
Company LLC, a privately-held company principally owned by Hubert Guez. During 2004, Commerce Clothing re-entered the market after being dormant for several years, and is involved in the design, manufacture and sale of denim clothing. Commerce
Clothing had unaudited net sales of $17.4 million for the six months ended December 31, 2004 and $13.4 million for the first quarter of 2005, and was profitable in both periods. The preliminary proposed purchase price would be approximately 12
million shares of Cygne common stock and a promissory note in the approximate amount of $40-$50 million. In addition, Cygne would enter into a supply agreement with a company controlled by the seller to manufacture denim products to be sold by
Cygne. Mr. Guez would have the right to nominate three designees for election to Cygnes Board of Directors and may, under certain circumstances, be deemed to be in control of Cygne. The discussions are at a preliminary stage and
the terms of the acquisition could change materially. In addition, there can be no assurance that the transaction will be consummated.



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



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



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



The following tables summarize certain selected financial information that should be read in conjunction with Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial statements of the Company, which have been audited by independent auditors. The discontinued operation in 2001, 2002, 2003 and 2004 and the reversal of income tax
accruals of $4,800,000 and $400,000 in 2002 and 2003, respectively, materially affect the comparability of the financial data reflected below.



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|                                                                                                                                                                      |  |                                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                                                                      |  | Fiscal Year (1)                         |       
|                                                                                                                                                                      |  | 2000 (1)                                |        |   | 2001 |   |        | 2002 |  |   | 2003   |   |  | 2004 |       
|                                                                                                                                                                      |  | (In thousands except per share amounts) |       
|Income Statement Data                                                                                                                                                 |  |                                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                                                                                                                                      |  |                                         |        |   |     
|Net sales                                                                                                                                                             |  | $                                       | 28,381 |   |      | $ | 28,249 |      |  | $ | 24,019 |   |  | $    | 27,082 |   |  | $ | 28,960 |  
|                                                                                                                                                                      |  |                                         |        |   |     
|Cost of goods sold                                                                                                                                                    |  |                                         | 24,852 |   |      |   | 23,311 |      |  |   | 20,694 |   |  |      | 22,932 |   |  |   | 25,133 |  
|                                                                                                                                                                      |  |                                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Gross profit                                                                                                                                                          |  |                                         | 3,529  |   |      |   | 4,938  |      |  |   | 3,325  |   |  |      | 4,150  |   |  |   | 3,827  |  
|Selling, general and administrative                                                                                                                                   |  |                                         | 3,508  |   |      |   | 4,008  |      |  |   | 3,099  |   |  |      | 3,448  |   |  |   | 3,312  |  
|Provision for impairment of fixed assets (2)                                                                                                                          |  |                                         |       |   |      |   |       |      |  |   | 282    |   |  |      |       |   |  |   |       |  
|Reversal for impairment of Knit business assets (3)                                                                                                                   |  |                                         |       |   |      |   | (959   | )    |  |   |       |   |  |      |       |   |  |   |       |  
|                                                                                                                                                                      |  |                                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Income from continuing operations before interest, other expense and income taxes                                                                                     |  |                                         | 21     |   |      |   | 1,889  |      |  |   | (56    | ) |  |      | 702    |   |  |   | 515    |  
|Interest income                                                                                                                                                       |  |                                         | (277   | ) |      |   | (34    | )    |  |   | (24    | ) |  |      | (16    | ) |  |   | (14    | )
|Interest expense                                                                                                                                                      |  |                                         | 89     |   |      |   | 195    |      |  |   | 223    |   |  |      | 180    |   |  |   | 159    |  
|Other expense                                                                                                                                                         |  |                                         |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   | 26     |  
|                                                                                                                                                                      |  |                                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Income from continuing operations before income taxes                                                                                                                 |  |                                         | 209    |   |      |   | 1,728  |      |  |   | (255   | ) |  |      | 538    |   |  |   | 344    |  
|Provision (benefit) for income taxes (4)                                                                                                                              |  |                                         | 20     |   |      |   | 44     |      |  |   | (4,750 | ) |  |      | (374   | ) |  |   | 3      |  
|                                                                                                                                                                      |  |                                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Income from continuing operations                                                                                                                                     |  |                                         | 189    |   |      |   | 1,684  |      |  |   | 4,495  |   |  |      | 912    |   |  |   | 341    |  
|(Loss) from discontinued operation, net (includes a (loss) gain on disposal of $(479) and $400 in year ended January 31, 2004 and February 1,
2003, respectively) (5) |  |                                         |       |   |      |   | (1,905 | )    |  |   | (2,410 | ) |  |      | (528   | ) |  |   | (28    | )
|                                                                                                                                                                      |  |                                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net income                                                                                                                                                            |  | $                                       | 189    |   |      | $ | (221   | )    |  | $ | 2,085  |   |  | $    | 384    |   |  | $ | 313    |  
|                                                                                                                                                                      |  |                                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Income per share-basic and diluted from continuing operations                                                                                                         |  | $                                       | 0.02   |   |      | $ | 0.13   |      |  | $ | 0.36   |   |  | $    | 0.07   |   |  | $ | 0.03   |  
|Loss per share-basic and diluted from discontinued operation                                                                                                          |  |                                         |       |   |      |   | (0.15  | )    |  |   | (0.19  | ) |  |      | (0.04  | ) |  |   |       |  
|                                                                                                                                                                      |  |                                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net income (loss) per share-basic and diluted                                                                                                                         |  | $                                       | 0.02   |   |      | $ | (0.02  | )    |  | $ | 0.17   |   |  | $    | 0.03   |   |  | $ | 0.03   |  
|                                                                                                                                                                      |  |                                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  



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Balance Sheet Data (as of the end of period)



|                              |  |                 |        |      |   |        |  |      |       |      |   |       |  |   |      
|----------------------------- |  | --------------- | ------ | ---- | - | ------ |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                              |  | Fiscal Year (1)
|                              |  | 2000            |        | 2001 |   | 2002   |  | 2003 |       | 2004
|                              |  | (In thousands) 
|Cash                          |  | $               | 2,378  |      | $ | 2,558  |  | $    | 2,610 |      | $ | 3,345 |  | $ | 3,575
|Trade accounts receivable (6) |  |                 | 3,633  |      |   | 1,167  |  |      | 2,194 |      |   | 1,775 |  |   | 837  
|Inventories                   |  |                 | 5,225  |      |   | 2,350  |  |      | 1,939 |      |   | 2,206 |  |   | 2,707
|Total assets                  |  |                 | 14,986 |      |   | 15,537 |  |      | 9,818 |      |   | 9,529 |  |   | 9,160
|Working Capital               |  |                 | 3,035  |      |   | 2,427  |  |      | 5,323 |      |   | 5,742 |  |   | 6,003
|Stockholders Equity          |  |                 | 5,332  |      |   | 5,111  |  |      | 7,115 |      |   | 7,502 |  |   | 7,715



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



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



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



|(4) | As the result of the settlement agreement between the Company and U.S. Internal Revenue Service, the Company reversed a tax accrual of $4,800,000 established in connection with a
potential deficiency at May 4, 2002. At January 31, 2004, the Company reversed a part of a tax audit reserve by $400,000 based on its knowledge of the status of the issues of the audit of a subsidiary located in Guatemala. At January 29, 2005, the
Company reversed a tax audit reserve of $12,000 to reflect the results of a local tax audit.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Pursuant to an agreement dated June 10, 2002 modified by an amendment dated July 29, 2002, the Company sold its Jordanian business to Century Investment Group (CIG) for
$833,000 plus the assumption of all outstanding liabilities of the Jordanian company of approximately $943,000. The agreement also stated that any disputes between the parties must be submitted to arbitration in Jordan.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



12



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|(6) | The balances shown under the caption trade accounts receivable for fiscal years 2000 and 2004 represent amounts due from customers; the balances shown for fiscal years
2001, 2002, and 2003 represent amounts due from GMAC, the Companys factor for those fiscal years.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



Overview



On May 13, 2001, the Company acquired a knit business located in Jordan from Best Knits, L.L.C. and the trade name Best Knits (Jordanian business). The Company accounted for this transaction as a purchase.



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



The first payment of $400,000 was received at the closing and the final payment of $433,000 was due on April 30, 2003. As Cygne has not received the final payment of $433,000, it has submitted its claim for this payment to arbitration. As
the outcome of this arbitration is uncertain, Cygne management, at January 31, 2004, deemed it appropriate to provide a reserve of $433,000 against this receivable. There have been no significant developments in the arbitration proceedings since
January 31, 2004.



Cygne agreed not to compete with CIG for knit business in
Jordan for five years starting June 1, 2002 in consideration of $350,000 payable by February 5, 2006. In connection with the non-compete agreement, the Company recorded deferred income of $350,000 which it was amortizing to income over a five-year
period. At January 31, 2004, as a result of the uncertainty of the arbitration with CIG, Cygne has



13



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discontinued the amortization of remaining deferred income of $309,000, and has reserved the corresponding net receivable of $309,000 and has written off the
related deferred income. The impact of these transactions had no effect on the results of continuing operations.



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



The
Company historically has been dependent on one or more key customers. A significant portion of the Companys sales has been and is expected to continue to be to New York and Company, Inc. (Lerner New York changed its name to New York &
Company, Inc. in May 2004). Sales to New York and Company, Inc. (NY&C) accounted for approximately 82%, 91% and 93% respectively, of Cygnes net sales from continuing operations for years 2004, 2003 and 2002. (See Item 1.
Business)



Although Cygne has a long-established relationship with NY&C,
its key customer, Cygne does not have long-term contracts with NY&C. The Companys future success will be dependent upon its ability to attract new customers and to maintain its relationship with NY&C. During 2004, Cygne was able to
attract one new customer. Cygne continues to maintain its positive working relationship with NY&C by providing on-time deliveries of quality products.



Effective January 1, 2005, the United States (USA) has discontinued textile import quotas affecting the products sourced by the Company. As a result, the USA
total imports from China during the first quarter of 2005 including the product categories manufactured by Cygne in Guatemala have increased substantially. USA is considering introducing safeguards which will limit the increase in apparel imports
from China, but as of April 15, 2005, no action has been taken. Cygne does not anticipate that the increase in imports from China will have a material affect on Cygnes sales during its first quarter of 2005 as compared to its comparable 2004
period, although Cygne anticipates that its results of operations could be adversely affected for the balance of 2005 compared to 2004 on account of the increase in imports from China.



The Central American countries, which include Guatemala, and USA have negotiated a Central America Free Trade Agreement (CAFTA).
The Agreement will allow USA duty free imports from Guatemala if the woven fabric is manufactured using USA yarn. Cygne anticipates that this Agreement could make Guatemala competitive with imports from China in the categories manufactured by Cygne
in Guatemala. The USA Senate must ratify the Agreement in order for it to become effective. There can be no assurance that CAFTA will be adopted by the United States.



