<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                ----------------
                                  FORM 10-K/A

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

     For the fiscal year ended December 31, 1997

                                       OR

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

                         Commission file number 0-28596

                              THE NORTH FACE, INC.
             (Exact name of registrant as specified in its charter)

             DELAWARE                                       94-3204082
   (State or other jurisdiction of                       (I.R.S. Employer
   incorporation or organization)                     Identification Number)


407 Merrill Avenue, Carbondale, Colorado                      81623
(Address of principal executive offices)                   (Zip Code)

      Registrant's telephone number, including area code: (970) 704-2300

          Securities registered pursuant to Section 12(b) of the Act:
                                     None
                                        
          Securities registered pursuant to Section 12(g) of the Act:
                   Common Stock, par value $.0025 per share
                                        
  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/A or any amendment to
this Form 10-K/A.   [ ]


  On March 31, 1999, the aggregate market value of the registrant's voting stock
held by non-affiliates was $149,472,100.

  As of March 31, 1999, the number of shares of the registrant's Common Stock
outstanding was 12,724,587.

                                       1
<PAGE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of stockholders are incorporated by reference in Part III of this report.

                                     PART I

             SIGNIFICANT FINANCIAL & GENERAL BUSINESS DEVELOPMENTS

     This Annual Report on Form 10-K/A contains forward-looking statements
that involve risks and uncertainties.  The statements contained herein that are
not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act, including
without limitation statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future.  All forward-looking statements
included in this document or incorporated by reference herein are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statements.  The Company
assumes that results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors contained herein.

     The North Face, Inc., a Delaware corporation was founded in 1965 by
outdoor enthusiasts as a retailer of high performance climbing and backpacking
equipment.  The North Face, Inc., together with its consolidated subsidiaries
("The North Face" or the "Company"), designs and distributes technically
sophisticated outerwear, snowsports gear, functional sportswear, tents, sleeping
bags, backpacks, daypacks, accessories and rugged footwear under The North
Face/(R)/ name.  Through its subsidiary Las Sportiva USA, and its affiliate La
Sportiva S.p.A., the Company designs, manufactures and distributes rock climbing
shoes, mountaineering boots and other rugged footwear under the La Sportiva
name.  The Company believes that The North Face/(R)/ is the world's premier
brand of high performance outdoor apparel and equipment.

                                  RESTATEMENT

     Subsequent to the issuance of the Company's Consolidated Financial
Statements for the year ended December 31, 1997, the Company's management
determined that certain barter transaction revenue had been improperly
recognized, certain capitalized costs related to the abandonment of an
information system project should have been expensed, certain deferred start up
and marketing costs did not have a demonstrated future benefit and should have
been expensed, and the warranty reserve had been improperly computed.  In
addition, it was determined that certain property amounts had been improperly
accrued.  As a result, the 1997 Consolidated Financial Statements have been
restated from amounts previously reported.

     The effects of the restatement are presented in Note 16 of the Notes to the
Consolidated Financial Statements and have been reflected herein.

     In addition to the restatements reflected herein, the Company has also
restated its previously issued Condensed Consolidated Financial Statements for
the three, six and nine months ended March 31, 1998, June 30, 1998 and September
30, 1998. See the Company's Quarterly Reports on Form 10-Q/A for the three, six
and nine months ended March 31, 1998, June 30, 1998 and September 30, 1998.

                                  TENDER OFFER

     On February 27, 1999, the Company's Board of Directors approved a
Transaction Agreement (the "Transaction Agreement") between the Company and TNF
Acquisition LLC ("TNF"), an affiliate of Leonard Green & Partners, L.P. ("LGP").
The Transaction Agreement provides for a tender offer for all of the Company's
outstanding stock (other than shares held by James G. Fifield, President and
Chief Executive Officer) at $17 cash per share and the acquisition of control of
the Company by LGP and Mr. Fifield.  On March 5, 1999, the Company withdrew its
tender offer, however, the Transaction Agreement remained in full force and
effect.  There can be no assurance that the transactions contemplated by the
Transaction Agreement (the "Transactions") will be consummated at all or on
terms favorable to the Company's shareholders. If the Transaction Agreement is
terminated, the Company could be required under certain circumstances to pay TNF
$7 million plus up to $5.5 million of TNF's expenses associated with the
Transactions.

                                       2
<PAGE>
 
     In connection with the Transactions and following the Company's
accounting-related announcements, which reported the restatement of the
Company's 1997 Consolidated Financial Statements and 1998 interim Condensed
Consolidated Financial Statements, several lawsuits have been filed against the
Company. There can be no assurance that the Company will successfully defend
these lawsuits. Regardless of whether the Transactions are consummated or of the
outcome of these lawsuits, the Company will likely incur significant related
expenses and costs that could have a material adverse affect on the Company's
business and operations. See "Item 3. Legal Proceedings."

                            TRADEMARKS AND LICENSING
                                        
     The Company considers its trademarks to be among its most valuable assets
and has numerous trademark registrations in the United States, Europe and other
foreign countries. Among the Company's trademarks are The North Face/(R)/, 'N'
Design logo/(R)/, Remote Terrain Gear/(R)/, Extreme Gear/(R)/, A5 and
Design/(R)/, Expedition System/(R)/, Extreme/(R)/, Tekware/(R)/, Steep
Tech/(R)/, Quick Pitch/(R)/, Hydrenaline/TM/, Search and Rescue/(R)/,
VaporWick/(R)/ , Hydroseal/(R)/ , UltraWick/TM/ and Windy Pass/(R)/. Because of
the popularity of many of the Company's products and their strong brand identity
and distinctive design, The North Face/(R)/ brand in recent years has been
subject to unauthorized copying and mislabeling of imitation goods. The Company
maintains an aggressive program of trademark enforcement and cooperation with
domestic and foreign customs officials and other authorities, and will continue
to vigorously defend its trademarks against infringement.

     The Company has licensed its trademarks to Mitsui, which markets Company-
designed products under The North Face/(R)/ name in Hong Kong and Macau. In
1998, the Company entered into trademark license agreements with Youngone
Corporation for the territories of China and Nepal. In addition, in Japan and
Korea substantially all of the Company's trademarks are owned by Goldwin.

                                    PART II
                                        
Item 3.   Legal Proceedings

     During the first week of March 1999, various complaints were filed against
the Company and its Board of Directors in the Delaware Court of Chancery and in
the California Superior Court, Alameda County in connection with the
transactions (the "Transactions") contemplated by the Transaction Agreement,
dated February 27, 1999, between the Company and TNF Acquisition LLC. The
complaints, filed on behalf of a purported class of the Company's shareholders,
generally allege that the Transactions are unfair and inadequate to the
Company's shareholders and charge the defendants with self-dealing and breach of
fiduciary duties. The various complaints generally request injunctive relief to
prevent the consummation of the Transactions, and seek other remedies in the
event the Transactions are completed. The Company has not yet responded to these
complaints.

     On March 9, 1999, a purported shareholder class action complaint was filed
in federal district court in Colorado, alleging that the Company and various of
its officers and directors violated the federal securities laws by making false
and misleading statements about the Company's financial results during a class
period from April 25, 1997 through March 4, 1999.  Markus v. The North Face,
Inc., et al., Civ. A. No. 99-WM-473.  Subsequently, complaints with similar
allegations and class periods on behalf of persons trading in the Company's
securities, have been filed in federal district courts in Colorado and
California (collectively, the "Securities Litigation").  The Company believes it
has meritorious defenses to these claims and intends to contest the Securities
Litigation vigorously.  An unfavorable resolution of the Securities Litigation
could have a material adverse effect on the business, results of operations or
financial condition of the Company.

     On April 6, 1999, a shareholder derivative action purportedly on behalf of
the Company, captioned Eng v. Cason, et al., Civil Action No. 810726-0, was
filed in California Superior Court, Alameda County.  The complaint alleges that
the Company's directors and various officers violated California law and
breached fiduciary duties to the Company by engaging in alleged wrongful conduct
from April 25, 1997 through March 12, 1999, including the conduct complained of
in the Securities Litigation.  The Company is named solely as a nominal
defendant, against whom the plaintiff seeks no recovery.

                                       3
<PAGE>
 
DIRECTORS AND EXECUTIVE OFFICERS OF THE NORTH FACE, INC. AS OF APRIL 1999

<TABLE>
<CAPTION>
Name                                         Age  Position
----                                         ---  --------
<S>                                          <C>  <C>
Marsden S. Cason                              56  Chairman
William N. Simon                              51  Vice Chairman
James G. Fifield                              56  Chief Executive Officer, President and Director
Karl Heinz Salzburger                         41  Chief Executive Officer The North Face (Europe), Inc.
Christopher F. Crawford                       41  General Manager of California Operations
Jeffrey C. Mack                               36  Acting Chief Financial Officer
Robert P. Bunje                               54  Director
Michael F. Doyle                              56  Director
Michael J. Solomon                            60  Director
</TABLE>

     Mr. Cason has been Chairman of the Company since February 1997 and served
as Chief Executive Officer of the Company from June 1994 to February 1997.  From
January 1993 to June 1994, Mr. Cason served as President and Director of TNF
Holdings Company.  

     Mr. Simon, has been Vice Chairman of the Company since May 1998. From March
1997 to May 1998, he served as the Company's President, CEO and Director.  From
December 1995 to March 1997, he served as the Company's President and Director.
From January 1994 to December 1995, he was the Company's Vice Chairman. Mr.
Simon holds a Bachelor of Arts degree from the University of California,
Berkeley.

     Mr. Fifield has been President, CEO and Director of the Company since May,
1998.  He comes to the Company from EMI Music where he served as its President
and Chief Executive Officer during his ten-year tenure.  Prior to joining EMI,
Mr. Fifield was President and CEO of CBS/Fox Video, a leading worldwide home
video company, from 1985 to 1988.  Mr. Fifield was also with General Mills for
twenty years where his last position was Group Executive Vice President of all
consumer non-food operations. Mr. Fifield attended Southern Methodist University
gaining Bachelors and Masters degrees in Business Administration.

     Mr. Salzburger, was appointed Chief Executive Officer for the Company's
European operations effective April 1, 1997.  From 1990 to 1997, Mr. Salzburger
served in varying capacities with Benetton Sports System, including Vice
President where he supervised the European subsidiaries, which market and
distribute Nordica, Prince, Rollerblade, Asolo and Killer Loop.  He also served
as the General Manager of Sales and Marketing for the Nordica Group with
Benetton Sports System where he was in charge of the brand strategy and the
contribution of each of the Group's brands. Mr. Salzburger holds a Bachelor of
Commerce and Economics from the University of Padua.

     Mr. Crawford  served as Chief Financial Officer of the Company from August
29, 1997 through March 30, 1999 and presently serves as General Manager of
California Operations, a position to which he was appointed in July 1998.  He
comes to The North Face, Inc. from CFM Majestic, Inc. and Vermont Castings, Inc.
where  Mr. Crawford served as V. P. Business Development and Strategic Planning
for CFM from May 1996 to May 1997.  CFM is a premier manufacturer of wood and
gas fired hearth products with sales of over $200 million.  Prior to that
period, Mr. Crawford was Chief Financial Officer of Vermont Castings, Inc., a
privately-held manufacturer of hearth products that was acquired by CFM Majestic
in 1996. Mr. Crawford also spent 10 years at PacificCorp., Inc., a $13 billion
diversified public utility, where he was involved in mergers and acquisitions,
credit and internal audit. Mr. Crawford is a Certified Public Accountant and has
a J. D. degree from Lewis and Clark Law School and a Bachelor of Science degree
from Cal State University, Northridge and is a member of the Oregon Bar.

     Mr. Mack, Controller and Acting Chief Financial Officer of The North Face,
Inc., joined the Company in December of 1998 as Controller and became the Acting
Chief Financial Officer in March 1999.  Prior to joining the Company, Mr. Mack
worked in several growth and start-up companies.  Most recently, he was
Controller for 

                                       4
<PAGE>
 
Thoratec Laboratories Corporation from January 1996 to November 1998. Prior to
this, Mr. Mack held a number of financial and operational positions at Kenetech
Corporation from September 1989 to January 1996. Mr. Mack holds a Bachelor of
Science degree in Business Administration from California State University at
Hayward and is a Certified Public Accountant.

     Mr. Bunje, has been a Director of the Company since May 1997.  He has been
the President of Bunje Pacific Consulting Corporation since April 1994.  From
1977 through March 1994, he was a partner at Deloitte & Touche LLP and its
predecessor Touche Ross & Co., and served as Managing Director of International
Merger and Acquisition Services from 1984 to 1994. Mr. Bunje attended Santa
Clara University, B.S.C. and their School of Law.

     Mr. Doyle, has been a Director of the Company since October 1996.  He is
Chairman of the Board of The Soft Bicycle Company and has been the President of
Michael Doyle and Associates, a professional consulting company, since September
1987.  Mr. Doyle has a Bachelor of Architecture degree from the University of
Cincinnati.

     Mr. Solomon, joined the Company's Board in August 1998.  He is a 41-year
veteran of the entertainment industry and since April 1994, has been Chairman
and President of his own Company, Solomon Broadcasting International.  Prior to
that, since 1989 was President of Warner Bros. International Television.   Mr.
Solomon was educated at Boston's Emerson College and New York University's
Evening School of Commerce (Stern School of Business).  He holds an honorary
Doctor of Law degree from Emerson College.

                                       5
<PAGE>
 
Item 6.  Selected Consolidated Financial Data.

