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

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934 FOR
       For the fiscal year ended December 31, 1998
                                       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 [_]  No [X]

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

     As of 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.

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                                     PART I

ITEM 1.  BUSINESS.

GENERAL

     This Annual Report on Form 10-K 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. Actual results,
events, or performance could differ materially from those anticipated in these
forward-looking statements as a result of a variety of factors, including those
set forth in "Factors that may Affect the Company's Business," and elsewhere
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 La 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(R)
name.  The Company believes that The North Face(R) is the world's premier brand
of high-performance outdoor apparel and equipment.

INDUSTRY OVERVIEW

     Technical outdoor apparel and equipment historically have been used
primarily by professional climbers and serious outdoor enthusiasts.  In recent
years, these products have become increasingly popular among a broader group of
consumers. The Company believes that this growth has been the result primarily
of: (i) an increase in outdoor recreational activities and adventure travel by
the general population; (ii) a shift in consumer preferences leading to a
growing demand for highly functional products at the expense of fashion-oriented
products; (iii) a growing acceptance of outdoor apparel as casual wear; and (iv)
an increase in the technical sophistication of products in this field.

     The trend towards more active outdoor lifestyles is demonstrated by
increased participation in a variety of outdoor activities such as camping,
hiking and backpacking.  According to The Outdoor Recreation Coalition of
America, from 1993 to 1994 the number of people who participated in rock
climbing increased 32%, while participation in mountain biking increased 20% and
backpacking increased 11%.  A 1997 survey by the Travel Industry Association of
America indicated that one-half of U.S. adults, or 74 million people, have taken
an adventure travel trip in the past five years.  Of these, 31 million engaged
in "hard" adventure activities like whitewater rafting, scuba diving and
mountain climbing.  In addition, outdoor or rugged apparel has been increasingly
worn as casual clothing even by individuals who do not participate in outdoor
activities or require the functionality of a high-performance product.  Casual
wear in general also has become increasingly popular, particularly in the
workplace as evidenced by the dramatic increase in "casual days" and the
increased prevalence of "brown shoes."

     The Company believes that consumers recently have demonstrated an
increasing preference for functional, performance-oriented products.  Purchase
decisions often are driven as much by a desire to create a particular perception
of themselves as healthy and active as by an actual need for these products.  An
example of this trend is the growing popularity of sport utility vehicles, which
have become one of the fastest growing segments of the automotive industry
despite the fact that most owners of such vehicles never venture off paved
streets.  Additionally, over the last decade, there have been significant
technological advances in materials and designs that have increased product
functionality and performance.  The number of products and product segments in
the industry has increased dramatically as marketers have developed and
introduced specific products designed to suit a greater variety of individual
activities and conditions.

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COMPANY OVERVIEW

     The Company is a leading designer, distributor and marketer of technically
sophisticated outdoor apparel and equipment under The North Face brand name.
Over the past 34 years, the Company has built a strong and widely recognized
reputation for high-quality, innovative and technically sophisticated products,
which management believes has established The North Face as the world's premier
brand of outdoor apparel and equipment. The Company has achieved an increase of
103% in revenues from $121.5 million in 1995 to $247.1 million in 1998, an
increase of 103% in gross margin from $55.1 million to $112.0 million, and an
increase of 39% in EBITDA from $13.2 million to $18.3 million during the same
time period.

     EBITDA represents earnings before interest expense, income tax expense,
depreciation and amortization. EBITDA is a widely accepted financial indicator
of a Company's ability to service or incur debt.  EBITDA is not a measurement of
operating performance calculated in accordance with U.S. generally accepted
accounting principals.  EBITDA may not be indicative of the Company's historical
operating results, nor be predictive of potential future results.  While EBITDA
is frequently used as a measure of operations and the ability to meet debt
service requirements, it is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the method of
calculation.  In addition, as defined in this note, it is not a presentation
accepted by the Securities and Exchange Commission.  Accordingly, any
presentation of EBITDA or any information concerning EBITDA which may be
included in a future document filed with the Securities and Exchange Commission,
may be substantially different than the presentation included herein.