Cygne believes that there could be downward pressure on gross margins for the year 2005 as a result of the competition from Chinese imports.





14



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



On April 19, 2005, Cygne announced that it was in preliminary discussions to acquire the branded and private label denim clothing supply
business of Commerce Clothing Company LLC, a privately-held company principally owned by Hubert Guez. During 2004, Commerce Clothing re-entered the market after being dormant for several years, and is involved in the design, manufacture and sale of
denim clothing. Commerce Clothing had unaudited net sales of $17.4 million for the six months ended December 31, 2004 and $13.4 million for the first quarter of 2005, and was profitable in both periods. The preliminary proposed purchase price would
be approximately 12 million shares of Cygne common stock and a promissory note in the approximate amount of $40-$50 million. In addition, Cygne would enter into a supply agreement with a company controlled by the seller to manufacture denim products
to be sold by Cygne. Mr. Guez would have the right to nominate three designees for election to Cygnes Board of Directors and may, under certain circumstances, be deemed to be in control of Cygne. The discussions are at a
preliminary stage and the terms of the acquisition could change materially. In addition, there can be no assurance that the transaction will be consummated.



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



Critical Accounting
Estimates



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



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



For trade accounts receivable, the Company estimates the net collectibility, considering both historical and anticipated deductions taken by customers. For inventory,
the Company values its inventory which is allocated to the fulfillment of customers orders at cost and all other inventory which includes seconds and of excess production at no value. For amounts of additional income taxes that may be assessed
by the various taxing authorities upon audit of the Companys tax returns, the Company estimates the amount based upon its knowledge of the cases and upon the advice of its tax counsel.



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



15



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



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



Depreciation and Amortization



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



Revenue Recognition



Revenues are recorded at the time of shipment of merchandise, provided that the price is
fixed, title has been transferred, collection of the resulting receivable is reasonably assured and the Company has no significant obligations remaining to be performed. The Company establishes reserves for sales returns and allowances. Such
reserves amounted to zero, $5,000 and $20,000 at January 29, 2005, January 31, 2004 and February 1, 2003, respectively.



Foreign Currency Exchange



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



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



Results of Operations



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



|                                                                                         |  |       |   |  |       |   |  |       |  
|---------------------------------------------------------------------------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                                                                                         |  | Year  |  
|                                                                                         |  | 2004  |   |  | 2003  |   |  | 2002  |  
|Net Sales                                                                                |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %
|                                                                                         |  |       |   |  |       |   |  |       |  
|Gross profit                                                                             |  | 13.2  |   |  | 15.3  |   |  | 13.8  |  
|Selling, general and administrative expenses                                             |  | 11.4  |   |  | 12.7  |   |  | 12.9  |  
|Provision for impairment of fixed assets                                                 |  |      |   |  |      |   |  | 1.2   |  
|                                                                                         |  |       |   |  |       |   |  |       |  
|Income (loss) from continuing operations before interest, other expense and income taxes |  | 1.8   |   |  | 2.6   |   |  | (0.3  | )
|Interest expense, net                                                                    |  | 0.5   |   |  | 0.6   |   |  | 0.8   |  
|Other expense                                                                            |  | 0.1   |   |  |      |   |  |      |  
|Provision (benefit) for income taxes                                                     |  |      |   |  | (1.4  | ) |  | (19.8 | )
|                                                                                         |  |       |   |  |       |   |  |       |  
|Income from continuing operations                                                        |  | 1.2   | % |  | 3.4   | % |  | 18.7  | %
|                                                                                         |  |       |   |  |       |   |  |       |  



16



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2004 compared to 2003



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



Net Sales



Net sales from continuing operations for 2004 were $28,960,000, an increase of $1,878,000 or 6.9%, from $27,082,000 in 2003.



The increase in sales for the year 2004 compared to the year 2003 resulted from an increase in sales to Jordache Enterprises of $1,988,000, an increase in sales to
other customers of $793,000 offset by a decrease to New York and Company, Inc. (NY&C) of $903,000.



The increase in sales to Jordache Enterprises for the year 2004 compared to year 2003 was the result of the number and size of the programs that Jordache purchased from
Cygne. Jordache Enterprises is no longer a Cygne customer.



The decrease in
sales to NY&C for the year 2004 compared to the year 2003 was the result of the number and size of the programs that NY&C purchased from Cygne.



NY&C and Jordache accounted for 82% and 14%, respectively, of Cygnes net sales for the year 2004 and 91% and 8%, respectively, of Cygnes net sales for the
year 2003.



At January 29, 2005 the Company had unfilled confirmed customer
orders of $4,800,000 compared to $4,600,000 at January 31, 2004. In general, the amount of unfilled orders at a particular time is affected by a number of factors, including the scheduling of manufacture and shipping of the product which, in some
instances, depends on the customers 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.



Gross Profit



The gross profit for the year 2004 was $3,827,000 or 13.2% of net sales, a decrease of $323,000 or 7.8% from the gross profit of $4,150,000 or 15.3% of net sales for the year 2003.



The decrease in gross profit for the year 2004 compared to the year 2003 was attributable to
higher overhead at the Companys Guatemala manufacturing facility and higher fabric and freight variances,



17



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offset in part by the increase in sales volume in year 2004 over year 2003 and the sale of second quality inventory for $300,000 which had been marked down
in prior periods.



Selling, General, and Administrative Expenses



Selling, general, and administrative expenses for 2004 were
$3,312,000, a decrease of 136,000 or 3.9% from $3,448,000 in 2003. The decrease in expense for the year 2004 compared to the year 2003 was principally lower payroll expense in 2004 than in 2003.



Interest



Interest expense includes factor fees, factor early termination fees and the amortization of the deferred financing cost. Interest expense
for the year 2004 was $159,000, a decrease of $21,000 from $180,000 from the year 2004. The decrease in interest expense is attributable to lower usage of factor fees in 2004 than 2003.



Other expense



Other expense for the year 2004 of $26,000 represents a loss on expired warrants issued by a third party for the purchase of its common stock.



Provision (Benefit) for Income Taxes



The provision for income taxes for the year 2004 was $3,000 as compared to an income tax
benefit of $374,000 in the year 2003. The 2004 provision was comprised of $15,000 of state and local income taxes which was offset by a reversal of $12,000 of a prior year local tax provision, leaving a net provision for year 2004 of $3,000. In
2004, the Company settled a local tax audit. As a result of this settlement, the Company has reversed an excess tax accrual of $12,000 established in prior years in connection with this audit.



The 2003 provision was comprised of $15,000 of state and local income taxes and $11,000 of
foreign income tax for a total gross provision of $26,000 which was offset by a reversal of $400,000 of a prior year tax provision for Guatemalan tax leaving a net benefit for the year 2003 of $374,000.



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



Discontinued Operation



The sale of the Jordanian business in 2002 and its related operating results have been excluded from the results from continuing operations and are classified as a
discontinued operation for all periods presented in accordance with the requirements of SFAS 144 Accounting for Impairment or Disposal of Long-Lived Assets. The discontinued operation expense of $28,000 in the year 2004 represents
professional fees incurred in connection with Cygnes arbitration case against Century Investment Group (CIG) for the collection of Cygnes receivable from CIG of $433,000.



18



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2003 compared to 2002



Net Sales



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



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



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



At January
31, 2004 the Company had unfilled confirmed customer orders of $4,600,000 compared to $6,700,000 at February 1, 2003. In general, the amount of unfilled orders at a particular time is affected by a number of factors, including the scheduling of
manufacture and shipping of the product which, in some instances, depends on the customers demands. Accordingly, a comparison of unfilled orders from period to period is not necessarily meaningful and may not be indicative of eventual actual
shipments. The Companys experience has been that the cancellations, rejections or returns of orders do not materially reduce the amount of sales realized from its backlog.



Gross Profit



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



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



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



Selling, General, and Administrative Expenses



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



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



19



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Provision for Impairment of Fixed Assets



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



Interest



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



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



Provision (Benefit) for Income Taxes



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



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



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



Discontinued Operation



The sale of the Jordanian business in 2002 and its related operating results for years 2003 and 2002 have been excluded from the results from continuing operations and
are classified as a discontinued operation for all periods presented in accordance with the requirements of FAS 144 Accounting for Impairment or Disposal of Long-Lived Assets. The discontinued operation expense for 2003 of $528,000 is
comprised of a reserve of $433,000 against the current arbitration, $46,000 of non-collectible Jordan custom security deposits, and $49,000 for legal and other professional fees incurred connection with Cygnes arbitration case against Century
Investment Group (CIG) for the collection of $433,000. The first payment of $400,000 was received at the closing and the final payment of $433,000 was due on April 30, 2003. As Cygne has not received the final payment of $433,000, it has
submitted its claim for this payment to



20



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



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



Liquidity and Capital Resources



On May 11, 2001 the Company entered into a Revolving Credit and Security Agreement and a Factoring Agreement with GMAC Commercial Credit LLC (GMAC ). The
Agreement was cancelled on December 31, 2002.



Effective January 1, 2003, the
Company entered into an Amended and Restated Factoring Agreement with GMAC Commercial Credit LLC (Factor Agreement). The Factor Agreement, which was scheduled to terminate on December 31, 2004, was terminated on October 30, 2004. The
Company paid GMAC its contractual early termination fee of $22,500. The Company does not have a credit facility and does not forecast any borrowing requirements in 2005.



Total net cash provided by operating activities for the year 2004 was $522,000 compared to total net cash provided in for the year 2003 of
$1,054,000.



Net cash used in operating activities for the year 2004 from the
discontinued operation was $28,000. Net cash provided by operating activities in 2004 from continuing operations was $550,000. The components of cash provided by continuing operations totaling $1,633,000,000 were (i) a decrease in trade accounts
receivable and other assets of $948,000 and (ii) net income from continuing operations of $685,000. The cash provided by continuing operations was partially offset by the use of funds in operations of $1,083,000. The components of cash used in
operations were (a) an increase in inventories of $501,000, (b) an increase in other receivables of $12,000, (c) a decrease in accounts payable of $261,000 and (d) a decrease in accrued expenses and income taxes payable of $309,000



Net cash used in operating activities for the year 2003 from the discontinued operation was
$49,000. Net cash provided by operating activities in 2003 from continuing operations of $1,103,000. The components of cash provided by continuing operations totaling $1,692,000 were (i) a decrease in trade accounts receivable of $419,000, (ii) a
decrease in other receivables of $125,000, (iii) an increase in accrued expenses and income taxes payable of $355,000, and (iv) net income from continuing operations of $793,000. The cash provided by continuing operations was partially offset by the
use of funds in operations of $589,000. The components of cash used in operations are (a) an increase in inventories of $267,000, and (b) a decrease in accounts payable of $322,000.