                              THE NORTH FACE, INC.
                      SELECTED CONSOLIDATED FINANCIAL DATA
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                           The Predecessor (1)               
                                            Fiscal Years Ended                The Company
                                                 March 31,              Years Ended December 31,
                                           -------------------  ------------------------------------------
                                             1993       1994    1994 (2)      1995       1996     1997 (3)
                                           --------   --------  --------    --------   --------   --------
<S>                                       <C>         <C>       <C>        <C>        <C>        <C>
Net sales                                  $ 86,710   $ 87,411  $ 89,187    $121,534   $158,226   $203,247 
Operating income (loss)                      (6,548)     3,794     7,334      10,524     13,544     16,133
Income (loss) before provision for           
 taxes and extraordinary items               (9,991)     1,548     2,680       5,583      9,275     13,146 
Income (loss) before extraordinary items   $(10,508)  $    826  $  1,708    $  3,485   $  5,664   $  7,955
Net income per share before extraordinary                                  
 items:                                                                  
  Basic                                                                     $   1.07   $   0.84   $   0.70
  Diluted                                                                   $   0.47   $   0.62   $   0.69
Weighted average shares outstanding:                                     
  Basic                                                                        3,249      6,742     11,297
  Diluted                                                                      7,434      9,183     11,578
</TABLE>                                                                 
                                                                         
(1)  On June 7, 1994 the Company acquired substantially all of the operating
     assets of The North Face (the "Predecessor").  Due to the acquisition, and
     resulting change in accounting basis, and significant differences in the
     capital structures of the Predecessor and the Company, the financial
     statements of the Company may not be comparable to the Predecessor. 
     Additionally, effective December 31, 1994 the Company changed its year end
     from March 31 to December 31.

(2)  Assumes the acquisition occurred on January 1, 1994.

(3)  As restated; see Note 16 to the Consolidated Financial Statements.


<TABLE>
<CAPTION>
                                             As of March 31,                 As of December 31,
                                           --------------------   ---------------------------------------
                                             1993        1994       1994      1995      1996     1997 (1)
                                           --------    --------   --------   --------  --------  --------
<S>                                        <C>         <C>        <C>        <C>       <C>       <C>
Balance Sheet Data:
Working capital                            $ 23,725    $ 22,987    $14,189   $22,668  $ 51,799   $ 61,995
Total assets                                 53,318      50,363     66,549    84,508   110,587    167,449
Short-term debt                                 782       1,511      1,327     4,838        95     25,734
Long-term debt                               48,580      46,895     29,047    36,388       135      5,177
Stockholders' equity (deficit)             $(13,346)   $(13,130)   $17,179   $20,568  $ 86,499   $100,141
</TABLE>

(1) As restated; see Note 16 to the Consolidated Financial Statements.

                                       6
<PAGE>
 
Item 7.  Management's Discussion And Analysis Of Financial Condition And Results
Of Operations.

                              THE NORTH FACE, INC.
                             SUMMARY FINANCIAL DATA
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                               As of Percentage of Sales
                                               Years Ended December 31,        (except for income taxes)
                                           -------------------------------   ----------------------------
                                             1995        1996      1997 (1)    1995      1996    1997 (1)
                                           --------    --------   --------   --------  --------  --------
<S>                                        <C>         <C>        <C>        <C>       <C>       <C>
Net sales                                  $121,534    $158,226    $203,247     100.0%   100.0%     100.0%
Gross profit                                 55,064      70,031      92,483      45.3%    44.3%      45.5%
Operating expenses                           44,540      56,487      76,350      36.6%    35.7%      37.6%
Operating income                             10,524      13,544      16,133       8.7%     8.6%       7.9%
Interest expense                             (5,530)     (4,625)     (2,238)     (4.6%)   (2.9%)     (1.1%)
Other income (expense), net                     589         356        (749)      0.5%     0.2%      (0.4%)
Income before provision for taxes and         5,583       9,275      13,146       4.6%     5.9%       6.5%
 extraordinary items
Provision for income taxes                    2,098       3,611       5,191      37.6%    38.9%      39.5%
Income before extraordinary items             3,485       5,664       7,955       2.9%     3.6%       3.9%
</TABLE>

(1) As restated; see Note 16 to the Consolidated Financial Statements.


     The following table sets forth, for the periods indicated, the Company's
net sales by distribution channel as well as domestic versus international net
sales:

<TABLE>
<CAPTION>
                                                                             For the Years Ended December 31,
                                                                     -----------------------------------------------
                                                                       1995               1996              1997 (1)
                                                                     --------           --------            --------
<S>                                                                  <C>                <C>                 <C>
Wholesale                                                            $ 87,386           $125,292            $168,274
Company-operated retail                                                29,968             32,768              34,704
Government                                                              4,180                166                 269
                                                                     --------           --------            --------

Total net sales                                                      $121,534           $158,226            $203,247
                                                                     ========           ========            ========

United States                                                        $ 96,069           $120,027            $150,798
International                                                          25,465             38,199              52,449
                                                                     --------           --------            --------

Total net sales                                                      $121,534           $158,226            $203,247
                                                                     ========           ========            ========
</TABLE>

(1) As restated; see Note 16 to the Consolidated Financial Statements.

                                       7
<PAGE>
 
                                    GENERAL

     Restatement of Financial Results.  Subsequent to the issuance of the
Company's Consolidated Financial Statements for the year ended December 31,
1997, the Company's management determined that certain barter transaction
revenue had been improperly recognized, certain capitalized costs related to the
abandonment of an information system project should have been expensed, certain
deferred start up and marketing costs did not have a demonstrated future benefit
and should have been expensed, and the warranty reserve had been improperly
computed.  In addition, it was determined that certain property amounts had been
improperly accrued.  As a result, the 1997 consolidated financial statements
have been restated from amounts previously reported.  The effects of the
restatement are presented in Note 16 of the Notes to the Consolidated Financial
Statements and have been reflected herein.

     In addition to the restatements reflected herein, the Company has also
restated its previously issued Condensed Consolidated Financial Statements for
the three, six and nine months ended March 31, 1998, June 30, 1998 and September
30, 1998. See the Company's Quarterly Reports on Form 10-Q/A for the three, six
and nine months ended March 31, 1998, June 30, 1998 and September 30, 1998.

     Acquisition.  The assets and certain of the liabilities of the Company's
predecessor were acquired in June 1994 (the "Acquisition") by the Company, which
had been formed for this purpose.

     Products.  In 1995, sales of outerwear, equipment, snowsports gear and
other products represented approximately 50%, 25%, 14% and 11%, respectively, of
net sales.  In 1996, sales of outerwear, equipment, Tekware, snowsports gear and
other products including the launch of Ascentials represented approximately 52%,
25%, 7%, 12% and 4%, respectively, of net sales.  In 1997, sales of outerwear,
equipment, Tekware, snowsports gear, Ascentials and other products represented
approximately, 48%, 20%, 12%, 9%, 6% and 5% respectively, of net sales.

     Distribution.  The North Face is a global company with operations in the
United States, Europe and Canada.  To protect the integrity of The North 
Face/(R)/ brand and ensure a high level of customer service, the Company limits
the distribution of its products to a select number of specialty retailers. In
1997, the Company sold its products to approximately 1,750 wholesale customers
representing approximately 2,600 store fronts. Additionally, the Company's
products are sold under a trademark licensing agreement in Hong Kong, Japan and
Korea.

     Order Cycle. The North Face currently is engaged primarily in a two season
wholesale business, Spring (January to June) and Fall (July to December).
Wholesale customers place preseason orders, which generally are non-cancelable,
with the Company from one to eight months prior to the beginning of the season.
Reorders are placed throughout the season and products are shipped based on
availability.  Preseason orders have typically accounted for approximately 75%
of total sales to wholesale customers and historically have been an accurate
indicator of actual product shipments; however, there can be no assurance that
preseason orders will be an accurate indicator of actual product shipments in
the future.  The Company has decided to increase its investment in inventory of
core products to better allow it to capture reorder opportunities.  Accordingly,
the foregoing percentage may decline in the future.  With the introduction of
Tekware and Summit Shops, the Company expects that it increasingly will be
supplying its products to its wholesale customers on a year-round basis.
Preseason orders for the 1998 Spring season increased 25% over preseason orders
for the 1997 Spring season.

     Production Cycle.  Based on preseason orders and expected reorders, the
Company places production orders with its contract manufacturers for an entire
season three to five months before the beginning of the season. Fixed production
prices are agreed upon approximately three months prior to placement of such
production orders. As a result, the Company's production costs are relatively
predictable one season in advance of the delivery of products.  In the past, the
Company and its wholesale customers were unable to maximize sales of the
Company's most popular products due to the Company's strategy of determining
production quantities based primarily on preseason orders.  As a result, the
Company frequently was unable to meet strong reorder demand for its most popular
items.  In October 1996, the Company initiated a core inventory replenishment
program in which its core products and materials are being inventoried for rapid
reorder or manufacturing.  As a result of this new program, the Company has
maintained and plans to continue to maintain higher levels of inventories.

     Summit Shops.  In 1996, The North Face introduced Summit Shops in order to
increase sales to wholesale customers.  There were 14 concept shops, precursors
to the Summit Shops, opened in the first six months of 1996

                                       8

<PAGE>
 
and 28 Summit Shops opened in the second half of 1996, followed by an additional
160 shops in 1997. At the end of 1998, there was a total of 394 Summit Shops.
The additional shops were added to our total under a revised program which
provided a wider selection of Summit Shop formats, each varying in size and
design, to better match Summit Shop designs with the store's environment and
capacity. In Fall 1998, the new Summit Shop design was further refined to allow
even more merchandising flexibility and greater fixture capacity. The Company
plans to open approximately 150 additional Summit Shops in 1999, maintaining our
strategy of formats varying in size and design. While the Company expects future
Summit Shops to be an average of 425 square feet with an average investment for
fixtures of approximately $35,000, there can be no assurance that Summit Shops
will not require substantially more total capital investment in the future.

     Company-Operated Retail Sales.  In 1997, the Company operated nine full-
priced retail stores, three outlets, and one temporary outlet.  New stores and
outlets are included in comparable store sales commencing in their thirteenth
month of operation.  The Company currently does not plan to open any additional
retail stores in the near future because the Company believes that Summit Shops
will provide comparable merchandising and marketing benefits to those that are
received from Company operated retail stores, with a lower commitment of
financial and operational resources and a higher return on investment.

     Government Tent Sales.  The North Face historically has produced tents for
the U.S. Government.  The timing of these sales has fluctuated historically and
is dependent on the Company's obtaining and retaining contracts from the
government.  The timing of the sales under these contracts can significantly
affect the Company's quarterly results.  In September 1996, the Company received
a new tent contract from the Marine Corps totaling approximately $0.9 million
with two options for an additional $0.9 million each.  Shipments commenced
pursuant to this contract in 1998.  There can be no assurance however, that the
Company will obtain any additional contracts to produce tents for the Marine
Corps in the future.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

     Net Sales.  Net sales increased by 28.5% to $203.2 million from $158.2
million for 1997 compared to 1996.

     Net sales to wholesale customers increased by 34.3% to $168.3 million from
$125.3 million for 1997 compared to 1996.  This increase related primarily to
increased unit shipments to the Company's new and existing wholesale customers
resulting from: (i) the introduction of new products, including the Ascentials
product line; (ii) significant growth in sales of Tekware, which accounted for
over 12% of total sales in 1997 as compared to 7% in 1996; (iii) continued
strong sales of existing products; (iv) continued growth in international sales,
especially in Europe; and (v) the opening of 160 summit shops during 1997.

     Company-operated retail-store sales increased by 5.9% to $34.7 million from
$32.8 million for 1997 compared to 1996.  This increase was attributable to
comparable store sales increases as well as the full-year results of the
Freeport, Maine retail outlet opened in July 1996 and the partial-year sales
from the temporary Vacaville Outlet.

     Gross Profit.  Gross profit as a percentage of net sales for 1997 was 45.5%
compared to 44.3% for 1996. The higher margin was primarily attributable to
improved pricing in production, mix of product, improvements in Tekware gross
margins from the low levels associated with its 1996 introduction and general
improvements made possible by the Company's increased volume leverage.

     Operating Expenses.  Operating expenses include selling, marketing and
general and administrative expenses.  Operating expenses increased by 35.2% to
$76.4 million from $56.5 million for 1997 compared to 1996.  Operating expenses
increased as a percentage of net sales to 37.6% for 1997 from 35.7% for 1996.
These increases in operating expenses are primarily a result of increases in
variable and fixed costs to support the growth of the Company's business, as
well as the net impact of the following two items: (1) In connection with the
decision to select a new enterprise-wide software package, the Company, in
December 1997, wrote off capitalized software costs of $2.9 million; (2) During
the fourth quarter, the Company reassessed its estimate of future warranty

                                       9
<PAGE>
 
liabilities as part of an overall review of the methodology of processing
warranty claims.  As a result of this review, the warranty reserve was reduced
at December 31, 1997 by $0.9 million.

     Interest Expense.  Interest expense decreased to $2.2 million from $4.6
million for 1997 compared to 1996 primarily as a result of the application of
the proceeds from the Company's initial public offering in July 1996 and
secondary offering in November 1996 to repay debt, partially offset by higher
levels of working-capital related debt incurred in 1997.