Cash used in investing activities in 2004 was $292,000. The cash used by investing activities consisted of the purchase of sewing machines
and other equipment for the Guatemalan facility in the amount of $95,000, the purchase of computer equipment for the New York office in the amount of $31,000, and leasehold improvements for the New York office of $166,000.



21



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



There was no cash used in financing activities in 2004 or 2003.



At January 29, 2005 and January 31, 2004, working capital was $6,003,000 and $5,742,000
respectively.



The Companys financial performance for 2005 will depend on
a variety of factors, including the amount of sales to NY&C, and the effect on the Cygne business on account of the discontinued textile import quotas by the United States effective January 1, 2005. As a result of the discontinuance of textile
import quotas the Companys customers may be able to secure the products currently being purchased from the Company in other in other places at a lower price. If the Company has significant operating losses, the Company could face severe
liquidity pressures, which would adversely affect the Companys financial condition and results of operations and cash flows. The Company has in the past incurred costs in restructuring its operations due to the loss of customers and could
incur additional costs in the future associated with the restructuring of its operations. The Company believes that it will have sufficient working capital to support the business for the next twelve months.



Contractual Obligations and Commercial Commitments



The Companys contractual obligations and commercial commitments at January 29, 2005
are as follows:



|                                       |  |       |         |                        |   |           |  |         |         |  |   |        
|-------------------------------------- |  | ----- | ------- | ---------------------- | - | --------- |  | ------- | ------- |  | - | -------
|                                       |  |       |         | Payments Due By Period
|                                       |  | Total |         | Within1 Year           |   | 2-3 Years |  | 4 Years
|Contractual Obligations                |  |       |         |                        |   |           |  |         |         |  |   |        
|Operating lease (1)                    |  | $     | 666,831 |                        | $ | 163,322   |  | $       | 359,800 |  | $ | 143,709
|Purchase obligations for inventory (2) |  |       | 139,000 |                        |   | 139,000   |  |         |        |  |   |       
|                                       |  |       |         |                        |   |           |  |         |         |  |   |        
|Total Contractual Obligations          |  | $     | 805,831 |                        | $ | 302,322   |  | $       | 359,800 |  | $ | 143,709



The Company has employment agreements
with its two officers through April 30, 2006. Future minimum aggregate annual payments under these agreements amount to approximately $1,015,000 in 2005 and $256,000 in 2006. The officers and employees may receive additional compensation based upon
the income, as defined, of the Company or one or more of its subsidiaries.



|(1) | See note 8 to Consolidated Financial Statements.
|--- | ------------------------------------------------



|(2) | The Company generally does not make unconditional purchase commitments for goods and services other than inventory.
|--- | -------------------------------------------------------------------------------------------------------------------



Off-Balance Sheet Arrangements



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



22



---

Effect of New Accounting Standards



In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS No. 151 retains the
general principle of ARB 43, Chapter 4, Inventory Pricing (AC Section I78), that inventories are presumed to be stated at cost; however, it amends ARB 43 to clarify that abnormal amounts of idle facility expense, freight, handling costs,
and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventories based on the normal capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company has evaluated SFAS No. 151 and it does not anticipate
that the adoption of SFAS No. 151 would have a material impact on the Companys financial condition, results of operations, and cash flows.



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS123R requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements. The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. SFAS 123R covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees. This statement becomes effective for the Companys annual reporting period that begins in February 2006. The Company is required to implement this new standard in the
quarter ending April 29, 2006. The impact of this new standard, if it had been in effect, on the net earnings and related per share amounts of our fiscal years ended in January 2005, 2004 and 2003 are disclosed in Note 1, Summary of Significant
Accounting Policies, Stock Based Compensation.



Inflation



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



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



The Company does not believe it has a material exposure to market risk. The Companys earnings may be affected by changes in short-term interest rates if it had a
credit facility.



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



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



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



None



23



---

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



The Companys management with the participation of its chief executive officer and chief financial officer has evaluated the effectiveness of the Companys
disclosure controls and procedures as of January 29, 2005. Based on this evaluation, the Companys chief executive officer and chief financial officer, concluded that the Companys disclosure controls and procedures are effective in
alerting them on a timely basis to material information required to be included in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended. Such evaluation did not identify any change in the Companys
internal controls over financial reporting that occurred during the year ended January 29, 2005, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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 of the Registrant



The executive officers of the Company are as follows:



|                  |  |     |  |                                                                        
|----------------- |  | --- |  | -----------------------------------------------------------------------
|Name              |  | Age |  | Position with the Company                                              
|Bernard M. Manuel |  | 57  |  | Director, Chairman of the Board and Chief Executive Officer            
|                  |  |    
|Roy E. Green      |  | 72  |  | Senior Vice President-Chief Financial Officer, Treasurer, and Secretary



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



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



24



---

received a Bachelors degree in Business Administration from Rutgers University. Mr. Green is a certified public accountant.



Section 16(a) Beneficial Ownership Reporting Compliance



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



Based upon a review of the copies of such forms furnished to the Company and written representations from the Companys executive officers and directors, we believe
that during the fiscal year ended January 29, 2005, all Section 16(a) filing requirements applicable to the executive officers, directors and greater than ten percent beneficial owners were complied with.



Audit Committee and Financial Reports



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



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



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



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



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



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



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



25



---

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



The following table sets forth the aggregate fees billed by the independent auditors for services rendered to the Company for the audit of the Companys financial
statements for the years ended January 29, 2005 (2004) and January 31, 2004 (2003). The services also included reviews of the financial statements included in the Companys Quarterly Reports on Form 10Q and for other
services rendered on behalf of our Company in those fiscal years. No services were performed by, or fees incurred to, Mahoney Cohen & Company, CPA, P.C. in connection with the financial information services design and implementation projects
during 2004 or 2003. The fees billed by Mahoney Cohen & Company, CPA, P.C., our independent auditors, for audit and other professional services during 2004 and 2003 are summarized below. The audit committee has considered whether the provision
of these services is compatible with maintaining the principle accountants independence and has concluded that such services are compatible. All fees paid were reviewed and pre-approved by the audit committee.



|                       |  |      |         |      |   |       
|---------------------- |  | ---- | ------- | ---- | - | ------
|                       |  | 2004 |         | 2003
|Audit fees (1)         |  | $    | 105,125 |      | $ | 90,803
|Non-audit services (2) |  |      | 2,208   |      |   | 0     
|Tax fees               |  |      | 0       |      |   | 0     
|All other fees         |  |      | 0       |      |   | 0     
|                       |  |      |         |      |   |       
|Total fees             |  | $    | 107,333 |      | $ | 90,803



|(1) | Includes fees in connection with the audit of the Companys annual consolidated financial statements and reviews of the consolidated financial statements included in the
Companys Quarterly Reports on Form 10-Q.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Represents fees billed for professional services rendered on general business matters.
|--- | --------------------------------------------------------------------------------------



PART IV



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



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



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



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



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



|            |  |                                                                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                           
|2.1         |  | Amended and Restated Acquisition Agreement, dated as of August 1, 1999 by and among M.T.G.I. - Textile Manufacturers Group (Israel), Limited, MBS Company, AC Services Inc. and Jordache
Limited. *(1)
|            | 
|2.2         |  | Agreement dated May 9, 2001 between Cygne Designs, Inc. and Best Knits, LLC. *(8)                                                                                                                     



26



---

|      |  |                                                                                                                                                                                                        
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|3.1   |  | Restated Certificate of Incorporation, as amended by Certificate of Amendment filed August 6, 1994 with the Secretary of State of the State of Delaware. *(2)                                          
|      | 
|3.2   |  | Certificate of Amendment to Restated Certificate of Incorporation. * (3)                                                                                                                               
|      | 
|3.3   |  | By-laws. *(4)                                                                                                                                                                                          
|      | 
|4.0   |  | Specimen Stock Certificate. *(4)                                                                                                                                                                       
|      | 
|10.1  |  | Amended and Restated Employment Agreement, dated as of January 1, 1995, between the Company and Bernard M. Manuel. *(5)                                                                                
|      | 
|10.3  |  | 1993 stock option plan, as amended, through June 28, 1994. *(2).                                                                                                                                       
|      | 
|10.4  |  | Form of Stock Option Agreement. *(4)                                                                                                                                                                   
|      | 
|10.8  |  | Lease between the Company and L.H. Charney Associates, L.P. *(6)                                                                                                                                       
|      | 
|10.9  |  | Lease Extension and Modification between the Company and L.H. Charney Associates, L.P. amendments. * (7)                                                                                               
|      | 
|10.10 |  | Revolving Credit and Security agreement, dated as of May 11, 2001, between GMAC Commercial Credit LLC, as lender, and Cygne Designs. *(8)                                                              
|      | 
|10.12 |  | Credit agreement between Prosperity Textiles Ltd. and Egyptian Arab Land Bank. * (7)                                                                                                                   
|      | 
|10.13 |  | Asset Purchase Agreement dated June 9, 2002 between Cygne Designs, Inc. and Prosperity Textiles Ltd., and House and Garden Company and Century Investment Group *(9)                                   
|      | 
|10.14 |  | Amended and Restated Factoring Agreement dated January 1, 2003 between GMAC Commercial Credit LLC and Cygne Designs, Inc. * (10)                                                                       
|      | 
|10.15 |  | Amendment dated July 29, 2002 to Asset Purchase Agreement dated June 9, 2002 between Cygne Designs, Inc. and Prosperity Textiles Ltd. And House and Garden Company and Century Investment
Group. * (10)
|      | 
|10.16 |  | Sublease between Thacher Proffitt & Wood, LLP, sub landlord and Cygne Designs, Inc., subtenant. *(12)                                                                                                  
|      | 
|14.1  |  | Code of Ethics for Companys Officers and Financial Professionals. * (11)                                                                                                                              
|      | 
|21    |  | Subsidiaries of the Company (13)                                                                                                                                                                       
|      | 
|31.1  |  | Certificates of Principle Executive Officer (13)                                                                                                                                                       
|      | 
|31.2  |  | Certificates of Principal Financial Officer (13)                                                                                                                                                       



27



---

|     |  |                                                                                                                                            
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|32.1 |  | Certifications of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002 (13)     
|     | 
|32.2 |  | Certifications Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002 (13)



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



|     |  |                                                                                
|---- |  | -------------------------------------------------------------------------------
|(1)  |  | Companys Quarterly Report on Form 10-Q for the quarter ended July 31, 1999.   
|     | 
|(2)  |  | Companys Quarterly Report on Form 10-Q for the quarter ended July 30, 1994.   
|     | 
|(3)  |  | Companys Quarterly Report in Form 8-K dated December 5, 2000.                 
|     | 
|(4)  |  | Companys Registration Statement of Form S-1 (Registration No. 33-64358)       
|     | 
|(5)  |  | Companys Annual Report on Form 10-K for fiscal year ended January 28, 1995.   
|     | 
|(6)  |  | Companys Annual Report on Form 10-K for the fiscal year ended January 29, 2000
|     | 
|(7)  |  | Companys Annual Report on Form 10-K for the fiscal year ended February 3, 2001
|     | 
|(8)  |  | Companys Quarterly Report on Form 10-Q for the quarter ended May 5, 2001      
|     | 
|(9)  |  | Companys Quarterly Report on Form 10-Q for the quarter ended May 4, 2002      
|     | 
|(10) |  | Companys Annual Report on Form 10-K for the fiscal year ended February 1, 2003
|     | 
|(11) |  | Companys Annual Report on Form 10-K for the fiscal year ended January 31, 2004
|     | 
|(12) |  | Companys Quarterly Report on Form 10-Q for the quarter ended May 1, 2004      
|     | 
|(13) |  | Filed herewith                                                                 



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.