     Provision For Income Taxes.  Provision for income taxes as a percent of
pretax income was approximately 39.5% for 1997 compared to 38.9% for 1996. This
increase in effective rate relates to the Company entering a higher tax bracket
in 1997 as well as the mix of the Company's pretax earnings amongst domestic and
international operations, which are subject to different tax rates.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

     Net Sales.  Net sales increased by 30.2% to $158.2 million from $121.5
million for 1996 compared to 1995.

     Net sales to wholesale customers increased by 43.4% to $125.3 million from
$87.4 million for 1996 compared to 1995.  This increase related primarily to
increased unit shipments to the Company's existing wholesale customers resulting
from: (i) the introduction of new products, including the initial shipments of
Tekware; (ii) continued strong sales of existing products; (iii) better service
to wholesale customers; (iv) a more targeted advertising and marketing campaign;
and (v) the opening of 42 concept (Summit) shops during 1996.

     Company-operated retail-store sales increased by 9.3% to $32.8 million from
$30.0 million for 1996 compared to 1995. This increase was attributable to
comparable store sales increases of 0.3% as well the opening of one new retail
store in October 1995 and one outlet in July 1996. In addition, the Company
closed two outlets in mid-1995.

     Government sales decreased by 96.0% to $0.2 million from $4.2 million for
1996 compared to 1995. This decrease was due to the timing of government tent
shipments under a contract, which was completed in 1995.

     Gross Profit.  Gross profit as a percentage of net sales for 1996 was 44.3%
compared to 45.3% for 1995. The lower margin was primarily attributable to
faster growth of wholesale sales compared to retail sales, as well as lower
wholesale margins related primarily to lower initial margins on the introduction
of the Company's new Tekware line.

     Operating Expenses.  Operating expenses include selling, marketing and
general and administrative expenses.  Operating expenses increased by 26.8% to
$56.5 million from $44.5 million for 1996 compared to 1995, primarily as a
result of increases in variable and fixed costs to support the growth of the
Company's business and the expansion of the merchandising department to launch
the Summit Shops program as well as operating costs associated with the
operation of a new retail store and outlet.  Operating expenses decreased as a
percentage of net sales to 35.7% for 1996 from 36.6% for 1995.

     Interest Expense.  Interest expense decreased to $4.6 million from $5.5
million for 1996 compared to 1995 primarily as a result of the application of
the proceeds from the Company's initial public offering in July 1996 and
secondary offering in November 1996 used to repay debt, offset by higher levels
of debt incurred to finance working capital growth.

     Provision For Income Taxes.  Provision for income taxes as a percent of
pretax income was approximately 38.9% for 1996 compared to 37.6% for 1995. This
increase relates to the mix of the Company's pretax earnings between the U.S.
and the United Kingdom, which have different tax rates.

                                       10
<PAGE>
 
     Extraordinary Items.  In 1996, the Company reported noncash extraordinary
charges of approximately $863,000, net of income taxes, as a result of
substantially restructuring both the credit facility and the subordinated note
in connection with the Company's initial public offering in July 1996.


YEAR 2000 COMPLIANCE

     Many currently installed computer systems and software products are coded
to accept only six digit entries in the date code field.  These date code fields
will need to accept eight digit entries to distinguish 21st century dates from
20th century dates.  As a result, during the next year, computer systems,
software and some non-information technology ("IT") products used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.

     State of Readiness.  We have conducted an internal review of our
information and significant non-IT systems.  We are involved in an enterprise-
wide project to upgrade or modify portions of our software so that our computer
systems will meet Year 2000 requirements.  We have been using both external and
internal resources to reprogram or upgrade our software.  We plan to complete
the modifications and upgrades, including testing, of all systems by November
1999.  No significant Year 2000 problems have been identified in the Company's
non-IT systems.

     Costs to Address the Year 2000 Issue. Based on Management's current
estimates, the total cost for addressing the Year 2000 issue is estimated to be
approximately $750,000 of which $366,000 has been incurred through December 31,
1998.

     Risks Presented by the Year 2000 Issue.  We believe that the modifications
and upgrades to our software will mitigate any Year 2000 problems associated
with our internal systems.   However, if we do not complete the process of
modifying and upgrading our software in a timely manner, or at all, or if we do
not identify computer systems and non-IT systems that need to be upgraded, the
Year 2000 issue could have a material impact on our operations.  We have
surveyed our significant vendors and other third parties on whom we rely to
ensure that they will convert their systems in a timely manner.  We currently
are in the process of analyzing third party responses to our survey.  We cannot
be sure that other companies will convert their systems effectively or in a
timely manner.  If third parties, such as suppliers, manufacturers and other
vendors, fail to meet Year 2000 requirements, our business could be materially
adversely affected.

     Contingency Plans.  The Company's Year 2000 plan includes the development
of contingency plans in the event that the Company has not completed all of its
remediation plans in a timely manner or any third parties who provide goods or
services essential to the Company's business fail to appropriately address their
Year 2000 issues.  The Company plans to conclude the development of these plans
by the end of the third quarter of 1999.

                                       11
<PAGE>
 
                         QUARTERLY DATA AND SEASONALITY

     The following table sets forth certain unaudited financial data for each of
the Company's eight fiscal quarters ended December 31, 1997. The operating
results for any quarter are not necessarily indicative of results for any future
period.

<TABLE>
<CAPTION>
                                                                         Year Ended December 31, 1997
                                                                   (In thousands, except per share amounts)
                                                                 -------------------------------------------
                                                                     Q1          Q2         Q3       Q4 (2)
                                                                 ---------   ---------  ---------  ---------
<S>                                                              <C>         <C>         <C>       <C>
Net sales                                                          $39,342     $31,087    $87,007  $  45,811
Gross profit                                                        17,215      13,041     39,689     22,538
Operating income (loss)                                                442      (2,934)    18,887       (262) (1)
Net income (loss)                                                      235      (2,007)    10,767     (1,040)
Net income (loss) per share:                                        
  Basic                                                            $  0.02     $ (0.18)   $  0.96  $   (0.09)
  Diluted                                                          $  0.02     $ (0.18)   $  0.92  $   (0.09)
Weighted average shares outstanding:                             
  Basic                                                             11,206      11,222     11,262     11,388
  Diluted                                                           11,643      11,222     11,708     11,388
                                                                 
                                                                 
                                                                        Year Ended December 31, 1996
                                                                 -------------------------------------------
                                                                     Q1          Q2         Q3        Q4
                                                                 ---------   ---------  ---------  ---------
<S>                                                              <C>         <C>         <C>       <C>
Net sales                                                          $31,020     $22,471    $68,138  $  36,597
Gross profit                                                        12,603       9,204     30,703     17,521
Operating income (loss)                                                139      (2,512)    13,031      2,886
Income (loss) before extraordinary items                              (629)     (2,410)     7,412      1,291
Net income (loss) per share:                                              
  Basic                                                            $ (0.22)    $ (0.84)   $  0.75  $    0.12
  Diluted                                                          $ (0.22)    $ (0.84)   $  0.71  $    0.12
Weighted average shares outstanding:                             
  Basic                                                              2,901       2,876      9,887     10,656
  Diluted                                                            2,901       2,876     10,499     11,121
</TABLE>                                                         
                                                                 
(1) Includes $2.9 million expense representing the write-off of abandoned system
    development costs partially offset by a $0.9 million reduction in the
    warranty reserve.
(2) The financial data for the quarter ended December 31, 1997 was restated as
    described in Note 16 of the Notes to the Consolidated Financial Statements.
--------------------------------------------------------------------------------

     The Company's business, like other retailers, is subject to seasonality and
quarterly fluctuations. Historically, the Company has realized substantially all
of its profits in the third quarter and has recognized losses during the second
quarter, and, until 1997, the first quarter.  The Company's results of
operations may fluctuate from quarter to quarter as a result of, among other
things, the amount and timing of shipments to wholesale customers, government
shipments, the timing and magnitude of discounts in retail stores, advertising
and marketing expenditures, increases in the number of employees and overhead to
support growth and store opening costs.

     The Company anticipates that it will continue to incur net losses during
the first and second calendar quarters for the foreseeable future. Additionally,
the Company's effective tax rate can vary significantly from quarter to quarter
due to the relative mix of earnings from the Company's domestic and
international operations, which are taxed at different rates.

                                       12
<PAGE>

STOCK MARKET RISKS

     The trading price of the Company's Common Stock has fluctuated
significantly since the Company's initial public offering in July 1996, and may
fluctuate in the future as a result of many factors, including the Company's
operating results, new products introduced by the Company or its competitors,
market conditions for the Company's products, changes in earnings estimates by
analysts, actual results reported by the Company which may be better or worse
than estimates provided by analysts, insider selling of Common Stock and
speculation in the trade or business press.  The trading price may also be
affected by retail industry, stock market, or economic factors unrelated to the
Company's operating performance.  Future sales of substantial amounts of Common
Stock by existing stockholders may also adversely affect prevailing market
prices for the Common Stock and could impair the Company's ability to raise
equity capital in the future.

     Trading in the Company's Common Stock was halted on April 16, 1999. There 
can be no assurance that the trading price of the Company's Common Stock will 
not fluctuate significantly upon the resumption of trading in its Common Stock 
or that there will not be any other adverse effect on the Company's business or
operations as a result of the trading halt.

                        LIQUIDITY AND CAPITAL RESOURCES

     Throughout 1997, the Company used cash of approximately $21.3 million for
operations, primarily due to increased levels of inventory and accounts
receivable and $13.9 million was used for investing activities to purchase
property and equipment.  These funds were provided by existing cash balances and
borrowings under the Company's credit facility.

     Historically, the Company's ability to maintain adequate levels of
inventory was constrained by its capital resources.  As a result of increases in
its credit facility as well as the Company's public offerings in 1996, the
Company increased its level of inventory in order to better enable it to meet
reorder demand for its key products.  The Company anticipates that inventory and
receivable levels will continue to increase as the Company expands its business
and continues to enhance its core inventory replenishment program.  Anticipated
increases in inventory are expected to be financed by borrowings under the
Company's credit facility.  The Company's credit facility currently provides for
borrowings up to $60.0 million under its revolving line of credit, with actual
borrowings limited to the lesser of $60.0 million or available collateral
(approximately $58.4 million of gross availability as of December 31, 1997) of
which the Company had $24.4 million outstanding at December 31, 1997 at an
average interest rate of 7.41%, and for borrowings of up to $5.0 million under a
term note for capital expenditures, which was fully utilized as of December 31,
1997.  The credit facility also provides a sublimit for letters of credit of up
to $25.0 million to finance the Company's purchases of merchandise inventories
from foreign suppliers.  At December 31, 1997, the Company had approximately
$3.8 million outstanding under this letter-of-credit facility.  Additionally,
Europe had approximately $2.0 million outstanding letters of credit as of
December 31, 1997. 

     In September 1998, the Company entered into a new five year Global Senior
Secured Revolving Credit Facility (the "New Credit Facility") with The
Industrial Bank of Japan, Limited, New York Branch (as syndication agent and
documentation agent), and IBJ Whitehall Business Credit Corporation (as
arrangers, collateral agent and as administrative agent for itself and the other
lenders), and other financial institutions (the "Financial Institutions"). The
New Credit Facility includes a term note, a revolving line of credit and a
letter of credit facility. The term note (availability up to $15 million) is
payable in equal quarterly installments based on five year amortization of the
outstanding term loan from the last day of the term loan availability period
with payments commencing on October 1, 1999, but the outstanding principal
balance shall be due and payable in full on the termination date which is
September 2003. The term note carries interest payable monthly at the higher of
(a) the bank's base commercial lending rate minus one-half of one percent (.50%)
and (b) one-half of one percent (.50%) above the federal funds effective rate
plus the applicable margin. The Company had an outstanding $5 million term note
as of December 31, 1998, with the interest rate of 7.25%. The revolving line of
credit provides for borrowing up to $115 million with the actual borrowings
limited to available collateral, representing eligible receivables and inventory
(approximately $91.9 million of gross availability as of December 31, 1998, of
which the Company borrowed $55.1 million at December 31, 1998). Interest on the
revolving line of credit is payable monthly at a rate of either (1) the prime
rate which is the higher of (a) the bank's base commercial lending rate minus
 .50% and (b) .50% above the federal funds effective rate plus the applicable
margin, or (2) LIBOR plus the applicable margin, at the option of the Company.
The average interest rate was 7.15% at December 31, 1998. The revolving line of
credit agreement provides a sublimit facility for letters of credit up to a
maximum of $40 million (approximately $10.5 million outstanding as of December
31, 1998). Fees for outstanding letters of credit are payable quarterly at 1.5%
per annum. The Company also pays a monthly unused line fee on the revolver at
 .375% per annum. Borrowings and outstanding letters of credit under the New
Credit Facility are secured by substantially all of the assets of the Company.
The New Credit Facility includes certain financial covenants and restrictions on
new indebtedness and the payment of cash dividends. On May 3, 1999, the Company
received a written waiver from the Financial Institutions for violations of
certain of the Company's non-financial covenants set forth in the agreements
relating to the New Credit Facility.

     Capital expenditures in 1998 were approximately $17.2 million.  This amount
was used principally for investing in Summit Shops, the upgrade of management
information systems, the expansion of the Company's administration and
distribution facilities, the construction of the new technology center, the
expansion of its European sales and marketing operations, and remodeling of its
existing stores.

     The Company anticipates that cash available under the Company's credit
facility and cash through an increase in its overall credit facility will be
sufficient to satisfy its cash requirements for at least the next 12 months.
However, there can be no assurance that the Company will not require additional
capital in 1999 or subsequent years.

Impact of New Accounting Standards

     See Note 2 to the Consolidated Financial Statements for a discussion of the
impact of new accounting standards.

Foreign Exchange Fluctuation

     The Company's inventory purchases from contract manufacturers in the Far
East are denominated in United States dollars; however, purchase prices for the
Company's products may be impacted by fluctuations in the exchange rate between
the United States dollar and the local currencies of the contract manufacturers,
which may have the effect of increasing the Company's cost of goods in the
future.  In addition, the Company's sales in Europe and Canada are denominated
in the local currencies of the applicable specialty retailer, which may have a
negative impact on profit margins or the rate of growth of sales in those
countries if the U.S. dollar were to strengthen significantly.  Due to the
number of foreign currencies involved and the fact that not all of these foreign
currencies fluctuate in the same manner against the United States dollar, the
Company cannot quantify in any meaningful way the potential effect of such
fluctuations on future income.  The Company engages in certain forward foreign
exchange hedging activities with respect to its European and Canadian inventory
purchases and sales.  See Note 11 to the Company's Consolidated Financial
Statements.

                                       13

<PAGE>
 
Inflation

     The Company believes that the relatively moderate rates of inflation during
1996 and 1997 in the United States, where it primarily competes, have not had a
significant effect on its net sales or results of operations.  Higher rates of
inflation have been experienced in a number of foreign countries in which the
Company's products are manufactured but also have not had a material effect on
the Company's net sales or results of operations.  In the past, the Company has
been able to offset its cost increases by increasing selling prices or changing
suppliers.

Asia Currency Crisis

     The Company may be affected by the current devaluation of the Asian
currencies due to the Company's importing of raw materials to Asia.
Furthermore, the Company may be affected by economic and political conditions in
each of the countries in which it operates.  Risks associated with operating in
the international arena include: (i) economic instability, including the
possible revaluation of currencies; (ii) extreme currency exchange fluctuations
where the Company has not entered into foreign currency forward and option
contracts to manage exposure to certain foreign currency commitments; (iii)
changes to import or export regulations (including quotas); (iv) labor or civil
unrest; and (v) in certain parts of the world, political instability.  The
Company has not as yet been materially affected by any such risks, but cannot
predict the likelihood of such developments occurring or the impact of any such
risks to the future profitability of the Company.

                               SUBSEQUENT EVENTS

     See Note 15 to the Consolidated Financial Statements for subsequent events
information relating to, among other matters, the proposed tender offer,
litigation and recently signed contracts.


                                       14
<PAGE>
 
Item 8.  Financial Statements and Supplementary Data.

                              THE NORTH FACE, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

<TABLE>                                                                     
<CAPTION>                                                                   
                                                                           For the Years Ended December 31,
                                                                           --------------------------------
                                                                             1997        1996        1995
                                                                           --------    --------    --------
                                                                          RESTATED
                                                                        (SEE NOTE 16)
<S>                                                                    <C>            <C>         <C>
Net sales                                                                  $203,247    $158,226    $121,534
Cost of sales                                                               110,764      88,195      66,470
                                                                           --------    --------    --------
  Gross profit                                                               92,483      70,031      55,064
Operating expenses                                                           76,350      56,487      44,540
                                                                           --------    --------    --------
  Operating income                                                           16,133      13,544      10,524
Interest expense                                                             (2,238)     (4,625)     (5,530)
Other income (expense), net                                                    (749)        356         589
                                                                           --------    --------    --------
Income before provision for income taxes and extraordinary items             13,146       9,275       5,583
Provision for income taxes                                                    5,191       3,611       2,098
                                                                           --------    --------    --------
Income before extraordinary items                                             7,955       5,664       3,485
Extraordinary items - losses on extinguishment of debt, net of                   --        (863)         --
 income taxes of $575                                                      --------    --------    --------
Net income                                                                 $  7,955    $  4,801    $  3,485
                                                                           ========    ========    ========
Income per share before extraordinary items:                            
  Basic                                                                    $   0.70    $   0.84 (1)$   1.07 (1)
  Diluted                                                                  $   0.69    $   0.62    $   0.47
Net income per share:                                                   
  Basic                                                                    $   0.70    $   0.71 (1)$   1.07 (1)
  Diluted                                                                  $   0.69    $   0.52    $   0.47
Weighted average shares outstanding:                                    
  Basic                                                                      11,297       6,742       3,249
  Diluted                                                                    11,578       9,183       7,434
</TABLE>                                                                
                                                                        
(1) See Note 2 of the Notes to the Consolidated Financial Statements.

          See accompanying notes to consolidated financial statements.

                                       15
<PAGE>
 
                              THE NORTH FACE, INC.
                          CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                                                             December 31,
                                                                                                   ------------------------------
                                                                                                     1997                  1996
                                                                                                   --------              --------
                                                                                                   RESTATED
                                                                                                 (SEE NOTE 16)
<S>                                                                                                <C>                   <C>
ASSETS                                                                                              
Current assets:                                                                                     
 Cash and cash equivalents                                                                         $  4,511              $  8,315
 Trade accounts receivable, net                                                                      48,745                21,405
 Other receivables                                                                                    6,112                 2,744
 Inventories                                                                                         46,682                31,475
 Deferred taxes                                                                                       2,865                 2,490
 Other current assets                                                                                 9,046                 2,879
                                                                                                   --------              --------
  Total current assets                                                                              117,961                69,308
Property and equipment, net                                                                          17,524                10,678
Trademarks and intangibles, net                                                                      29,066                29,346
Debt issuance costs, net                                                                                 27                    58
Other assets                                                                                          2,871                 1,197
                                                                                                   --------              --------
  Total assets                                                                                     $167,449              $110,587
                                                                                                   ========              ========
LIABILITIES AND STOCKHOLDERS' EQUITY                                                               
Current liabilities:                                                                             
 Accounts payable                                                                                  $ 18,113              $  9,966
 Accrued employee expenses                                                                            2,917                 1,924
 Short-term borrowings and current portion of long-term debt and capital lease obligations           25,734                    95
 Income taxes payable                                                                                 2,077                 1,010
 Other current liabilities                                                                            7,125                 4,514
                                                                                                   --------              --------
  Total current liabilities                                                                          55,966                17,509
Long-term debt and capital lease obligations                                                          5,177                   135
Other long-term liabilities                                                                           6,165                 6,444
                                                                                                   --------              --------
 Total liabilities                                                                                   67,308                24,088
                                                                                                   --------              --------
Commitments and contingencies                                                                            --                    --

Stockholders' equity:                                                                            
 Preferred stock, $1.00 par value-shares authorized 4,000,000; none issued              
  and outstanding                                                                                        --                    --
 Common stock, $.0025 par value-shares authorized 50,000,000; issued and outstanding             
  11,502,000 and 11,200,000, respectively                                                                29                    29
 Additional paid-in capital                                                                          81,727                76,130
 Subscriptions receivable                                                                                --                   (95)
 Retained earnings                                                                                   18,068                10,113
 Cumulative translation adjustments                                                                     317                   322
                                                                                                   --------              --------
  Total stockholders' equity                                                                        100,141                86,499
                                                                                                   --------              --------
  Total liabilities and stockholders' equity                                                       $167,449              $110,587
                                                                                                   ========              ========
</TABLE>  
          

          See accompanying notes to consolidated financial statements.

                                       16
<PAGE>

                              THE NORTH FACE, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                   For the Years Ended December 31,
                                                                                   --------------------------------
                                                                                      1997       1996       1995
                                                                                   ---------   ---------   --------
                                                                                    RESTATED
                                                                                 (SEE NOTE 16)
<S>                                                                                <C>         <C>        <C>
Cash Flows From Operating Activities:

 Net income                                                                         $  7,955   $  4,801   $ 3,485
 Adjustments to reconcile net income to cash
  used in operating activities
   Depreciation and amortization                                                       5,130      3,595     3,075
   Loss on disposal of property and equipment                                          2,869         --        --
   Adjustment to warranty accrual                                                       (895)        --        --
   Deferred income taxes                                                                (375)      (260)     (441)
   Provision for doubtful accounts                                                       278        427       285
   Extraordinary items - losses on extinguishments of debt                                --        863        --
   Tax benefit of exercise of stock options                                            4,803      3,595        --
 Effect of changes in:
   Accounts receivable                                                               (27,618)    (7,994)   (3,381)
   Inventories                                                                       (15,207)   (10,427)   (8,980)
   Other assets                                                                      (11,714)    (2,054)     (469)
   Accounts payable and accrued liabilities                                           13,435      1,290     3,631
                                                                                    --------   --------   -------
     Net cash used in operating activities                                           (21,339)    (6,164)   (2,795)
                                                                                    --------   --------   -------

Investing Activities:
 Purchases of property and equipment                                                 (13,935)    (4,621)   (5,665)
                                                                                    --------   --------   -------
Financing Activities:
 Long-term debt proceeds                                                               6,826      2,825     5,600
 Repayments of long-term debt                                                           (546)   (32,009)   (2,595)
 Proceeds (payments) from revolver, net                                               24,400    (11,812)    7,847
 Payment of debt issuance costs                                                          (94)      (262)     (300)
 Proceeds from issuance of stock                                                         889     56,884        --
                                                                                    --------   --------   -------
     Net cash provided by financing activities                                        31,475     15,626    10,552
                                                                                    --------   --------   -------
 Effect of foreign currency fluctuations on cash                                          (5)       651       (95)
                                                                                    --------   --------   -------

 Increase (decrease) in cash and cash equivalents                                     (3,804)     5,492     1,997

 Cash and cash equivalents, beginning of year                                          8,315      2,823       826
                                                                                    --------   --------   -------
 Cash and cash equivalents, end of year                                             $  4,511   $  8,315   $ 2,823
                                                                                    ========   ========   =======

 Supplemental Cash Flow Information:
     Cash paid for:
         Interest                                                                   $  2,136   $  4,859   $ 4,383
         Income taxes                                                               $  4,488   $  1,302   $ 1,785
     Noncash transactions:
         Cancellation of stock and related promissory note                          $     --   $     --   $   119
         Conversion of preferred stock into common stock                            $     --   $ 15,075   $    --
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       17
<PAGE>
 
                              THE NORTH FACE, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (In thousands)
<TABLE>
<CAPTION>
                                               Preferred Stock              Common Stock              Cumulative
                                             ------------------   -------------------------------      Preferred
                                                                                       Additional      Dividends
                                              Shares    Amount    Shares   Amount        Capital         Accrued
                                             -------   --------   ------   ------      ----------     -----------
<S>                                          <C>       <C>        <C>      <C>         <C>            <C>
January  1, 1995                               1,936   $ 12,267    3,431      $ 8         $   764         $   696
 Net income                                       --         --       --       --              --              --
 Cancellation of restricted stock                 --         --     (529)      (1)           (119)             --
 Stock dividends on preferred                     --         --                --              --           1,353
 Translation adjustments                          --         --       --       --              --              --
                                             -------   --------   ------   ------      ----------     -----------
December 31, 1995                              1,936     12,267    2,902        7             645           2,049
 Net income                                       --         --                --              --              --
 Stock dividends on preferred                     --         --                --              --             759
 Declaration of preferred dividend               443      2,808                --              --          (2,808)
 Conversion of preferred stock                (2,379)   (15,075)   4,221       11          15,064              --
 Exercise of stock options
   including tax benefit                          --         --      379        1           3,873              --
 Sale of common stock                             --         --    3,829       10          56,578              --
 Cancellation of restricted stock                 --         --     (131)      --             (30)             --
 Translation adjustments                          --         --       --       --              --              --
                                             -------   --------   ------   ------      ----------     -----------
December 31, 1996                                 --         --   11,200       29          76,130              --
 Net income (Restated, See Note 16)               --         --                --              --              --
 Exercise of stock options
   including tax benefit                          --         --      286       --           5,354              --
 Employee stock purchase plan                                --       16       --             243              --
 Translation adjustments                          --         --       --       --              --              --
                                             -------   --------   ------   ------      ----------     -----------
December 31, 1997 (Restated, See Note 16)    $  --     $  --      11,502      $29         $81,727     $        --
                                             =======   ========   ======   ======      ==========     ===========

                                                                              Cumulative        Total            
                                              Subscription      Retained      Translation    Stockholders'       
                                               Receivable       Earnings      Adjustments       Equity 
                                             -------------     ---------      ------------   ------------
<S>                                          <C>               <C>           <C>               <C>
January  1, 1995                                     ($261)      $ 3,939             ($234)   $ 17,179
 Net income                                             --         3,485                --       3,485
 Cancellation of restricted stock                      119            --                --          (1)
 Stock dividends on preferred                           --        (1,353)               --
 Translation adjustments                                --            --               (95)        (95)
                                             -------------     ---------      ------------    ---------
December 31, 1995                                     (142)        6,071              (329)     20,568
 Net income                                             --         4,801                --       4,801
 Stock dividends on preferred                           --          (759)               --
 Declaration of preferred dividend                      --            --                --
 Conversion of preferred stock                          --            --                --
 Exercise of stock options
   including tax benefit                                17            --                --       3,891
 Sale of common stock                                   --            --                --      56,588
 Cancellation of restricted stock                       30            --                --
 Translation adjustments                                --            --               651         651
                                             -------------     ---------      ------------    ---------
December 31, 1996                                      (95)       10,113               322      86,499
 Net income (Restated, See Note 16)                     --         7,955                --       7,955
 Exercise of stock options
   including tax benefit                                95            --                --       5,449
 Employee stock purchase plan                           --            --                --         243
 Translation adjustments                                --            --                (5)         (5)
                                             -------------     ---------      ------------    ---------
December 31, 1997 (Restated, See Note 16)           $   --       $18,068            $  317    $100,141
                                             =============     =========      ============    =========
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       18
<PAGE>
 
                              THE NORTH FACE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Business and Basis of Presentation

     Business.  The North Face, Inc. designs and distributes technically
sophisticated outerwear, skiwear, functional sportswear, tents, sleeping bags,
backpacks and daypacks under The North Face/(R)/ name. The Company sells its
products to select specialty retailers throughout the United States, Europe and
Canada.   The Company also operates nine full-priced retail stores, three
outlets and one temporary outlet.