28



---

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



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



SIGNATURES



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



Cygne Designs, Inc.(Registrant)By:

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




Date: April 29, 2005



29



---

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



|                                         |  |                                                                                                                          |  |               
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | --------------
|Signature                                |  | Title                                                                                                                    |  | Date          
|/s/ Bernard M. ManuelBernard M. Manuel   |  | Chairman of the Board of Directors, Chief Executive Officer and Director (principal executive officer)                   |  | April 29, 2005
|                                         |  |                                                                                                                         
|/s/ Roy E. GreenRoy E. Green             |  | Senior Vice President, Chief Financial Officer, and Treasurer (principal financial and accounting officer) and Secretary |  | April 29, 2005
|                                         |  |                                                                                                                         
|/s/ James G. GroningerJames G. Groninger |  | Director                                                                                                                 |  | April 29, 2005



30



---

Cygne Designs, Inc. and Subsidiaries



Consolidated Financial Statements



Index to Consolidated Financial Statements



|                                                                                                                |  |     
|--------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                |  | Page
|Report of Independent Registered Public Accounting Firm                                                         |  | F-2 
|Consolidated Balance Sheets as of January 29, 2005 and January 31, 2004                                         |  | F-3 
|Consolidated Statements of Operations for Each of the Three Years in the Period Ended January 29, 2005          |  | F-4 
|Consolidated Statements of Stockholders Equity For Each of the Three Years in the Period Ended January 29, 2005 |  | F-5 
|Consolidated Statements of Cash Flows for Each of the Three Years In the Period Ended January 29, 2005          |  | F-6 
|Notes to Consolidated Financial Statements                                                                      |  | F-7 
|Financial Schedule Schedule II                                                                                  |  | F-24



F-1



---



Report of Independent Registered Public Accounting Firm



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 29, 2005 and January 31, 2004 and the related
consolidated statements of operations, stockholders equity and cash flows for each of the three years in the period ended January 29, 2005. Our audits also included the financial statement schedule listed in the Index on page F-1. These
financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.



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



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cygne Designs, Inc. and Subsidiaries as of January 29, 2005 and January 31, 2004 and
the consolidated results of their operations and their cash flows for each of the three years in the period ended January 29, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion,
the related financial statement schedule when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



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



New York, New York

April 8, 2005 except for Note 13, which is as of April 19, 2005



F-2



---



Cygne Designs, Inc. and Subsidiaries



Consolidated Balance Sheets



|                                                                                                     |  |                                                   |          |   |                 |   |          |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | -------- | - | --------------- | - | -------- | -
|                                                                                                     |  | January 29,2005                                   |          |   | January 31,2004 |  
|                                                                                                     |  | (In thousands, except shareand per share amounts) |         
|Assets                                                                                               |  |                                                   |          |   |                 |   |          |  
|Current Assets:                                                                                      |  |                                                   |          |   |                 |   |          |  
|Cash and cash equivalents                                                                            |  | $                                                 | 3,575    |   |                 | $ | 3,345    |  
|Trade accounts receivable                                                                            |  |                                                   | 837      |   |                 |   |         |  
|Due from factor                                                                                      |  |                                                   |         |   |                 |   | 1,775    |  
|Inventories                                                                                          |  |                                                   | 2,707    |   |                 |   | 2,206    |  
|Marketable securities                                                                                |  |                                                   | 37       |   |                 |   | 163      |  
|Other receivables and prepaid expenses                                                               |  |                                                   | 292      |   |                 |   | 280      |  
|                                                                                                     |  |                                                   |          |   |                 |   |          |  
|Total current assets                                                                                 |  |                                                   | 7,448    |   |                 |   | 7,769    |  
|Fixed assets, net                                                                                    |  |                                                   | 1,679    |   |                 |   | 1,717    |  
|Other assets                                                                                         |  |                                                   | 33       |   |                 |   | 43       |  
|                                                                                                     |  |                                                   |          |   |                 |   |          |  
|Total assets                                                                                         |  | $                                                 | 9,160    |   |                 | $ | 9,529    |  
|                                                                                                     |  |                                                   |          |   |                 |   |          |  
|                                                                                                     |  |                                                  
|Liabilities and Stockholders Equity                                                                 |  |                                                   |          |   |                 |   |          |  
|Current liabilities:                                                                                 |  |                                                   |          |   |                 |   |          |  
|Accounts payable                                                                                     |  | $                                                 | 362      |   |                 | $ | 623      |  
|Accrued expenses                                                                                     |  |                                                   | 517      |   |                 |   | 814      |  
|Income taxes payable                                                                                 |  |                                                   | 566      |   |                 |   | 590      |  
|                                                                                                     |  |                                                   |          |   |                 |   |          |  
|Total current liabilities                                                                            |  |                                                   | 1,445    |   |                 |   | 2,027    |  
|                                                                                                     |  |                                                   |          |   |                 |   |          |  
|Commitments and contingencies (note 8)                                                               |  |                                                   |          |   |                 |   |          |  
|Stockholders equity:                                                                                |  |                                                   |          |   |                 |   |          |  
|Preferred Stock, $0.01 par value; 1,000,000 shares authorized: none issued and outstanding           |  |                                                   |         |   |                 |   |         |  
|Common Sock, $0.01 par value; 25,000,000 shares authorized: 12,438,038 shares issued and outstanding |  |                                                   | 124      |   |                 |   | 124      |  
|Paid-in capital                                                                                      |  |                                                   | 120,918  |   |                 |   | 120,918  |  
|Accumulated other comprehensive loss                                                                 |  |                                                   | (178     | ) |                 |   | (78      | )
|Accumulated deficit                                                                                  |  |                                                   | (113,149 | ) |                 |   | (113,462 | )
|                                                                                                     |  |                                                   |          |   |                 |   |          |  
|Total stockholders equity                                                                           |  |                                                   | 7,715    |   |                 |   | 7,502    |  
|                                                                                                     |  |                                                   |          |   |                 |   |          |  
|Total liabilities and stockholders equity                                                           |  | $                                                 | 9,160    |   |                 | $ | 9,529    |  
|                                                                                                     |  |                                                   |          |   |                 |   |          |  



See accompanying notes.



F-3



---



Cygne Designs, Inc. and Subsidiaries



Consolidated Statements of Operations



|                                                                                                                                                                  |  |                                         |        |   |                 |   |        |                 |  |   |        |   |  | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------ | - | --------------- | - | ------ | --------------- |  | - | ------ | - |  | 
|                                                                                                                                                                  |  | Year Ended                              |        |   |                
|                                                                                                                                                                  |  | January 29,2005                         |        |   | January 31,2004 |   |        | February 1,2003 |  |   |       
|                                                                                                                                                                  |  | (In thousands except per share amounts) |        |   |                
|Net sales                                                                                                                                                         |  | $                                       | 28,960 |   |                 | $ | 27,082 |                 |  | $ | 24,019 |   |  | 
|Cost of goods sold                                                                                                                                                |  |                                         | 25,133 |   |                 |   | 22,932 |                 |  |   | 20,694 |   |  | 
|                                                                                                                                                                  |  |                                         |        |   |                 |   |        |                 |  |   |        |   |  | 
|Gross profit                                                                                                                                                      |  |                                         | 3,827  |   |                 |   | 4,150  |                 |  |   | 3,325  |   |  | 
|Selling, general and administrative expenses                                                                                                                      |  |                                         | 3,312  |   |                 |   | 3,448  |                 |  |   | 3,099  |   |  | 
|Provision for impairment of fixed assets                                                                                                                          |  |                                         |       |   |                 |   |       |                 |  |   | 282    |   |  | 
|                                                                                                                                                                  |  |                                         |        |   |                 |   |        |                 |  |   |        |   |  | 
|Income (loss) from continuing operations before interest, other expense and income taxes                                                                          |  |                                         | 515    |   |                 |   | 702    |                 |  |   | (56    | ) |  | 
|Interest income                                                                                                                                                   |  |                                         | (14    | ) |                 |   | (16    | )               |  |   | (24    | ) |  | 
|Interest expense                                                                                                                                                  |  |                                         | 159    |   |                 |   | 180    |                 |  |   | 223    |   |  | 
|Other expense                                                                                                                                                     |  |                                         | 26     |   |                 |   |       |                 |  |   |       |   |  | 
|                                                                                                                                                                  |  |                                         |        |   |                 |   |        |                 |  |   |        |   |  | 
|Income (loss) from continuing operations before income taxes                                                                                                      |  |                                         | 344    |   |                 |   | 538    |                 |  |   | (255   | ) |  | 
|Provision (benefit) for income taxes                                                                                                                              |  |                                         | 3      |   |                 |   | (374   | )               |  |   | (4,750 | ) |  | 
|                                                                                                                                                                  |  |                                         |        |   |                 |   |        |                 |  |   |        |   |  | 
|Income from continuing operations                                                                                                                                 |  |                                         | 341    |   |                 |   | 912    |                 |  |   | 4,495  |   |  | 
|(Loss) from discontinued operation, net (includes a (loss) gain on disposal of ($479) and $400 in year ended January 31, 2004 and February 1,
2003, respectively) |  |                                         | (28    | ) |                 |   | (528   | )               |  |   | (2,410 | ) |  | 
|                                                                                                                                                                  |  |                                         |        |   |                 |   |        |                 |  |   |        |   |  | 
|Net income                                                                                                                                                        |  | $                                       | 313    |   |                 | $ | 384    |                 |  | $ | 2,085  |   |  | 
|                                                                                                                                                                  |  |                                         |        |   |                 |   |        |                 |  |   |        |   |  | 
|Income per share-basic and diluted from continuing operations                                                                                                     |  | $                                       | 0.03   |   |                 | $ | 0.07   |                 |  | $ | 0.36   |   |  | 
|(Loss) per share-basic and diluted from discontinued operation                                                                                                    |  |                                         |       |   |                 |   | (0.04  | )               |  |   | (0.19  | ) |  | 
|                                                                                                                                                                  |  |                                         |        |   |                 |   |        |                 |  |   |        |   |  | 
|Net income per share-basic and diluted                                                                                                                            |  | $                                       | 0.03   |   |                 | $ | 0.03   |                 |  | $ | 0.17   |   |  | 
|                                                                                                                                                                  |  |                                         |        |   |                 |   |        |                 |  |   |        |   |  | 
|Weighted average common shares outstanding:                                                                                                                       |  |                                         |        |   |                 |   |        |                 |  |   |        |   |  | 
|Basic                                                                                                                                                             |  |                                         | 12,438 |   |                 |   | 12,438 |                 |  |   | 12,438 |   |  | 
|                                                                                                                                                                  |  |                                         |        |   |                 |   |        |                 |  |   |        |   |  | 
|Diluted                                                                                                                                                           |  |                                         | 12,443 |   |                 |   | 12,441 |                 |  |   | 12,439 |   |  | 
|                                                                                                                                                                  |  |                                         |        |   |                 |   |        |                 |  |   |        |   |  | 



See accompanying notes.