2.  Summary of Significant Accounting Policies

     Principles of Consolidation.  The consolidated financial statements include
the financial statements of The North Face, Inc. and its wholly-owned
subsidiaries.  All intercompany accounts have been eliminated.

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

     Foreign Currency Translation.  The assets and liabilities of the Company's
foreign subsidiaries have been translated into U.S. dollars using the exchange
rates in effect at period end, and the revenues and expenses have been
translated into U.S. dollars using the average exchange rates in effect during
the period. Adjustments resulting from translating foreign financial statements
into U.S. dollars are reported as translation adjustments as a separate
component of stockholders' equity. Aggregate transaction gains (losses) for
1997, 1996 and 1995 were ($698,000), $173,000 and $188,000, respectively.

     Cash and Cash Equivalents represent short-term investments with original
maturities of less than three months.

     Accounts Receivable are recorded upon the sale of inventory to independent
customers.  A sale occurs when inventories are shipped and title and risk of
loss have transferred from the Company to the buyer. Seasonal goods are
generally shipped to customers prior to the selling season.  The Company offers
extended payment terms for pre-season orders.

     Inventories are stated at the lower of average cost or market. The Company
principally contracts for the manufacture of its products in the U.S., Asia and
Europe. Costs related to these inventories represent landed cost, which consists
of the price paid to third party manufacturers, and inbound duties and freight.

     Trademarks and Intangibles are amortized on a straight-line basis over
forty years.  Accumulated amortization at December 31, 1997 and 1996 was
approximately $2.8 million and $2.0 million, respectively.  Amortization
expense was $785,000, $783,000 and $790,000 for the years ended December 31,
1997, 1996 and 1995, respectively.

     Property And Equipment is stated at cost.  Depreciation and amortization is
computed using the straight-line method over the remaining estimated useful life
of the asset (or over the remaining lease term, if shorter, for capital leases).
The estimated useful lives of certain categories are as follows:

<TABLE>
<CAPTION>
<S>                                                           <C> 
Leasehold improvements                                        5 - 10 years
Machinery and equipment                                       5 years
Furniture, fixtures and office equipment                      3 - 7 years
</TABLE>

                                       19
<PAGE>
 
     Expenditures for replacements and improvements are capitalized;
maintenance and repairs are expensed as incurred.

     Product Warranty. Substantially all of the Company's products carry a
lifetime warranty for defects in quality and workmanship which allows the
Company to repair or replace, at its option, the products found to have a
manufacturing defect. The Company maintains warranty departments in the U.S.,
Canada and Europe and repairs the majority of items returned under warranty. The
Company's estimated liability for future warranty claims related to past sales
at December 31, 1997, and 1996 is approximately $4.2 million and $4.9 million,
respectively, of which the non-current portion of $3.0 million and $3.8 million
is classified as other long term liabilities as of December 31, 1997 and 1996,
respectively. The current portion of the warranty liability is $1.2 million and
$1.2 million and is classified as other current liabilities as of December 31,
1997 and 1996, respectively. Warranty expense was approximately $1,496,000,
$1,711,000 and $1,004,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.

     Deferred Rent. Certain of the Company's operating leases contain
predetermined fixed increases of the minimum rental rate during the initial
lease term. For these leases, the Company recognizes the related rental expense
on a straight-line basis over the life of the lease and records the difference
between the amount charged to rent expense and the rent paid as deferred rent.

     Income Taxes. The Company applies an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactment of
changes in the tax laws or rates. Deferred taxes are provided for temporary
differences between assets and liabilities for financial reporting purposes and
for income tax purposes and valuation allowances are recorded against net
deferred tax assets where appropriate. No U.S. income tax provisions have been
provided on the cumulative undistributed earnings of foreign operations as it is
the Company's intention to utilize those earnings in those foreign operations
for an indefinite period of time.

     Earnings Per Share. In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128). The Company adopted SFAS 128 in the fourth
quarter of 1997 and has restated earnings per share (EPS) data for prior periods
to conform with SFAS 128. SFAS 128 requires a dual presentation of basic and
diluted EPS. Basic EPS is computed by dividing net income by the weighted
average of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur upon exercise of outstanding stock options
and conversion of convertible securities.

     The following is a summary of the calculation of the number of shares
used in calculating basic and diluted EPS (in thousands):

     
<TABLE> 
<CAPTION> 
                                                             Years Ended December 31,
                                                     ----------------------------------------
                                                      1997             1996             1995
                                                     -------           -----            -----
<S>                                                  <C>               <C>              <C> 
         Shares used to compute basic EPS             11,297           6,742            3,249
         Add effect of dilutive securities:
             Stock options                               281             436              553
             Convertible preferred stock                  --           2,005            3,632
                                                     -------           -----            -----
         Shares used to compute diluted EPS           11,578           9,183            7,434
                                                     =======           =====            =====
</TABLE> 

                                       20
<PAGE>
 
     In 1998, the Company adopted the requirements of Securities and
Exchange Commission Staff Accounting Bulletin ("SAB") No. 98, issued in February
1998, and began presenting its basic earnings per share data on a historical
basis without giving retroactive effect to the conversion of all of its
outstanding Series A Preferred Stock into 4,220,808 shares of common Stock in
connection with the Company's initial public offering of its common stock in
1996. The pro forma basic earnings per share and shares used in proforma basic
earnings per share calculations for the years ended December 31, 1996 and 1995
shown below reflect this conversion as of the beginning of the year.


<TABLE> 
<CAPTION> 
                                                                   Years ended December 31,
                                                                   ------------------------
                                                                      1996          1995
                                                                   ----------   -----------
<S>                                                                <C>          <C> 
Pro forma basic income per share before extraordinary items           $0.65          $0.51
Pro forma basic net income per share                                  $0.55          $0.51
Pro forma weighted average shares outstanding (basic)                 8,747          6,881
</TABLE> 

     Stock-based Compensation. Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-based Compensation (SFAS No. 123)", allows either
adoption of a fair value method for accounting for stock-based compensation
plans or continuation of accounting under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations with supplemental disclosures. The Company has chosen to account
for its stock options using the intrinsic value based method prescribed in APB
Opinion No. 25 and, accordingly, does not recognize compensation expense for
stock option grants made at an exercise price equal to or in excess of the fair
market value of the stock at the date of grant. Pro forma net income and
earnings per share amounts as if the fair value method had been adopted are
presented in Note 12. SFAS No. 123 does not impact the Company's results of
operations, financial position or cash flows.

     Derivatives. Gains and losses on forward foreign exchange contracts
used to hedge foreign currency denominated receivables are recognized currently.
Gains and losses related to qualifying hedges of preseason orders (which are
considered firm commitments) are deferred and recognized in income when the
hedged transaction occurs.

New Accounting Pronouncements

     The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long Lived Assets and Long Lived Assets to be Disposed of" (SFAS 121) for the
year ended December 31, 1996. SFAS 121 establishes recognition and measurement
criteria for losses whenever events or changes in circumstances indicate that
the carrying value of assets may not be recoverable. There was no effect on the
Company's consolidated financial statements as a result of the adoption of SFAS
121.

     In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS No. 130) which requires that an enterprise report, by major components and
as a single total the change in its net assets during the period from non-owner
sources; and Statement of Financial Accounting No. 131, "Disclosures about
Segments of an Enterprise" (SFAS No. 131) which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Adoption of these statements will not impact the Company's consolidated
financial position, results of operations or cash flows, and any effect will be
limited to the form and content of its disclosures. Both statements are
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted.

     Reclassifications.  Certain amounts in the 1996 and 1995 financial  
statements  have been  reclassified to conform with the 1997 presentation.

                                       21
<PAGE>
 
3.   Accounts Receivable

     The allowance for doubtful accounts was $1,321,000, $1,282,000 and
$1,067,000 as of December 31, 1997, and 1995, respectively. Write-offs to
accounts receivable during the years ended December 31, 1997, 1996 and 1995 were
approximately $239,000, $212,000 and $71,000, respectively.

     During the years ended December 31, 1997, 1996 and 1995, no customer
accounted for more than 10% of net sales.

4.   Inventories

     Inventories as of December 31, 1997 and 1996 consist of (in thousands):

<TABLE> 
<CAPTION> 
                                                                  1997                1996
                                                                ---------          ---------
 <S>                                                            <C>                <C> 
     Finished goods                                             $  41,637          $  28,473
     Work in progress                                                 789                793
     Raw materials                                                  4,256              2,209
                                                                ---------          ---------
     Total inventories                                          $  46,682          $  31,475
                                                                =========          =========
</TABLE> 

5.   Property and Equipment

     Property and equipment as of December 31, 1997 and 1996 consist of (in
thousands):

<TABLE> 
<CAPTION> 
                                                                       1997               1996
                                                                    ---------          ---------
<S>                                                                 <C>                <C> 
         Leasehold improvements                                     $   7,287          $   7,246
         Furniture, fixtures and office equipment                      16,630              6,098
         Machinery and equipment                                        1,965              1,476
                                                                    ---------          ---------
         Subtotal                                                      25,882             14,820
         Less accumulated depreciation and amortization                (8,358)            (4,142)
                                                                    ---------          ---------
         Total property and equipment, net                          $  17,524          $  10,678
                                                                    =========          =========
</TABLE> 

     Depreciation and amortization expense related to property and equipment
was $4,218,000, $2,302,000 and $1,268,000 for the years ended December 31, 1997,
1996, and 1995, respectively. Maintenance and repair expense was $648,000,
$671,000, and $565,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.

     In December 1997, in connection with the decision to terminate the
implementation of an enterprise-wide software package, the Company wrote off
capitalized system implementation costs of $2.9 million.

6.   Income Taxes

     The Company's pre tax income before extraordinary items consisted of (in
thousands):

<TABLE> 
<CAPTION> 
                                         For the Years Ended December 31,
                                    ------------------------------------------
                                     1997             1996              1995
                                    -------          -------           -------
<S>                                 <C>              <C>               <C> 
                  U.S.              $ 8,582          $ 6,332           $ 3,749
                  Foreign             4,564            2,943             1,834
                                    -------          -------           -------
                                    $13,146          $ 9,275           $ 5,583
                                    =======          =======           =======
</TABLE> 

                                       22
<PAGE>
 
         The provision for income taxes consists of the following (in
thousands):

<TABLE> 
<CAPTION> 
                                         For the Years Ended December 31,
                                   -------------------------------------------
                                     1997             1996              1995
                                   --------          -------           -------
<S>                                 <C>              <C>               <C> 
         Federal
              Current               $2,698            $2,514            $  825
              Deferred                  61              (338)              375
         State
              Current                  632               679               202
              Deferred                 240               (80)               77
         Foreign
              Current                1,805               879               641
              Deferred                (245)              (43)              (22)
                                   -------           -------           -------
                                    $5,191            $3,611            $2,098
                                   =======           =======           =======
</TABLE> 

     Reconciliation of the U.S. Federal statutory rate to the Company's
effective tax rate is as follows:

<TABLE> 
<CAPTION> 
                                                                     For the Years Ended December 31,
                                                            -----------------------------------------------
                                                                1997             1996              1995
                                                            -----------       -----------       -----------
<S>                                                          <C>              <C>               <C> 
         Statutory rate                                            34.0%             34.0%             34.0%
         State income taxes, net of federal benefit                 4.3%              4.3%              4.2%
         Other                                                      1.2%              0.6%             -0.6%
                                                            -----------       -----------       -----------
         Effective tax rate                                        39.5%             38.9%             37.6%
                                                            ===========       ===========       ===========
</TABLE> 

     Deferred income taxes for the Company reflect the tax effects of
temporary differences between amounts of assets and liabilities for financial
reporting purposes and such amounts measured by tax laws.

     Significant components of the net deferred tax asset as of December 31,
1997 and 1996 are as follows (in thousands):

<TABLE> 
<CAPTION> 
                                                                      1997                1996
                                                                    ---------          ---------
<S>                                                                 <C>                <C> 
         Deferred tax asset:
         Inventory costs not yet deductible                         $   1,691          $   1,048
         Depreciation                                                     599                522
         Liabilities not yet deductible for tax                         3,030              2,661
                                                                    ---------          ---------
                                                                        5,320              4,231
                                                                    ---------          ---------
         Deferred tax liabilities:
         Depreciation                                                     (97)               (97)
         Intangibles                                                   (3,758)            (3,169)
         Liabilities deductible for tax not book                         (809)              (261)
                                                                    ---------          ---------
                                                                       (4,664)            (3,527)
                                                                    ---------          ---------
         Net deferred income tax asset                              $     656          $     704
                                                                    =========          =========

         Current asset                                              $   2,865          $   2,490
         Long-term liability                                           (2,209)            (1,786)
                                                                    ---------          ---------
                                                                    $     656          $     704
                                                                    =========          =========
</TABLE> 
     The cumulative amount of undistributed earnings of the European and
Canadian subsidiaries, which the Company intends to indefinitely reinvest
outside of the United States and upon which deferred income taxes are not
provided, approximates $9.7 million at December 31, 1997.


                                       23
<PAGE>
7.   Pension Plan
 
     The Company's European subsidiary has a contributory defined benefit
pension plan covering substantially all full-time employees. Benefits are based
on years of service and compensation. The Company funds the plan in amounts not
less than the minimum statutory requirements in the United Kingdom. The plan's
assets consist of a mutual fund which invests in equity securities.

     Pension expense consisted of the following (in thousands):

<TABLE> 
<CAPTION> 
                                                                   For the Years Ended December 31,
                                                            ---------------------------------------------
                                                                1997              1996             1995
                                                            ----------        ----------        ---------
<S>                                                         <C>               <C>               <C> 
         Service cost                                       $     101         $      76         $      55
         Interest cost on projected benefit obligations           291               222               180
         Actual return on plan assets                            (269)             (101)             (323)
         Net amortization                                         (14)             (101)              176
                                                            ----------        ----------        ---------
         Pension expense                                    $     109         $      96         $      88
                                                            =========         =========         =========
         Contributions to the plan                          $     341         $     371         $     346
                                                            =========         =========         =========
</TABLE> 
     Actuarial present value of the benefit obligation as of December 31,
1997 and 1996 is as follows (in thousands):
<TABLE> 
<CAPTION> 
                                                                      1997                1996
                                                                    ---------          ---------
<S>                                                                 <C>                <C> 
         Accumulated benefit obligation                             $   3,981          $   2,897
         Additional amounts related to pension benefit
             obligation compensation increases                             --                221
                                                                    ---------          ---------
         Projected benefit obligation                                   3,981              3,118
         Less fair value of assets                                     (3,600)            (2,571)
                                                                    ---------          ---------
         Projected benefit obligation in excess of fair value       $     381          $     547
                                                                    =========          =========
</TABLE> 

     The projected benefit obligation of $381,000 and $547,000 at December
31, 1997 and 1996, respectively, is included in other long-term liabilities in
the consolidated balance sheet. The significant assumptions for 1997 and 1996
were as follows:
<TABLE> 
<CAPTION> 
                                                                      1997                1996
                                                                    ---------          ---------
<S>                                                                 <C>                <C> 
         Discount rate                                                      9%                 9%
         Expected long term rate of return on plan assets                   9%                 9%
         Rate of increase in future compensation levels                     7%                 7%
</TABLE> 

8.   Debt

     Total debt as of December 31, 1997 and 1996 consists of the following
(in thousands):
<TABLE> 
<CAPTION> 
                                                                      1997                1996
                                                                    ---------          ---------
<S>                                                                 <C>                <C> 
         Revolving line of credit                                   $  24,400          $      --
         Term note                                                      5,000                 --
         Mortgage                                                          96                123
         Notes payable                                                    962                 --
                                                                    ---------          ---------
         Total                                                         30,458                123
         Less: current portion                                        (25,639)               (26)
                                                                    ---------          ---------
         Long-term debt                                             $   4,819          $      97
                                                                    =========          =========
</TABLE> 

                                       24
<PAGE>
 
     Aggregate principal payments for the four years subsequent to December
31, 1997 are as follows:
<TABLE> 
<CAPTION> 
<S>                                                                                     <C> 
         1998                                                                           $  25,639
         1999                                                                               1,421
         2000                                                                               3,380
         2001                                                                                  18
                                                                                        ---------
                                                                                        $  30,458
                                                                                        =========
</TABLE> 

     Effective April 7, 1997, the Company entered into a Third Amended and
Restated Loan & Security Agreement (the "Facility"), expiring in February, 2000,
with a group of three financial institutions, which includes a term note, a
revolving line of credit and a letter of credit facility. The term note
(availability up to $5.0 million) is payable in equal quarterly installments
based on five year amortization of the amount outstanding on March 31, 1998
commencing in April, 1998, but the outstanding principal balance shall be due
and payable in full on the Termination Date which is February, 2000. The term
note carries interest payable monthly at the bank's Prime Rate minus .50%. The
Company had an outstanding $5.0 million term note as of December 31, 1997, with
the Interest rate of 8%. The revolving line of credit provides for borrowing up
to $60.0 million with the actual borrowings limited to available collateral,
representing eligible receivables and inventory (approximately $58.4 million of
gross availability as of December 31, 1997, of which the Company had borrowed
$24.4 million at December 31, 1997). Interest on the revolving line of credit is
payable monthly at a rate of either prime minus .50% or LIBOR plus 1.25%, at the
option of the Company. The average interest rate was 7.41% at December 31, 1997.
The revolving line of credit agreement provides a sublimit facility for letters
of credit up to a maximum of $25.0 million (approximately $3.8 million
outstanding as of December 31, 1997). Fees for outstanding letters of credit are
payable quarterly at 2.0% per annum. The Company also pays a monthly unused line
fee on the revolver at .5% per annum. Borrowings and outstanding letters of
credit under the Facility are secured by substantially all of the assets of the
Company. The Facility includes certain financial covenants and restrictions on
new indebtedness and the payment of cash dividends. 

     In addition, the Company has a European overdraft facility of
approximately $6.0 million with a bank. The Company also has a European letter
of credit facility. The bank overdraft facility is reduced by the value of any
outstanding letters of credit. As of December 31, 1997, the Company had
outstanding letters of credit under the European facility of approximately $2.0
million.

     In connection with the restructuring of the credit facility at the date
of the initial public offering, the Company recorded a non cash extraordinary
loss in 1996 of $186,000, net of tax benefits of $124,000, representing the
write-off of the remaining deferred debt issuance costs.

9.   Subordinated Debt

     In 1996, the Company repaid $24.3 million of its subordinated debt
using proceeds of the Company's initial public offering and secondary offering
and recorded a non cash extraordinary loss in 1996 of $677,000, net of tax
benefits of $451,000, representing the write-off of the remaining deferred debt
issuance costs.

10.  Leases

     The Company leases buildings, equipment and vehicles under non-cancelable
lease agreements that expire at various dates through 2003. The leases generally
provide for renewal options for periods ranging from three to ten years. The
building leases generally provide for additional rents based on store sales and
for payment of taxes, insurance and maintenance expenses related to the leased
assets.

     Future minimum lease payments under all leases with initial or
remaining non-cancelable lease terms in excess of one year as of December 31,
1997 are as follows (in thousands):

                                       25
<PAGE>
<TABLE> 
<CAPTION> 
                                                                        Capital           Operating
         Years Ending December 31,                                      Leases             Leases
         -------------------------------------------------------    --------------     ---------------
<S>                                                                 <C>                <C> 
         1998                                                       $     147          $   4,734
         1999                                                             147              4,819
         2000                                                             145              4,559
         2001                                                              26              3,434
         2002                                                              15              5,602
         Thereafter                                                        10          
                                                                    --------------     ---------------
         Minimum lease commitments                                        490          $  23,148
                                                                                       ===============
         Less: amount representing interest                               (37)
                                                                    --------------
         Prevent value of net minimum lease payments                      453
         Less: current portion                                            (95)
                                                                    --------------
         Long term portion                                          $     358
                                                                    ==============

</TABLE> 
 
     The cost of property under capitalized leases was $468,000 and $314,000, as
of December 31, 1997 and 1996, respectively, and primarily represents furniture,
fixtures and office equipment. Accumulated amortization related to these leases
was approximately $303,000 and $249,000 as of December 31, 1997 and 1996,
respectively.

     Rental expense for operating leases was as follows (in thousands):
<TABLE> 
<CAPTION> 
                                                               1997              1996             1995
                                                            ---------         ---------         ---------
<S>                                                         <C>               <C>               <C> 
         Minimum rentals                                    $   4,651         $   3,783         $   2,568
         Contingent rentals                                        90                98               122
                                                            ---------         ---------         ---------
                                                            $   4,741         $   3,881         $   2,690
                                                            =========         =========         =========
</TABLE> 

11.  Commitments and Contingencies

     Litigation.  See disclosure of litigation matters at Note 15.

     Income Taxes. The Internal Revenue Service ("IRS") is presently examining
the Company's Federal tax returns for the taxable years ended December 31, 1994
through 1996. The IRS is also examining intercompany transfer prices. The
outcome of these examinations and any related liabilities, if any, cannot
presently be determined. The Company has made no provision for any liability
that might result, as management is of the opinion that the Company will not
sustain any significant adjustments as a result of these examinations.

     Purchase Commitments. The Company has approximately $50.2 million and
$47.4 million of purchase commitments as of December 31, 1997 and 1996,
respectively, related to goods ordered for future production in the normal
course of business. Certain of these commitments are collateralized by
outstanding letters of credit. See Note 8.

     Derivatives. The Company's international subsidiaries sell merchandise
throughout Europe and Canada. These sales are denominated in the local currency
of the retailer's country. Additionally, certain of the purchases of the
Company's international subsidiaries are denominated in U.S. dollars. To protect
the Company from the risk that the eventual net cash inflows resulting from the
sale of products to foreign customers will be adversely affected by changes in
exchange rates, the Company's subsidiaries occasionally enter into forward
exchange contracts and options (hedging instruments) to hedge their foreign
denominated accounts receivable, matched firm orders and anticipated orders. As
of December 31, 1997 the Company had open forward contracts to sell foreign
currencies for British pounds as follows: $4.8 million German marks, $4.4
million French francs, $3.7 million Dutch guilders, $.4 million Italian lira,
$1.2 million Spanish pesetas, $1.7 million Swiss francs, $1.8 million Swedish
kroners, $1.1 million Belgium francs and $1.6 million Danish kroners. As of
December 31, 1997, the Company had outstanding foreign exchange options to sell
Canadian dollars for U.S. dollars of $13.7 million and open forward exchange
contracts to sell Canadian dollars for U.S. dollars of $2.5 million. All of the
Company's hedging instruments expired in 1998. Deferred gains and losses on
these transactions were immaterial at December 31, 1997.

                                       26
<PAGE>
 
12.  Stockholder's Equity

         Common Stock. In July and November 1996, the Company sold 2,823,611 and
1,000,000 shares, respectively, of its Common Stock in public offerings at
prices of $14.00 and $23.50, respectively, per share, yielding net proceeds of
approximately $56.6 million after deducting underwriting discounts of $4.0
million and expenses of $2.4 million related to the offering. The proceeds were
used to repay certain portions of the Company's line of credit and senior and
subordinated indebtedness.

         Preferred Stock. Upon consummation of the Company's initial public
offering, all outstanding shares of Series A Preferred Stock, including accrued
dividends, were converted into 4,220,808 shares of Common Stock. Series A
Preferred Stock were entitled to dividends of 10% of the face value payable
quarterly in either cash or additional shares of Series A Preferred Stock, were
convertible into common stock, carried liquidation preferences of face value and
had voting rights on an as-converted basis.

         1994 Stock Incentive Plan. In 1994, the Company adopted the 1994 Stock
Incentive Plan (the "1994 Plan") to issue non-qualified stock options ("NQSOs")
to purchase shares of Common Stock. All NQSOs were granted at an exercise price
that was, at the time of grant, an amount equal to the fair market value of a
share of Common Stock, as determined by the Board of Directors. Additionally,
1,159,950 restricted shares of Common Stock were granted under the 1994 Plan
pursuant to the payment of cash and delivery of promissory notes totaling
$261,250 due June 7, 2004, bearing interest at a rate of 9.0% per annum. As of
December 31, 1997, substantially all of the restricted stock had been converted
into common stock and the promissory notes had been repaid. The Company
currently does not anticipate making additional grants under the 1994 Plan.

         1995 and 1996 Stock Incentive Plans. The Company's 1995 Stock Incentive
Plan (the "1995 Plan") was adopted by the Company in April 1995, and the
Company's 1996 Stock Incentive Plan (the "1996 Plan") was adopted by the Company
in May 1996. The terms of the 1995 Plan and the 1996 Plan (together, the "Option
Plans") are substantially the same, except where noted below.

         A maximum of 924,820 shares of Common Stock (subject to adjustment in
the case of certain stock splits, stock dividends, and reorganizations) have
been reserved for issuance pursuant to options granted under the Option Plans.
NQSOs granted under the 1995 Plan and NQSOs granted to officers under the 1996
Plan become fully vested on June 7, 2004, with accelerated vesting over four
years based upon specified performance goals and expire on June 7, 2004. NQSOs
and Incentive Stock Options ("ISOs") granted under the 1996 Plan to employees
vest over 4 years and expire on June 7, 2004. The Company currently does not
anticipate making additional grants under the 1995 Plan.

         Under the 1996 Plan, options with respect to no more than 400,000
shares may be granted to any individual in any year and no options may be
granted to a person who, at the time of grant, owns shares possessing 10% or
more of the total combined voting power of all classes of stock of the Company.
All of the Company's officers, directors and other salaried employees are
eligible to receive options under the Option Plans.

         The exercise price of an option granted under the Option Plans may not
be less than 100% of the fair market value of a share of Common Stock at the
date of grant and no options may be exercisable more than ten years following
the date of grant. For grants to non-officers under the 1996 Plan, vesting must
be at least 20% per year following the date of grant, unless otherwise permitted
by applicable law.