F-4



---



Cygne Designs, Inc. and Subsidiaries



Consolidated Statements of Stockholders Equity



For The Years Ended January 29, 2005, January 31, 2004 and February 1, 2003



|                                                                           |  |                       |  |        |     |                |   |                                             |  |   |                      |   |  |       |          |   |  |   |       |  
|-------------------------------------------------------------------------- |  | --------------------- |  | ------ | --- | -------------- | - | ------------------------------------------- |  | - | -------------------- | - |  | ----- | -------- | - |  | - | ----- | -
|                                                                           |  | Number ofCommonShares |  | Amount |     | Paid-InCapital |   | AccumulatedOtherComprehensive Income (Loss) |  |   | (AccumulatedDeficit) |   |  | Total |         
|                                                                           |  | (In thousands)        | 
|Balance at February 2, 2002                                                |  | 12,438                |  | $      | 124 |                | $ | 120,918                                     |  | $ |                     |   |  | $     | (115,931 | ) |  | $ | 5,111 |  
|Net income for year ended February 1, 2003                                 |  |                      |  |        |    |                |   |                                            |  |   |                     |   |  |       | 2,085    |   |  |   | 2,085 |  
|Unrealized (loss) on marketable securities for year ended February 1, 2003 |  |                      |  |        |    |                |   |                                            |  |   | (81                  | ) |  |       |         |   |  |   | (81   | )
|                                                                           |  |                       |  |        |     |                |   |                                             |  |   |                      |   |  |       |          |   |  |   |       |  
|Comprehensive income for year ended February 1, 2003                       |  |                      |  |        |    |                |   |                                            |  |   |                     |   |  |       |         |   |  |   | 2,004 |  
|                                                                           |  |                       |  |        |     |                |   |                                             |  |   |                      |   |  |       |          |   |  |   |       |  
|Balance at February 1, 2003                                                |  | 12,438                |  |        | 124 |                |   | 120,918                                     |  |   | (81                  | ) |  |       | (113,846 | ) |  |   | 7,115 |  
|                                                                           |  |                       |  |        |     |                |   |                                             |  |   |                      |   |  |       |          |   |  |   |       |  
|Net income for year ended January 31, 2004                                 |  |                      |  |        |    |                |   |                                            |  |   |                     |   |  |       | 384      |   |  |   | 384   |  
|Unrealized gain on marketable securities for year ended January 31, 2004   |  |                      |  |        |    |                |   |                                            |  |   | 3                    |   |  |       |         |   |  |   | 3     |  
|                                                                           |  |                       |  |        |     |                |   |                                             |  |   |                      |   |  |       |          |   |  |   |       |  
|Comprehensive income for year ended January 31, 2004                       |  |                      |  |        |    |                |   |                                            |  |   |                     |   |  |       |         |   |  |   | 387   |  
|                                                                           |  |                       |  |        |     |                |   |                                             |  |   |                      |   |  |       |          |   |  |   |       |  
|Balance at January 31, 2004                                                |  | 12,438                |  |        | 124 |                |   | 120,918                                     |  |   | (78                  | ) |  |       | (113,462 | ) |  |   | 7,502 |  
|Net income for year ended January 29, 2005                                 |  |                      |  |        |    |                |   |                                            |  |   |                     |   |  |       | 313      |   |  |   | 313   |  
|Unrealized (loss) on marketable securities for year ended January 29, 2005 |  |                      |  |        |    |                |   |                                            |  |   | (126                 | ) |  |       |         |   |  |   | (126  | )
|Reclassification adjustment for realized losses included in net income     |  |                      |  |        |    |                |   |                                            |  |   | 26                   |   |  |       |         |   |  |   | 26    |  
|                                                                           |  |                       |  |        |     |                |   |                                             |  |   |                      |   |  |       |          |   |  |   |       |  
|Comprehensive income for year ended January 29, 2005                       |  |                      |  |        |    |                |   |                                            |  |   |                     |   |  |       |         |   |  |   | 213   |  
|                                                                           |  |                       |  |        |     |                |   |                                             |  |   |                      |   |  |       |          |   |  |   |       |  
|Balance at January 29, 2005                                                |  | 12,438                |  | $      | 124 |                | $ | 120,918                                     |  | $ | (178                 | ) |  | $     | (113,149 | ) |  | $ | 7,715 |  
|                                                                           |  |                       |  |        |     |                |   |                                             |  |   |                      |   |  |       |          |   |  |   |       |  



See accompanying notes.



F-5



---



Cygne Designs, Inc. and Subsidiaries



Consolidated Statements of Cash Flows



|                                                                                 |  |                 |       |   |                 |   |       |                 |  |   |        |  
|-------------------------------------------------------------------------------- |  | --------------- | ----- | - | --------------- | - | ----- | --------------- |  | - | ------ | -
|                                                                                 |  | Year Ended      |      
|                                                                                 |  | January 29,2005 |       |   | January 31,2004 |   |       | February 1,2003 | 
|                                                                                 |  | (In thousands)  |      
|Operating activities                                                             |  |                 |       |   |                 |   |       |                 |  |   |        |  
|Net income                                                                       |  | $               | 313   |   |                 | $ | 384   |                 |  | $ | 2,085  |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                 |       |   |                 |   |       |                 |  |   |        |  
|Write off and amortization of other intangibles                                  |  |                 |      |   |                 |   |      |                 |  |   | 255    |  
|Reversal of income tax liability                                                 |  |                 | (12   | ) |                 |   | (400  | )               |  |   | (4,800 | )
|Loss (gain) on sale of business                                                  |  |                 |      |   |                 |   | 479   |                 |  |   | (400   | )
|Depreciation                                                                     |  |                 | 330   |   |                 |   | 281   |                 |  |   | 382    |  
|Loss on marketable security                                                      |  |                 | 26    |   |                 |   |      |                 |  |   |       |  
|Impairment of fixed assets                                                       |  |                 |      |   |                 |   |      |                 |  |   | 282    |  
|Changes in operating assets and liabilities:                                     |  |                 |       |   |                 |   |       |                 |  |   |        |  
|Restricted cash                                                                  |  |                 |      |   |                 |   |      |                 |  |   | 146    |  
|Trade accounts receivable                                                        |  |                 | (837  | ) |                 |   |      |                 |  |   |       |  
|Due from factor                                                                  |  |                 | 1,775 |   |                 |   | 419   |                 |  |   | 3,244  |  
|Inventories                                                                      |  |                 | (501  | ) |                 |   | (267  | )               |  |   | 448    |  
|Other receivables and prepaid expenses                                           |  |                 | (12   | ) |                 |   | 125   |                 |  |   | 472    |  
|Other assets                                                                     |  |                 | 10    |   |                 |   |      |                 |  |   | 5      |  
|Accounts payable                                                                 |  |                 | (261  | ) |                 |   | (322  | )               |  |   | (25    | )
|Accrued expenses                                                                 |  |                 | (297  | ) |                 |   | 347   |                 |  |   | (194   | )
|Income taxes payable                                                             |  |                 | (12   | ) |                 |   | 8     |                 |  |   | (22    | )
|                                                                                 |  |                 |       |   |                 |   |       |                 |  |   |        |  
|Net cash provided by (used in) operating activities                              |  |                 | 522   |   |                 |   | 1,054 |                 |  |   | 1,878  |  
|Investing activities                                                             |  |                 |       |   |                 |   |       |                 |  |   |        |  
|Purchase of Jordanian business                                                   |  |                 |      |   |                 |   |      |                 |  |   | (40    | )
|Purchase of fixed assets                                                         |  |                 | (292  | ) |                 |   | (319  | )               |  |   | (82    | )
|Purchase of marketable securities                                                |  |                 |      |   |                 |   |      |                 |  |   | (241   | )
|Proceeds from sale of Jordanian business                                         |  |                 |      |   |                 |   |      |                 |  |   | 400    |  
|                                                                                 |  |                 |       |   |                 |   |       |                 |  |   |        |  
|Net cash (used in) provided by investing activities                              |  |                 | (292  | ) |                 |   | (319  | )               |  |   | 37     |  
|Financing activities                                                             |  |                 |       |   |                 |   |       |                 |  |   |        |  
|Short-term borrowings (repayments), net                                          |  |                 |      |   |                 |   |      |                 |  |   | (1,863 | )
|                                                                                 |  |                 |       |   |                 |   |       |                 |  |   |        |  
|Net cash used in financing activities                                            |  |                 |      |   |                 |   |      |                 |  |   | (1,863 | )
|Net increase in cash and cash equivalents                                        |  |                 | 230   |   |                 |   | 735   |                 |  |   | 52     |  
|Cash and cash equivalents at beginning of year                                   |  |                 | 3,345 |   |                 |   | 2,610 |                 |  |   | 2,558  |  
|                                                                                 |  |                 |       |   |                 |   |       |                 |  |   |        |  
|Cash and cash equivalents at end of year                                         |  | $               | 3,575 |   |                 | $ | 3,345 |                 |  | $ | 2,610  |  
|                                                                                 |  |                 |       |   |                 |   |       |                 |  |   |        |  
|Supplemental Disclosures of Cash Flow Information                                |  |                 |       |   |                 |   |       |                 |  |   |        |  
|Income taxes paid                                                                |  | $               | 27    |   |                 | $ | 18    |                 |  | $ | 39     |  
|                                                                                 |  |                 |       |   |                 |   |       |                 |  |   |        |  
|Interest paid                                                                    |  | $               | 131   |   |                 | $ | 132   |                 |  | $ | 333    |  
|                                                                                 |  |                 |       |   |                 |   |       |                 |  |   |        |  



See accompanying notes.



F-6



---



Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements



|1. | Significant Accounting Policies
|-- | -------------------------------



Principal Business Activity



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



Fiscal Year



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



Organization and Principles of Consolidation



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



Use of Estimates



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



F-7



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|1. | Significant Accounting Policies (continued)
|-- | -------------------------------------------



Cash and Cash Equivalents



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



Marketable Securities



Marketable securities are stated at fair value as determined by quoted market price. The
Company has classified its securities as investments available for sale pursuant to Statement of Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and Equity Securities. The related unrealized holding
gains and losses are excluded from operations and recorded in Accumulated Other Comprehensive Loss on the Consolidated Balance Sheets. At January 29, 2005, the gross unrealized loss was approximately $178,000. Realized gains and losses and declines
in value judged to be other-than-temporary on marketable securities are included in other expense.