         The following table summarizes additional information about stock
options outstanding at December 31, 1997:

                                       27
<PAGE>

<TABLE> 
<CAPTION> 
                                                        Weighted                                                      
                                                        Average                                                       
                                                       Remaining                                                      
                                                       Contractual       Weighted                         Weighted   
                                                          Life            Average         Shares          Average    
   Range of Exercise Prices     Shares Outstanding       (Years)      Exercise Price    Exercisable    Exercise Price 
  --------------------------    ------------------     -----------    --------------    -----------    --------------
<S>                             <C>                    <C>            <C>               <C>            <C> 
       $  0.22 to $  1.13             364,152                 6.43        $ 1.06           316,990        $  1.08
          3.38 to    9.60             118,714                 6.43          6.85            17,988           6.14
         14.38 to   26.50             663,800                 7.88         19.63            55,093          22.21
                                  -----------                                           ----------
  $  0.22      to    $ 26.50        1,146,666                 7.27        $12.41           390,071        $  4.30
                                  ===========                                           ==========               
</TABLE> 

         1996 Directors' Stock Option Plan. The 1996 Directors' Stock Option
Plan (the "Directors' Plan") was adopted by the Company in May 1996. A total of
100,000 shares of Common Stock has been reserved for issuance under the
Directors' Plan. The Directors' Plan provides for the grant of non-qualified
stock options to purchase 25,000 shares to each non-employee director of the
Company initially elected to the Board after the effective date of the
Directors' Plan. Because the disinterested administration requirement of Rule
16b-3 promulgated under the Securities Exchange Act of 1934 ceased to be
applicable to awards made under all equity based plans of the Company, no
further grants will be made as described in the preceding sentence and in lieu
thereof awards will be made under the Directors' Plan on a discretionary basis
to non-employee directors of the Company.
 
         Activity for all of the Company's stock option plans from January 1,
1995 through December 31, 1997 was as follows:

<TABLE>
<CAPTION>
                                            1997                       1996                       1995
                                   -----------------------     ---------------------   ------------------------
                                    Shares       Weighted      Shares       Weighted     Shares        Weighted
                                                 Average                    Average                    Average
                                                 Exercise                   Exercise                   Exercise
                                                  Price                      Price                      Price
                                   ---------     --------      ---------    --------   ---------       --------
<S>                              <C>             <C>          <C>           <C>           <C>          <C>
Outstanding, beginning of year     1,069,602     $   6.60      1,080,008    $   0.90     444,000       $   0.23
   Granted                           492,600        18.52        431,430       14.52     808,267           1.13
   Exercised                        (286,011)        1.93       (379,450)       0.73           -              -
   Cancelled                        (129,525)       10.84        (62,386)       0.23    (172,259)          0.23
                                   ---------                   ---------               ---------

   Outstanding, end of year        1,146,666     $  12.41      1,069,602    $   6.60   1,080,008       $   0.90
                                   =========                   =========               =========

Options exercisable at year end      390,071     $   4.30        533,833    $   1.09     443,139       $   0.96
                                   =========     ========      =========    ========   =========       ========

Weighted average fair value of
   options granted during the
   year                                          $   7.35                   $   5.05                   $   0.17
                                                 ========                   ========                   ========
</TABLE>

         Employee Stock Purchase Plan. The 1996 Employee Stock Purchase Plan
(the "Employee Plan"), adopted in May 1996, reserves a total of 150,000 shares
of Common Stock for issuance. Under the Employee Stock Purchase Plan, eligible
full-time employees can choose to have up to 10% of their annual base earnings
withheld to purchase the Company's common stock. The purchase price of the stock
is 85% of the lower of the beginning of the offering period or end of the
offering period market price. During 1997 and 1996, employees purchased
approximately 15,800 and 5,094 shares respectively at an average price of $15.95
and $11.81 respectively. At December 31, 1997, 129,106 shares are available for
future issuance.

         Pro Forma Stock Option Information. The Company accounts for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, Accounting For Stock Issued To
Employees and its related interpretations. No compensation cost has been
recognized in the financial statements for employee stock arrangements.

                                       28
<PAGE>
 
         Had compensation cost for the Company's stock-based compensation plans
in 1996 and 1995 been recorded in accordance with the fair value method of SAFS
123, the Company's net income and earnings per share for 1997, 1996 and 1995
would approximate the following pro forma amounts (in thousands, except per
share data):

<TABLE> 
<CAPTION> 
                                                              1997            1996           1995
                                                        --------------   -------------   -------------
<S>                                                     <C>              <C>             <C> 
Net income:
  As reported                                               $7,955           $ 4,801         $3,485
  Pro forma                                                  6,957             4,595          3,443

Diluted net income per share:
  As reported                                               $ 0.69           $  0.62         $ 0.47
  Pro forma                                                   0.61              0.51           0.46
</TABLE> 

         For purposes of computing the above pro forma amounts, the fair value
of each option granted during 1997, 1996, and 1995 was estimated as of the date
of grant using the Black-Scholes option-pricing model. This model requires
subjective assumptions, including future stock price volatility and expected
date of exercise, which greatly affects the calculated values. The following
weighted average assumptions were used in calculating the fair value of the
options granted: (i) dividend yield of 0% for 1997, 1996 and 1995; (ii) expected
volatility of 58.6% for 1997, 45% (for options granted subsequent to the filing
of the S-1 in connection with the initial public offering through December 31,
1996) and 0% (for options granted prior to the filing); (iii) risk-free interest
rate of 6.56%, 6.38% and 6.38% for 1997, 1996 and 1995 respectively; and (iv)
expected life from vesting to exercise of 6 months for 1997, 1996 and 1995.
Forfeitures are recognized as they occur.

         The effects of applying SFAS 123 in this pro forma disclosure may not
be indicative of future pro forma amounts, because the fair valued method has
not been applied to awards granted prior to 1995.

         Defined Contribution Plans. Effective January 1998, the Company has
available a profit sharing retirement plan. Under the plan employee and company
contributions qualify for favorable tax treatment under Section 401(k) of the
Internal Revenue Code. Under the 401(k) plan, the Company offers a discretionary
match, based on company growth and profits (paid in The North Face, Inc., common
stock). Employee contributions are always 100% vested. Employer contributions
will be vested at 20% per year; 100% after five years. The Company's Board of
Directors has approved the allocation of a 25% matching contribution on a
maximum of 6% of employee compensation contributed to the plan in accordance of
the terms of the plan for the year ending 1998.

                                       29
<PAGE>
 
13.  Segment Information

         The following table summarizes the Company's operations by geographical
area (in thousands). The Company's intercompany sales are not significant.

<TABLE> 
<CAPTION> 
                                                 United States        Canada         Europe        Consolidated
                                               ------------------  ------------  --------------  ----------------
<S>                                            <C>                 <C>           <C>             <C> 
For the year ended December 31, 1995:
   Net sales                                      $ 96,069           $ 5,130          $20,335      $121,534
   Operating income (loss)                           8,635              (200)           2,089        10,524
   Income before provision for income taxes          3,749              (271)           2,105         5,583
   Identifiable assets                              72,411             1,617           10,480        84,508

For the year ended December 31, 1996:
   Net sales                                      $120,027           $ 9,462          $28,737      $158,226
   Operating income                                 10,482               582            2,480        13,544
   Income before provision for income taxes          6,332             2,461              482         9,275
     and extraordinary items
   Identifiable assets                              92,058             3,769           14,760       110,587

For the year ended December 31, 1997:
   Net sales                                      $150,798           $12,661          $39,788      $203,247
   Operating income                                 10,213             1,369            4,551        16,133
   Income before provision for income taxes          8,582               817            3,747        13,146
   Identifiable assets                             133,949             7,396           26,104       167,449
</TABLE> 

14.  Estimated Fair Value of Financial Instruments

         SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of the estimated fair value of financial instruments. The
carrying value of cash and cash equivalents, accounts receivable, accounts
payable and debt approximates their estimated fair values at December 31, 1997.

15.  Subsequent Events

         On February 27, 1999, the Company's Board of Directors approved a
Transaction Agreement (the "Transaction Agreement") between the Company and TNF
Acquisition LLC ("TNF"), an affiliate of Leonard Green & Partners, L.P. ("LGP").
The Transaction Agreement provides for a tender offer for all of the Company's
outstanding stock (other than shares held by James G. Fifield, Chief Executive
Officer) at $17 cash per share and the acquisition of control of the Company by
LGP and Mr. Fifield. On March 5, 1999, the Company withdrew its tender offer,
however, the Transaction Agreement remained in full force and effect. There can
be no assurance that the transactions contemplated by the Transaction Agreement
(the "Transactions") will be consummated at all or on terms favorable to the
Company's stockholders. If the Transaction Agreement is terminated, the Company
could be required under certain circumstances to pay TNF a $7 million
termination fee plus up to $5.5 million of TNF's expenses associated with the
Transactions.

         In connection with the Transactions, and following the Company's
accounting related announcements which reported the restatement of the Company's
1997 Consolidated Financial Statements and 1998 interim Condensed Consolidated
Financial Statements, several lawsuits have been filed against the Company.
There can be no assurance that the Company will successfully defend these
lawsuits. Regardless of whether the Transactions are consummated or of the
outcome of these lawsuits, the Company will likely incur significant related
expenses and costs that could have a material adverse effect on the Company's
business and operations.

         During the first week of March 1999, various complaints were filed
against the Company and its Board of Directors in the Delaware Court of Chancery
and in the California Superior Court, Alameda County in connection with the
Transactions. The complaints, filed on behalf of a purported class of the
Company's shareholders, generally allege that the Transactions are unfair and
inadequate
                                       30
<PAGE>
 
to the Company's shareholders and charge the defendants with self-dealing and
breach of fiduciary duties. The various complaints generally request injunctive
relief to prevent the consummation of the Transactions, and seek other remedies
in the event the Transactions are completed. The Company has not yet responded
to these complaints.

         On March 9, 1999, a purported shareholder class action complaint was
filed in federal district court in Colorado, alleging that the Company and
various of its officers and directors violated the federal securities laws by
making false and misleading statements about the Company's financial results
during a class period from April 25, 1997 through March 4, 1999. Markus v. The
North Face, Inc., et al., Civ. A. No. 99-WM-473. Subsequently, complaints with
similar allegations and class periods on behalf of persons trading in the
Company's securities, have been filed in federal district courts in Colorado and
California (collectively, the "Securities Litigation"). The Company believes it
has meritorious defenses to these claims and intends to contest the Securities
Litigation vigorously. An unfavorable resolution of the Securities Litigation
could have a material adverse effect on the business, results of operations or
financial condition of the Company.

         On April 6, 1999, a shareholder derivative action purportedly on behalf
of the Company, captioned Eng v. Cason, et al., Civil Action No. 810726-0, was
filed in California Superior Court, Alameda County. The complaint alleges that
the Company's directors and various officers violated California law and
breached fiduciary duties to the Company by engaging in alleged wrongful conduct
from April 25, 1997 through March 12, 1999, including the conduct complained of
in the Securities Litigation. The Company is named solely as a nominal
defendant, against whom the plaintiff seeks no recovery.

16.  Restatement

          Subsequent to the issuance of the Company's Consolidated Financial
Statements for the fiscal year ended December 31, 1997, the Company's management
determined that certain barter transaction revenue had been improperly
recognized, certain capitalized costs related to the abandonment of an
information system project should have been expensed, certain deferred start up
and marketing costs did not have a demonstrated future benefit and should have
been expensed, and the warranty reserve had been improperly computed. In
addition, it was determined that certain property amounts had been improperly
accrued. As a result, the 1997 Consolidated Financial Statements have been
restated from amounts previously reported.

     In addition to the restatements reflected herein, the Company has also
restated its previously issued Condensed Consolidated Financial Statements for
the three, six and nine months ended March 31, 1998, June 30, 1998 and September
30, 1998. See the Company's Quarterly Reports on Form 10-Q/A for the three, six
and nine months ended March 31, 1998, June 30, 1998 and September 30, 1998.

                                       31
<PAGE>
 
A summary of the effects of the restatement as of December 31, 1997 and for the 
year then ended follows:

<TABLE> 
<CAPTION> 
                                                                    Year Ended December 31, 1997
                                                              ----------------------------------------
                                                                 PREVIOUSLY               RESTATED
                                                                  REPORTED
                                                              (In thousands, except per share amounts)
<S>                                                           <C>                      <C> 
Net sales                                                     $  208,403               $  203,247
Cost of sales                                                    113,339                  110,764
Operating expenses                                                73,720                   76,350

Income before provision for income taxes                          18,357                   13,146
Provision for income taxes                                         7,250                    5,191
Net income                                                        11,107                    7,955

Net income per share :
     Basic                                                    $     0.98               $     0.70
     Diluted                                                  $     0.96               $     0.69
</TABLE> 
<TABLE> 
<CAPTION> 
                                                                          December 31, 1997
                                                              ----------------------------------------
                                                                PREVIOUSLY               RESTATED
                                                                 REPORTED
                                                                            (In thousands)

<S>                                                           <C>                      <C> 
Total current assets                                              118,953                  117,961
Property and equipment, net                                        22,955                   17,524
Other assets                                                        3,279                    2,871

Total current liabilities                                          59,836                   55,966
Other long-term liabilities                                         5,974                    6,165
Retained earnings                                                  21,220                   18,068
</TABLE> 

                                       32
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and the Stockholders of The North Face, Inc.:

         We have audited the accompanying consolidated balance sheets of The
North Face, Inc. and its subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The North
Face, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.

         As discussed in Note 16, the accompanying 1997 financial statements
have been restated.