Inventories



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



Depreciation and Amortization



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



Revenue Recognition



Revenues are recorded at the time of shipment of merchandise, provided that the price is
fixed, title has been transferred, collection of the resulting receivable is reasonably assured and the Company has no significant obligations remaining to be performed. The Company establishes reserves for sales returns and allowances. Such
reserves amounted to zero, $5,000 and $20,000 at January 29, 2005, January 31, 2004 and February 1, 2003 respectively.



F-8



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|1. | Significant Accounting Policies (continued)
|-- | -------------------------------------------



Foreign Currency Translation



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



Net Income Per Share



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



|                                                                         |  |                 |  |                 |  |                
|------------------------------------------------------------------------ |  | --------------- |  | --------------- |  | ---------------
|                                                                         |  | Year Ended     
|                                                                         |  | January 29,2005 |  | January 31,2004 |  | February 1,2003
|                                                                         |  | (In thousands) 
|Weighted average common shares outstanding                               |  | 12,438          |  | 12,438          |  | 12,438         
|Effect of dilutive securities:                                           |  |                 |  |                 |  |                
|Stock Options                                                            |  | 5               |  | 3               |  | 1              
|                                                                         |  |                 |  |                 |  |                
|Weighted average common shares outstanding and common shares equivalents |  | 12,443          |  | 12,441          |  | 12,439         
|                                                                         |  |                 |  |                 |  |                



Comprehensive Income



Comprehensive income is comprised of net income or loss and unrealized
gain or loss on marketable securities for the years ended January 29, 2005, January 31, 2004, and February 1, 2003.



Stock Based Compensation



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



F-9



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|1. | Significant Accounting Policies (continued)
|-- | -------------------------------------------



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



|                                                                                                                 |  |                 |      |                 |   |                 |  |   |      
|---------------------------------------------------------------------------------------------------------------- |  | --------------- | ---- | --------------- | - | --------------- |  | - | -----
|                                                                                                                 |  | Year Ended     
|                                                                                                                 |  | January 29,2005 |      | January 31,2004 |   | February 1,2003
|Net income as reported                                                                                           |  | $               | 313  |                 | $ | 384             |  | $ | 2,085
|Deduct: stock-based employee compensation expense determined under fair value method, net of related tax effects |  |                 |     |                 |   |                |  |   | 1    
|                                                                                                                 |  |                 |      |                 |   |                 |  |   |      
|Pro forma net income                                                                                             |  | $               | 313  |                 | $ | 384             |  | $ | 2,084
|Net income per share:                                                                                            |  |                 |      |                 |   |                 |  |   |      
|Net income per share as reported-basic and diluted                                                               |  | $               | 0.03 |                 | $ | 0.03            |  | $ | 0.17 
|Net income per share pro-forma-basic and diluted                                                                 |  | $               | 0.03 |                 | $ | 0.03            |  | $ | 0.17 



The weighted average fair value of
options, calculated using the Black-Scholes option-pricing model, granted during 2003 and 2002, is $0.18 and $0.08 respectively. No options were granted in 2004.



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



Recent Accounting Pronouncements



In
November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS No. 151 retains the
general principle of ARB 43, Chapter 4, Inventory Pricing (AC Section I78), that inventories are presumed to be stated at cost; however, it amends ARB 43 to clarify that abnormal amounts of idle facility expense, freight, handling costs,
and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventories based on the



F-10



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|1. | Significant Accounting Policies (continued)
|-- | -------------------------------------------



normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company has evaluated SFAS No. 151 and it does not anticipate that the adoption of SFAS No. 151 would have a material impact on
the Companys financial condition, results of operations, and cash flows.



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. The amount of
compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. SFAS 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans. SFAS 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. This statement becomes effective for the Companys annual reporting period that begins in February 2006. The Company is required to implement this new standard in the quarter ending April 29, 2006. The impact of this new
standard, if it had been in effect, on the net earnings and related per share amounts of our fiscal years ended in January 2005, 2004 and 2003 are disclosed in Note 1, Summary of Significant Accounting Policies, Stock Based Compensation.



|2. | Acquisition and Disposition of Company
|-- | --------------------------------------



Jordanian business



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



The first payment of $400,000 was received at the closing and the final
payment of $433,000 was due on April 30, 2003. As Cygne has not received the final payment of $433,000, it has submitted its claim for this payment to arbitration. As the outcome of this arbitration is uncertain, Cygnes management, at January
31, 2004, deemed it appropriate to provide a reserve of $433,000 against this receivable. There have been no significant developments in the arbitration proceedings since January 31, 2004.



Cygne agreed not to compete with CIG for knit business in Jordan for five years starting June
1, 2002 in consideration of $350,000 payable by February 5, 2006. In connection with the



F-11



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|2. | Acquisition and Disposition of Company (continued)
|-- | --------------------------------------------------



non-compete agreement, the Company recorded deferred income of $350,000 which it was amortizing to income over a five-year period. At January 31, 2004, as a
result of the uncertainty of the arbitration with CIG, Cygne has discontinued the amortization of remaining deferred income of $309,000, and has reserved the corresponding net receivable of $309,000 and has written off the related deferred income.
The impact of these transactions had no effect on the results of continuing operations.



The sale of the Jordanian business and its related operating results have been excluded from the results from continuing operations and is classified as a discontinued operation for all periods presented in accordance with the requirements
of SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets. The Company wrote-off intangible assets of $213,000 as a result of the sale of the Jordanian business in 2002.



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



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



|                                                             |  |                 |     |   |                 |   |      |                 |  |   |        |  
|------------------------------------------------------------ |  | --------------- | --- | - | --------------- | - | ---- | --------------- |  | - | ------ | -
|                                                             |  | Year Ended      |    
|                                                             |  | January 29,2005 |     |   | January 31,2004 |   |      | February 1,2003 | 
|                                                             |  | (In thousands)  |    
|Net sales                                                    |  |                 |    |   |                 |   |     |                 |  | $ | 2,598  |  
|Cost of goods sold                                           |  |                 |    |   |                 |   |     |                 |  |   | 4,699  |  
|                                                             |  |                 |     |   |                 |   |      |                 |  |   |        |  
|Gross (loss)                                                 |  |                 |    |   |                 |   |     |                 |  |   | (2,101 | )
|Selling, general and administrative                          |  | $               | 28  |   |                 | $ | 49   |                 |  |   | 299    |  
|Write off and amortization of goodwill and other intangibles |  |                 |    |   |                 |   |     |                 |  |   | 255    |  
|Loss (gain) on sale of business, net                         |  |                 |    |   |                 |   | 479  |                 |  |   | (400   | )
|                                                             |  |                 |     |   |                 |   |      |                 |  |   |        |  
|(Loss) from operations                                       |  |                 | (28 | ) |                 |   | (528 | )               |  |   | (2,255 | )
|Interest expense                                             |  |                 |    |   |                 |   |     |                 |  |   | 155    |  
|                                                             |  |                 |     |   |                 |   |      |                 |  |   |        |  
|Net (loss)                                                   |  | $               | (28 | ) |                 | $ | (528 | )               |  | $ | (2,410 | )
|                                                             |  |                 |     |   |                 |   |      |                 |  |   |        |  



F-12



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|3. | Inventories
|-- | -----------



Inventories consist of the following:



|                                 |  |                 |       |                 |   |      
|-------------------------------- |  | --------------- | ----- | --------------- | - | -----
|                                 |  | January 29,2005 |       | January 31,2004
|                                 |  | (In thousands) 
|Raw material and Work-in-Process |  | $               | 2,707 |                 | $ | 2,094
|Finished goods                   |  |                 |      |                 |   | 112  
|                                 |  |                 |       |                 |   |      
|                                 |  | $               | 2,707 |                 | $ | 2,206
|                                 |  |                 |       |                 |   |      



|4. | Fixed Assets
|-- | ------------



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



|                                               |  |                 |       |                 |   |                       |  |              
|---------------------------------------------- |  | --------------- | ----- | --------------- | - | --------------------- |  | -------------
|                                               |  | January 29,2005 |       | January 31,2004 |   | EstimatedUseful Lives
|                                               |  | (In thousands)  |       |                
|Land                                           |  | $               | 258   |                 | $ | 258                   |  |              
|Building and building improvements             |  |                 | 1,569 |                 |   | 1,569                 |  | 20 years     
|Leasehold improvements                         |  |                 | 166   |                 |   |                      |  | Life of lease
|Equipment, furniture, and fixtures             |  |                 | 1,460 |                 |   | 1,459                 |  | 2-10 years   
|Vehicles                                       |  |                 | 29    |                 |   | 29                    |  | 5 years      
|                                               |  |                 |       |                 |   |                       |  |              
|                                               |  |                 | 3,482 |                 |   | 3,315                 |  |              
|Less accumulated depreciation and amortization |  |                 | 1,803 |                 |   | 1,598                 |  |              
|                                               |  |                 |       |                 |   |                       |  |              
|                                               |  | $               | 1,679 |                 | $ | 1,717                 |  |              
|                                               |  |                 |       |                 |   |                       |  |              



F-13



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|5. | Credit Facilities
|-- | -----------------



On May 11, 2001 the Company entered into a Revolving Credit and Security Agreement and a Factoring Agreement with GMAC Commercial Credit LLC. The Agreement was cancelled on December 31, 2002.



Effective January 1, 2003, the Company entered into an Amended and Restated Factoring
Agreement with GMAC Commercial Credit LLC (Factor Agreement). The Factor Agreement, which was scheduled to terminate on December 31, 2004, was terminated on October 30, 2004. The Company paid GMAC its contractual early termination fee of
$22,500.



There were no outstanding loans at October 30, 2004 and the Company
has not had any borrowings since January 2003.