/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
San Francisco, California
February 6, 1998
(May 6, 1999 as to Notes 15 and 16)

                                       33
<PAGE>
 
                               FINANCIAL REPORTING

Management of The North Face, Inc. is responsible for the information and
representations contained in this report. The financial statements have been
prepared in conformity with the generally accepted accounting principles we
considered appropriate in the circumstances and include some amounts based on
our best estimates and judgments. Other financial information in this report is
consistent with these financial statements.

The Company's accounting systems include controls designed to reasonably assure
that assets are safeguarded from unauthorized use or disposition and which
provide for the preparation of financial statements in conformity with generally
accepted accounting principles. These systems are supplemented by the selection
and training for qualified financial personnel and an organizational structure
providing for appropriate segregation of duties.

The Board of Directors pursues its responsibilities for these financial
statements through its Audit Committee, presently consisting of two outside
directors of the Company. The Audit Committee is responsible for recommending to
the Board of directors the appointment of the independent auditors and reviews
with the independent auditors and management the scope and the results of the
annual audit, the effectiveness of the accounting control system and other
matters relating to the financial affairs of the company as they deem
appropriate. The independent auditors have full access to the committee, with
and without the presence of management, to discuss any appropriate matters.

    /s/   James G. Fifield              /s/  Jeffrey C. Mack
    James G. Fifield                    Jeffrey C. Mack
    Chief Executive Officer             Acting Chief Financial Officer
    and President

                                       34
<PAGE>
 
PART III

Item 10. Directors and Executive Officers of the Registrant.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

     One required Report on Form 4 or Form 5 was not filed on a timely basis by
Mr. Simon in 1998 or 1999, respectively. One required Report on Form 4 or Form 5
was not filed on a timely basis by Mr. Fifield in 1998 or 1999, respectively. To
the Company's knowledge, based solely upon its review of the Forms submitted to
the Company by Mr. Simon and Mr. Fifield, neither Mr. Simon nor Mr. Fifield have
failed to file a Form required by Section 16(a) of the Exchange Act.

                                      35
<PAGE>
 
PART IV

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

  (a)(1) INDEX TO FINANCIAL STATEMENTS

Financial Statements:

    Consolidated Balance Sheets as of December 31, 1997 and 1996
    Consolidated Statements of Income for the
      Years Ended December 31, 1997, 1996 and 1995
    Consolidated Statements of Shareholders' Equity for the
      Years Ended December 31, 1997, 1996 and 1995
    Consolidated Statements of Cash Flows for the
      Years Ended December 31, 1997, 1996 and 1995
    Notes to Consolidated Financial Statements
    Independent Auditors' Report

  (2) Financial Statement Schedules

     All schedules are omitted because of the absence of the conditions under
which they are required or because the required information is set forth in the
consolidated financial statements and notes thereto.

  (3)   Exhibits

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

3.1(2)    Amended and Restated Certificate of Incorporation of The North
Face, Inc.

3.2(A)(1) Amended and Restated By-laws of The North Face, Inc.

10.1(1)** Management Stock Purchase and Non-Competition Agreement, dated as of
June 6, 1994, among TNF Holdings Company, Inc.,* Marsden S. Cason and William A.
McFarlane, as amended by Amendment No. 1, dated as of June 22, 1995.

10.2(1)   Stock Purchase Agreement, dated as of December 28, 1993, between TNF
Holdings Company, Inc.* and Kabushiki Kaisha Goldwin, as amended by Memorandum,
dated as of March 29,1994, among TNF Holdings Company, Inc.,*  and Kabushiki
Kaisha Goldwin, and Memorandum No.  2, dated as of May 20, 1994, between TNF
Holdings Company, Inc.,* and Kabushiki Kaisha Goldwin.

10.3(1)   Security holders Agreement, dated as of June 7, 1994, among TNF
Holdings Company, Inc.,* Marsden S.  Cason, William A. McFarlane, J.H.Whitney &
Co., Whitney 1990 Equity Fund, L.P., Whitney Subordinated Debt Fund, L.P.,
Richard T. Peery, Jack L. Richardson, Philip S. Schlein and Kenneth F. Siebel,
as amended by Amendment No. 1, dated as of June 22, 1995.

10.4(1)   Registration Rights Agreement, dated as of June 7, 1994, among TNF
Holdings Company, Inc.,* J.H. Whitney & Co., Whitney 1990 Equity Fund, L.P.,
Whitney Subordinated Debt Fund, L.P., Marsden S. Cason and William A. McFarlane,
as amended by Amendment No. 1, dated as of June 22, 1995, and Amendment No. 2,
dated as of May 20, 1996.

                                       36
<PAGE>
 
10.5(1)   Amended and Restated Loan and Security Agreement, dated as of March 1,
1995, between The North Face, Inc. and Heller Financial, Inc., as Agent and as a
Lender, as amended by First Amendment, dated as of May 4, 1995, Second
Amendment, dated as of August , 1995, Third Amendment, dated as of March 27,
1996, and Fourth Amendment, dated May 8, 1996.

10.5A(1)  Second Amended and Restated Loan and Security Agreement, dated as of
June , 1996, between The North Face, Inc. and Heller Financial, Inc., as Agent
and as a Lender.

10.5B     Third Amended and Restated Loan and Security Agreement, dated as of
April 7, 1997, between The North Face, Inc. and Heller Financial, Inc., as Agent
and as a Lender.

10.6(2)** TNF Holdings Company, Inc.* 1994 Stock Incentive Plan, as amended.

10.7(3)** The North Face, Inc. 1995 Stock Incentive Plan, as amended.

10.8(1)** The North Face, Inc. 1996 Stock Incentive Plan.

10.9(1)** The North Face, Inc. 1996 Employee Stock Purchase Plan.

10.10(1)** The North Face, Inc. 1996 Directors' Stock Option Plan.

10.11(1)  Trademark License, dated October 29, 1993, between The North Face and
W.L. Gore & Associates, Inc.

13(2)     1996 Annual Report to Stockholders

21.1(1)   List of Subsidiaries of The North Face, Inc.

23.1      Consent of Deloitte & Touche LLP.

27.1      Financial Data Schedule.


*  TNF Holdings Company, Inc., a Delaware corporation, changed its name to The
North Face, Inc. on June 8, 1994.

** Indicates management contract or compensatory plan or arrangement.

(1)  Incorporated by reference to the Company's Registration Statement on Form
     S-1 (No. 333-04107) filed on May 20, 1996 and amendments thereto, filed
     with the Securities and Exchange Commission on  June 3, 1996, and June 24,
     1996.

(2)  Incorporated by reference to the Company's Registration Statement on Form
     S-1 (No. 333-14945) filed with the Securities and Exchange Commission on
     October 28, 1996.

(3)  Incorporated by reference to the Company's Annual Report on Form 10-K for
     the fiscal year ended December 31, 1996 and filed with the Securities and
     Exchange Commission on March 28, 1997.

(b)  Reports on Form 8-K: none.  No reports on Form 8-K were filed by the
     Company during the fourth quarter of 1997.

(c)  The exhibits required by Item 601 are filed herewith.

(d)  The financial statement schedules required by Regulation S-X are filed 
     herewith.
                                      37
<PAGE>
 
                                  SIGNATURES

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

May 7, 1999               The North Face, Inc.
                          (Registrant)

                          By  /s/ James G. Fifield
                              -----------------------------
                              James G. Fifield
                              Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Marsden S. Cason, James G. Fifield and
Jeffrey C. Mack, and each of them, his true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to (i) act on, sign
and file with the Securities and Exchange Commission any and all amendments to
this report on Form 10-K/A together with all schedules and exhibits thereto,
(ii) act on, sign and file such certificates, instruments, agreements and other
documents as may be necessary or appropriate in connection therewith, and (iii)
take any and all actions which may be necessary or appropriate to be done, as
fully for all intents and purposes as he might or could do in person, hereby
approving, ratifying and confirming all that such agent, proxy and
attorney-in-fact or any of his substitutes may lawfully do or cause to be done
by virtue thereof.

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

<TABLE> 
<CAPTION> 
            Signature                         Title or Capacity                            Date
            ---------                         -----------------                            ----
<S>                                <C>                                                  <C> 
      /s/ Marsden S. Cason         Chairman                                             May 7, 1999
 -----------------------------
       Marsden S. Cason

      /s/ James G. Fifield         Chief Executive Officer, President and Director      May 7, 1999
 -----------------------------     (Principal Executive Officer) 
        James G. Fifield           

       /s/ Jeffrey C. Mack         Acting Chief Financial Officer (Principal            May 7, 1999
 -----------------------------     Financial and Accounting Officer) 
         Jeffrey C. Mack                                             

       /s/ Robert P. Bunje         Director                                             May 7, 1999
 -----------------------------
         Robert P. Bunje

      /s/ William N. Simon         Vice Chairman and Director                           May 7, 1999
 -----------------------------
        William N. Simon

      /s/ Michael F. Doyle         Director                                             May 7, 1999
 -----------------------------
        Michael F. Doyle

     /s/ Michael J. Solomon        Director                                             May 7, 1999
 -----------------------------
        Michael J. Solomon
</TABLE> 

                                       38
<PAGE>
 
                                 EXHIBIT INDEX

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

3.1(2)    Amended and Restated Certificate of Incorporation of The North
Face, Inc.

3.2(A)(1) Amended and Restated By-laws of The North Face, Inc.

10.1(1)** Management Stock Purchase and Non-Competition Agreement, dated as of
June 6, 1994, among TNF Holdings Company, Inc.,* Marsden S. Cason and William A.
McFarlane, as amended by Amendment No. 1, dated as of June 22, 1995.

10.2(1)   Stock Purchase Agreement, dated as of December 28, 1993, between TNF
Holdings Company, Inc.* and Kabushiki Kaisha Goldwin, as amended by Memorandum,
dated as of March 29,1994, among TNF Holdings Company, Inc.,*  and Kabushiki
Kaisha Goldwin, and Memorandum No.  2, dated as of May 20, 1994, between TNF
Holdings Company, Inc.,* and Kabushiki Kaisha Goldwin.

10.3(1)   Security holders Agreement, dated as of June 7, 1994, among TNF
Holdings Company, Inc.,* Marsden S.  Cason, William A. McFarlane, J.H.Whitney &
Co., Whitney 1990 Equity Fund, L.P., Whitney Subordinated Debt Fund, L.P.,
Richard T. Peery, Jack L. Richardson, Philip S. Schlein and Kenneth F. Siebel,
as amended by Amendment No. 1, dated as of June 22, 1995.

10.4(1)   Registration Rights Agreement, dated as of June 7, 1994, among TNF
Holdings Company, Inc.,* J.H. Whitney & Co., Whitney 1990 Equity Fund, L.P.,
Whitney Subordinated Debt Fund, L.P., Marsden S. Cason and William A. McFarlane,
as amended by Amendment No. 1, dated as of June 22, 1995, and Amendment No. 2,
dated as of May 20, 1996.

10.5(1)   Amended and Restated Loan and Security Agreement, dated as of March 1,
1995, between The North Face, Inc. and Heller Financial, Inc., as Agent and as a
Lender, as amended by First Amendment, dated as of May 4, 1995, Second
Amendment, dated as of August , 1995, Third Amendment, dated as of March 27,
1996, and Fourth Amendment, dated May 8, 1996.

10.5A(1)  Second Amended and Restated Loan and Security Agreement, dated as of
June , 1996, between The North Face, Inc. and Heller Financial, Inc., as Agent
and as a Lender.

10.5B     Third Amended and Restated Loan and Security Agreement, dated as of
April 7, 1997, between The North Face, Inc. and Heller Financial, Inc., as Agent
and as a Lender.

10.6(2)** TNF Holdings Company, Inc.* 1994 Stock Incentive Plan, as amended.

10.7(3)** The North Face, Inc. 1995 Stock Incentive Plan, as amended.

10.8(1)** The North Face, Inc. 1996 Stock Incentive Plan.

10.9(1)** The North Face, Inc. 1996 Employee Stock Purchase Plan.

10.10(1)** The North Face, Inc. 1996 Directors' Stock Option Plan.

10.11(1)  Trademark License, dated October 29, 1993, between The North Face and
W.L. Gore & Associates, Inc.

13(2)     1996 Annual Report to Stockholders

21.1(1)   List of Subsidiaries of The North Face, Inc.

23.1      Consent of Deloitte & Touche LLP.

27.1      Financial Data Schedule.


*  TNF Holdings Company, Inc., a Delaware corporation, changed its name to The
North Face, Inc. on June 8, 1994.

** Indicates management contract or compensatory plan or arrangement.

(1)  Incorporated by reference to the Company's Registration Statement on Form
     S-1 (No. 333-04107) filed on May 20, 1996 and amendments thereto, filed
     with the Securities and Exchange Commission on  June 3, 1996, and June 24,
     1996.

(2)  Incorporated by reference to the Company's Registration Statement on Form
     S-1 (No. 333-14945) filed with the Securities and Exchange Commission on
     October 28, 1996.

(3)  Incorporated by reference to the Company's Annual Report on Form 10-K for
     the fiscal year ended December 31, 1996 and filed with the Securities and
     Exchange Commission on March 28, 1997.

(b)  Reports on Form 8-K: none.  No reports on Form 8-K were filed by the
     Company during the fourth quarter of 1997.

(c)  The exhibits required by Item 601 are filed herewith.

(d)  The financial statement schedules required by Regulation S-X are filed 
     herewith.
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