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



|6. | Stock Options
|-- | -------------



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



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



F-14



---



Cygne Designs, Inc. and
Subsidiaries



Notes to Consolidated Financial Statements
(continued)



|6. | Stock Option (continued)
|-- | ------------------------



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



|                                        |  |                 |   |  |                           |             |                              |   |                |                            |         |                     |  |                              |                                        |                |   |       |                    |         |                              |  |                      |      |  |   |      |  |          |  
|--------------------------------------- |  | --------------- | - |  | ------------------------- | ----------- | ---------------------------- | - | -------------- | -------------------------- | ------- | ------------------- |  | ---------------------------- | -------------------------------------- | -------------- | - | ----- | ------------------ | ------- | ---------------------------- |  | -------------------- | ---- |  | - | ---- |  | -------- | -
|                                        |  |                 |   |  | Employee StockOption Plan |             |                              |   |                | Non-EmployeeDirectors Plan |         |                     |  |                              | Other EmployeeStock OptionArrangements |                |   |      
|                                        |  | Numberof Shares |   |  | Exercise PriceRange       |             | WeightedAverageExercisePrice |   | NumberofShares |                            |         | Exercise PriceRange |  | WeightedAverageExercisePrice |                                        | NumberofShares |   |       | ExercisePriceRange |         | WeightedAverageExercisePrice |  | TotalNumberof Shares |     
|Options outstanding at February 2, 2002 |  | 248,000         |   |  | $                         | 0.31-$13.88 |                              | $ | 2.99           |                            | 26,000  |                     |  | $                            | 0.14-$23.50                            |                | $ | 4.37  |                    | 60,000  |                              |  | $                    | 2.00 |  | $ | 2.00 |  | 334,000  |  
|Options granted in 2002                 |  |                |   |  |                           |             |                              |   |                |                            | 2,000   |                     |  | $                            | 0.08                                   |                | $ | 0.08  |                    |        |                              |  |                      |      |  |   |      |  | 2,000    |  
|                                        |  |                 |   |  |                           |             |                              |   |                |                            |         |                     |  |                              |                                        |                |   |       |                    |         |                              |  |                      |      |  |   |      |  |          |  
|Options outstanding at February 1, 2003 |  | 248,000         |   |  | $                         | 0.31-$13.88 |                              | $ | 2.99           |                            | 28,000  |                     |  | $                            | 0.08-$23.50                            |                | $ | 4.06  |                    | 60,000  |                              |  | $                    | 2.00 |  | $ | 2.00 |  | 336,000  |  
|Options granted in 2003                 |  |                |   |  |                           |             |                              |   |                |                            | 2,000   |                     |  | $                            | 0.13                                   |                | $ | 0.13  |                    |        |                              |  |                      |      |  |   |      |  | 2,000    |  
|Options canceled in 2003                |  | (153,000        | ) |  | $                         | 2.00-$4.00  |                              | $ | 3.61           |                            | (10,000 | )                   |  | $                            | 4.00                                   |                | $ | 4.00  |                    |        |                              |  |                      |      |  |   |      |  | (163,000 | )
|                                        |  |                 |   |  |                           |             |                              |   |                |                            |         |                     |  |                              |                                        |                |   |       |                    |         |                              |  |                      |      |  |   |      |  |          |  
|Options outstanding at January 31, 2004 |  | 95,000          |   |  | $                         | 0.31-$13.88 |                              | $ | 2.00           |                            | 20,000  |                     |  | $                            | 0.08-$23.50                            |                | $ | 3.70  |                    | 60,000  |                              |  | $                    | 2.00 |  | $ | 2.00 |  | 175,000  |  
|Options canceled in 2004                |  | (34,000         | ) |  | $                         | 2.00-$13.38 |                              | $ | 3.00           |                            | (2,000  | )                   |  | $                            | 23.50                                  |                | $ | 23.50 |                    | (60,000 | )                            |  | $                    | 2.00 |  | $ | 2.00 |  | (96,000  | )
|                                        |  |                 |   |  |                           |             |                              |   |                |                            |         |                     |  |                              |                                        |                |   |       |                    |         |                              |  |                      |      |  |   |      |  |          |  
|Options outstanding at January 29, 2005 |  | 61,000          |   |  | $                         | 0.31-$2.00  |                              | $ | 1.45           |                            | 18,000  |                     |  | $                            | 0.08-$10.00                            |                | $ | 1.50  |                    |        |                              |  |                      |      |  |   |      |  | 79,000   |  
|                                        |  |                 |   |  |                           |             |                              |   |                |                            |         |                     |  |                              |                                        |                |   |       |                    |         |                              |  |                      |      |  |   |      |  |          |  
|At January 29, 2005 options exercisable |  | 61,000          |   |  |                           |             |                              |   |                |                            | 15,000  |                     |  |                              |                                        |                |   |       |                    |        |                              |  |                      |      |  |   |      |  | 76,000   |  
|                                        |  |                 |   |  |                           |             |                              |   |                |                            |         |                     |  |                              |                                        |                |   |       |                    |         |                              |  |                      |      |  |   |      |  |          |  



Exercise prices for options issued
from February 3, 2002 through January 29, 2005 ranged from $0.08 to $0.13. The weighted average remaining contractual life of options outstanding as of January 29, 2005 is 2.1 years.



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



F-15



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|6. | Stock Options (continued)
|-- | -------------------------



The following table summarizes information about stock options outstanding at January 29, 2005:



|                         |  |                  |  |                                                    |  |                                |       |                  |        |                                |   |      
|------------------------ |  | ---------------- |  | -------------------------------------------------- |  | ------------------------------ | ----- | ---------------- | ------ | ------------------------------ | - | -----
|                         |  | Outstanding      |  | Exercisable (Vested)                              
|Range of exercise prices |  | Number ofoptions |  | Weighted averageremaining yearsof contractual life |  | Weighted averageexercise price |       | Number ofoptions |        | Weighted averageexercise price
|$0.08$0.69              |  | 34,000           |  | 1.99                                               |  | $                              | 0.28  |                  | 31,000 |                                | $ | 0.30 
|$1.75$2.00              |  | 43,000           |  | 0.10                                               |  |                                | 1.99  |                  | 43,000 |                                |   | 1.99 
|$10.00                   |  | 2,000            |  | 0.01                                               |  |                                | 10.00 |                  | 2,000  |                                |   | 10.00
|                         |  |                  |  |                                                    |  |                                |       |                  |        |                                |   |      
|                         |  | 79,000           |  | 2.10                                               |  | $                              | 12.27 |                  | 76,000 |                                | $ | 12.29
|                         |  |                  |  |                                                    |  |                                |       |                  |        |                                |   |      



|7. | Concentrations of Risk
|-- | ----------------------



For the years ended January 29, 2005, January 31, 2004 and February 1, 2003, sales to New York and Company, Inc. (Lerner New York changed its name to New York &
Company, Inc. in May 2004) accounted for approximately 82% and 91% and 93%, respectively, of Cygnes net sales from continuing operations. For the year ended January 29, 2005, Jordache Enterprises accounted for 14% of Cygnes net sales
from continuing operations. Jordache Enterprises is no longer a Cygne customer.



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



F-16



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|8. | Leases, Commitments and Litigation
|-- | ----------------------------------



Leases



Commencing May 20, 2004, the Company entered into a lease with an expiration date of October 31, 2008. Minimum future payments under this lease are as follows:



|                           |  |                         |        
|-------------------------- |  | ----------------------- | -------
|For the fiscal year ending |  | Minimum future payments
|January 2006               |  | $                       | 163,322
|January 2007               |  |                         | 174,283
|January 2008               |  |                         | 185,517
|January 2009               |  |                         | 143,709
|                           |  |                         |        
|                           |  | $                       | 666,831
|                           |  |                         |        



Total rent expense under the operating
leases from continuing operations for the years ended January 29, 2005, January 31, 2004 and February 1, 2003, was approximately $202,000, $287,000 and $264,000, respectively. Pursuant to the Companys lease, rent expense charged to operations
differs from rent paid because of the effect of free rent periods, landlord reimbursement of leasehold improvement costs and scheduled rent increases. Accordingly, the Company has recorded deferred rent payable of approximately $59,000 and $6,000,
respectively, at January 29, 2005 and January 31, 2004 which is included in accrued expenses. Rent expense is calculated by allocating total rental payments, including those attributable to scheduled rent increases on a straight-line basis over the
leased term.



Commitments



The Company has employment agreements with its two officers through April 30, 2006. Future
minimum aggregate annual payments under these agreements amount to approximately $1,015,000 in 2005 and $256,000 in 2006. 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



Pursuant to an agreement dated June 10, 2002 modified by an amendment dated July 29, 2002,
the Company sold its Jordanian business to Century Investment Group for $833,000 plus the assumption of all outstanding liabilities of the Jordanian company of approximately $943,000. The agreement also stated that any disputes between the parties
must be submitted to arbitration in Jordan. The first payment of $400,000 was received at the closing and the final payment of $433,000



F-17



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|8. | Leases, Commitments and Litigation (continued)
|-- | ----------------------------------------------





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



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



|9. | Income Taxes
|-- | ------------



Deferred income taxes are provided using the liability method. Under this method, deferred income taxes reflect tax 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 29,2005 |         |   | January 31,2004 |  
|                                 |  | (In thousands)  |        
|Deferred tax assets:             |  |                 |         |   |                 |   |         |  
|Net operating loss carryforwards |  | $               | 44,000  |   |                 | $ | 40,000  |  
|Valuation allowances             |  |                 | (44,000 | ) |                 |   | (40,000 | )
|                                 |  |                 |         |   |                 |   |         |  
|Net deferred tax assets          |  | $               | 0       |   |                 | $ | 0       |  
|                                 |  |                 |         |   |                 |   |         |  



F-18



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|9. | Income Taxes (continued)
|-- | ------------------------



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



|                     |  |                 |      |   |                 |   |     |                 |  |   |        |  
|-------------------- |  | --------------- | ---- | - | --------------- | - | --- | --------------- |  | - | ------ | -
|                     |  | Year Ended      |     
|                     |  | January 29,2005 |      |   | January 31,2004 |   |     | February 1,2003 | 
|                     |  | (In thousands)  |     
|Pretax income (loss) |  |                 |      |   |                 |   |     |                 |  |   |        |  
|United States        |  | $               | (190 | ) |                 | $ | 69  |                 |  | $ | (131   | )
|Foreign              |  |                 | 506  |   |                 |   | (59 | )               |  |   | (2,534 | )
|                     |  |                 |      |   |                 |   |     |                 |  |   |        |  
|Total                |  | $               | 316  |   |                 | $ | 10  |                 |  | $ | (2,665 | )
|                     |  |                 |      |   |                 |   |     |                 |  |   |        |  



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



|                |  |                 |   |                 |   |      |                 |  |   |        |  
|--------------- |  | --------------- | - | --------------- | - | ---- | --------------- |  | - | ------ | -
|                |  | Year Ended      |  
|                |  | January 29,2005 |   | January 31,2004 |   |      | February 1,2003 | 
|                |  | (In thousands)  |  
|Current:        |  |                 |   |                 |   |      |                 |  |   |        |  
|Federal         |  | $               | 0 |                 | $ | 0    |                 |  | $ | (4,800 | )
|Foreign         |  |                 | 0 |                 |   | (389 | )               |  |   | 35     |  
|State and local |  |                 | 3 |                 |   | 15   |                 |  |   | 15     |  
|                |  |                 |   |                 |   |      |                 |  |   |        |  
|Total           |  | $               | 3 |                 | $ | (374 | )               |  | $ | (4,750 | )
|                |  |                 |   |                 |   |      |                 |  |   |        |  



F-19



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|9. | Income Taxes (continued)
|-- | ------------------------



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



|                                                |  |                 |      |   |                  |       |   |                  |   |      |   |  |          |    |  |   |        |   |  |        |   
|----------------------------------------------- |  | --------------- | ---- | - | ---------------- | ----- | - | ---------------- | - | ---- | - |  | -------- | -- |  | - | ------ | - |  | ------ | --
|                                                |  | Year Ended      |     
|                                                |  | January 29,2005 |      |   | January 31, 2004 |       |   | February 1, 2003 |  
|                                                |  | (In thousands)  |     
|Tax at U.S statutory rates                      |  | $               | 107  |   |                  | 34.0  | % |                  | $ | 3    |   |  | 34.0     | %  |  | $ | (906   | ) |  | (34.0  | %)
|Loss, no benefit provided                       |  |                 | 65   |   |                  | 20.5  |   |                  |   | 20   |   |  | 200.0    |    |  |   | 906    |   |  | 34.0   |   
|Utilization of net operating loss carryforwards |  |                 |     |   |                  |      |   |                  |   | (23  | ) |  | (234.0   | )  |  |   |       |   |  |       |   
|Foreign income not subject to tax               |  |                 | (172 | ) |                  | (54.5 | ) |                  |   |     |   |  |         |    |  |   |       |   |  |       |   
|Reversal of tax accrual                         |  |                 | (12  | ) |                  | (3.8  | ) |                  |   | (400 | ) |  | (4,000.0 | )  |  |   | (4,800 | ) |  | (180.1 | ) 
|Foreign and state income taxes                  |  |                 | 15   |   |                  | 4.7   |   |                  |   | 26   |   |  | 260.0    |    |  |   | 50     |   |  | 1.9    |   
|                                                |  |                 |      |   |                  |       |   |                  |   |      |   |  |          |    |  |   |        |   |  |        |   
|                                                |  | $               | 3    |   |                  | 0.9   | % |                  | $ | (374 | ) |  | (3,740.0 | )% |  | $ | (4,750 | ) |  | (178.2 | )%
|                                                |  |                 |      |   |                  |       |   |                  |   |      |   |  |          |    |  |   |        |   |  |        |   



As of January 29, 2005, based upon tax
returns filed and to be filed, the Company expects to report a net operating loss carry forward for U.S. Federal income tax purposes of approximately $114,000,000. If unused, these loss carryforwards will expire in the Companys taxable years
ending in 2011 through 2025. Under Section 382 of the U.S. Internal Revenue Code, if there is a more than 50% ownership change (as defined therein) with respect to the Companys stock, the Companys loss carryforwards for U.S. Federal and
New York State and City tax purposes would be virtually eliminated. Approximately $78,000,000 of the federal net loss carryforwards will expire in the taxable year ended in January 2011.



As of January 29, 2005, 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 $67,000,000. If unused, these loss carryforwards will expire in the Companys taxable years ending in 2011 through 2025. Approximately $35,000,000 of the net
operating loss carryforwards for New York State and City (on a separate company basis) will expire in the taxable year ended in January 2011.



F-20



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|9. | Income Taxes (continued)
|-- | ------------------------



Tax Audits



In 2004, the Company settled a local tax audit. As a result of this settlement, the Company has reversed an excess tax accrual of $12,000
established in prior years in connection with this audit.



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



In 2002, the U.S. Internal Revenue Service
(the IRS) concluded its audit of the U.S. Federal income tax returns filed by GJM (US) Inc., the Companys 100% owned subsidiary, for its taxable years ending December 31, 1989 through October 7, 1994. The IRS and the Company have
executed a settlement agreement stating that no tax payment is due. As a result of this settlement for the year ended February 1, 2003, the Company has reversed a tax accrual of $4,800,000 established in prior years in connection with this audit.



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 condition, results of operations, and cash flows.



|10. | Segment Information
|--- | -------------------



Based on the criteria in SFAS No.131, Disclosures about Segments of an Enterprise and Related Information, the Company operates in one segment of the apparel market-womens career and causal apparel.



|11. | Employee Benefit Plans
|--- | ----------------------



The Company does not provide any post employment or post retirement benefits to its current or former employees. The Company implemented a 401(k) plan for domestic
employees on February 2, 1997. For the years ended January 31, 2004 and February 1, 2003, the Company did match 33% of the employees contributions up to 3% of the employees



F-21



---

Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|11. | Employee Benefit Plans (continued)
|--- | ----------------------------------



voluntary contribution which were $1,000, and $10,000, respectively. The Companys 401(k) plan was terminated on March 28, 2003.



|12. | Quarterly Financial Data (Unaudited)
|--- | ------------------------------------



The following table sets forth the quarterly financial data for the years ended January 29, 2005 (2004) and January 31, 2004 (2003).



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



|                                                                                         |  |                                         |         |   |       |   |        |       |  |   |       |   |  |       |       |       |  |   |       |  |   |       |   |  |   |       |   |  |   |       |  
|---------------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ----- | - | ------ | ----- |  | - | ----- | - |  | ----- | ----- | ----- |  | - | ----- |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                                                                         |  | 2004                                    |         |   | 2003  |  
|                                                                                         |  | Qtr.1                                   |         |   | Qtr.2 |   |        | Qtr.3 |  |   | Qtr.4 |   |  | Qtr.1 |       | Qtr.2 |  |   | Qtr.3 |  |   | Qtr.4 |  
|                                                                                         |  | (In thousands except per share amounts) |        
|Net sales                                                                                |  | $                                       | 5,586   |   |       | $ | 10,318 |       |  | $ | 8,470 |   |  | $     | 4,586 |       |  | $ | 6,064 |  | $ | 5,789 |   |  | $ | 9,117 |   |  | $ | 6,112 |  
|Gross profit                                                                             |  |                                         | 787     |   |       |   | 1,359  |       |  |   | 1,087 |   |  |       | 594   |       |  |   | 1,020 |  |   | 915   |   |  |   | 1,161 |   |  |   | 1,054 |  
|(Loss) income from continuing operations before interest, other expense and income taxes |  |                                         | (45     | ) |       |   | 266    |       |  |   | 179   |   |  |       | 115   |       |  |   | 209   |  |   | 137   |   |  |   | 242   |   |  |   | 114   |  
|(Loss) income from continuing operations                                                 |  |                                         | (86     | ) |       |   | 201    |       |  |   | 120   |   |  |       | 106   |       |  |   | 161   |  |   | 95    |   |  |   | 178   |   |  |   | 478   |  
|(Loss) from discontinued operation                                                       |  |                                         | (8      | ) |       |   | (7     | )     |  |   | (5    | ) |  |       | (8    | )     |  |   | 0     |  |   | 0     |   |  |   | (72   | ) |  |   | (456  | )
|Net (loss) income                                                                        |  |                                         | (94     | ) |       |   | 194    |       |  |   | 115   |   |  |       | 98    |       |  |   | 161   |  |   | 95    |   |  |   | 106   |   |  |   | 22    |  
|(Loss) income per share-basic and diluted from continuing operations                     |  |                                         | ($0.01) |   |       | $ | 0.02   |       |  | $ | 0.01  |   |  | $     | 0.01  |       |  | $ | 0.01  |  | $ | 0.01  |   |  | $ | 0.02  |   |  | $ | 0.03  |  
|(Loss) per share-basic and diluted from discontinued operation                           |  |                                         | (0.00   | ) |       |   | (0.00  | )     |  |   | (0.00 | ) |  |       | (0.00 | )     |  |   | 0.00  |  |   | (0.00 | ) |  |   | (0.01 | ) |  |   | (0.03 | )
|                                                                                         |  |                                         |         |   |       |   |        |       |  |   |       |   |  |       |       |       |  |   |       |  |   |       |   |  |   |       |   |  |   |       |  
|Net (loss) income per share-basic and diluted                                            |  |                                         | ($0.01) |   |       | $ | 0.02   |       |  | $ | 0.01  |   |  | $     | 0.01  |       |  | $ | 0.01  |  | $ | 0.01  |   |  | $ | 0.01  |   |  | $ | 0.00  |  
|                                                                                         |  |                                         |         |   |       |   |        |       |  |   |       |   |  |       |       |       |  |   |       |  |   |       |   |  |   |       |   |  |   |       |  



F-22



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Cygne Designs, Inc. and Subsidiaries



Notes to Consolidated Financial Statements (continued)



|13. | Subsequent Event (unaudited)
|--- | ----------------------------



On April 19, 2005, Cygne announced that it was in preliminary discussions to acquire the branded and private label denim clothing supply business of Commerce Clothing
Company



LLC, a privately-held company principally owned by Hubert Guez. During
2004, Commerce Clothing re-entered the market after being dormant for several years, and is involved in the design, manufacture and sale of denim clothing. Commerce Clothing had unaudited net sales of $17.4 million for the six months ended December
31, 2004 and $13.4 million for the first quarter of 2005, and was profitable in both periods. The preliminary proposed purchase price would be approximately 12 million shares of Cygne common stock and a promissory note in the approximate amount of
$40-$50 million. In addition, Cygne would enter into a supply agreement with a company controlled by the seller to manufacture denim products to be sold by Cygne. Mr. Guez would have the right to nominate three designees for election to Cygnes
Board of Directors and may, under certain circumstances, be deemed to be in control of Cygne. The discussions are at a preliminary stage and the terms of the acquisition could change materially. In addition, there can be no assurance
that the transaction will be consummated.



F-23



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Cygne Designs, Inc. and Subsidiaries



Schedule II- Valuation and Qualifying Accounts



|                                     |  |                                |     |                            |   |                                |  |                          |    |  |   |    
|------------------------------------ |  | ------------------------------ | --- | -------------------------- | - | ------------------------------ |  | ------------------------ | -- |  | - | ---
|Description                          |  | Balance at Beginning of Period |     | Charged toCost andExpenses |   | AllowancesProvided toCustomers |  | Balance at End of Period
|                                     |  | (In thousands)                
|Reserves for returns and allowances: |  |                                |     |                            |   |                                |  |                          |    |  |   |    
|Year ended February 1, 2003          |  | $                              | 0   |                            | $ | 42                             |  | $                        | 22 |  | $ | 20 
|Year ended January 31, 2004          |  |                                | 20  |                            |   | 56                             |  |                          | 71 |  |   | 5  
|Year ended January 29, 2005          |  |                                | 5   |                            |   | 52                             |  |                          | 57 |  |   | 0  
|                                     |  |                                |     |                           
|Reserve for other receivables:       |  |                                |     |                            |   |                                |  |                          |    |  |   |    
|Year ended January 31, 2004          |  | $                              | 0   |                            | $ | 433                            |  | $                        | 0  |  | $ | 433
|Year ended January 29, 2005          |  |                                | 433 |                            |   | 0                              |  |                          | 0  |  |   | 433



F-24