     The Company offers a broad range of high-performance, technically
sophisticated outdoor apparel and equipment, including outerwear, functional
sportswear ("Tekware(R)"), snowsports gear, rugged footwear, tents, sleeping
bags, backpacks and other products designed for outdoor activities.  As a result
of the more than 30 years of experience gained as a provider of outdoor apparel
and equipment to many of the world's most challenging high altitude and polar
expeditions, management believes that The North Face(R) brand has achieved the
highest level of authenticity in the outdoor apparel and equipment industry.
The Company's goal is to offer the most technically advanced products in its
field and to establish the industry standard in each of its product categories.
The Company designs many of its products for extreme applications such as high
altitude mountaineering, rock and ice climbing, and back-country skiing and
snowboarding.  While management believes that only a small fraction of consumers
who buy the Company's products purchase them exclusively for participation in
such activities, the ability of its products to achieve high levels of
performance under extreme conditions reinforces The North Face brand identity.

RESTATEMENT 

     The Company's management has determined that its previously issued
Consolidated Financial Statements for the year ended December 31, 1997 and 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
required restatement. See the Company's Annual Report on Form 10-K/A for the
year ended December 31, 1997 and its 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 entered into a Transaction Agreement (the
"Transaction Agreement") with 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. The Transaction Agreement
remains in full force and effect although, as of the date hereof, LGP has
informed the Company that they are reevaluating the transactions contemplated by
the Transaction Agreement. 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.

     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."

INVESTMENTS IN LA SPORTIVA BUSINESS

     On July 2, 1998, the Company acquired a 20% interest in La Sportiva S.r.l.,
a premier manufacturer and distributor of trekking, mountaineering, and climbing
footwear located in Ziano di Fiemme, Italy for a purchase price of $2.5 million,
and incurred direct costs of approximately $0.6 million, for a total purchase
price of approximately $3.1 million.  In August 1998, La Sportiva S.r.l. changed
its name to La Sportiva S.p.A.  The majority shareholders of La Sportiva S.p.A.
have a "put option" which may require the Company to purchase, in a single
transaction, an additional 31% interest in La Sportiva S.p.A. for 6.8 billion
lira ($4.1 million at December 31, 1998).  This put option may be exercised at
any time during the period beginning on July 1, 2000 and ending on July

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1, 2003. After the expiration of the "put option" and until December 31, 2004,
the Company may exercise a "call option" which, if exercised, would require the
majority shareholders of La Sportiva S.p.A. to sell an additional 31% interest
to the Company for 6.8 billion lira ($4.1 million at December 31, 1998). The
Company has accounted for its 20% interest in La Sportiva S.p.A. under the
equity method. The purchase price of La Sportiva S.p.A. exceeded the Company's
proportionate share of the net assets acquired by $2.4 million, which was
recorded as goodwill and is being amortized on a straight line basis over 40
years.

     In a related transaction on July 2, 1998, the Company acquired 100% of the
outstanding common stock of La Sportiva USA, (which owns the exclusive rights to
distribute footwear for La Sportiva S.p.A. in the United States) located in
Boulder, Colorado, for a purchase price of approximately $3.9 million.  The
purchase price includes $3.1 million which was paid in 133,335 shares of the
Company's Common Stock and additional $0.8 million in cash to be paid to the
former owners of La Sportiva USA over the next five years.


     The purchase price of La Sportiva USA exceeded the fair value of the net
assets acquired by approximately $3.8 million, which was recorded as goodwill
and is being amortized on a straight line basis over 40 years.  The fair value
of the net assets acquired is based on preliminary estimates, which are subject
to change. The acquisition was recorded under the purchase method of accounting.
The Company has consolidated the results of La Sportiva USA beginning on July 2,
1998.

PRODUCTS

     The Company offers a broad range of outerwear, equipment, Tekware(R),
Ascentials (accessories), snowsports gear, rugged footwear and other products
designed for outdoor activities such as, mountaineering, climbing, backpacking,
skiing, snowboarding, hiking, trekking and adventure travel.  The Company
designs its products to function as "equipment for the body," and its goal is to
offer the most technically advanced products in its field and to establish the
industry standard in each of its product categories.  The Company designs many
of its products for extreme applications such as high altitude mountaineering,
rock and ice climbing, and back-country skiing and snowboarding.  While
management believes that only a small fraction of consumers who buy the
Company's products participate in such activities, the ability of its products
to achieve high levels of performance under extreme conditions reinforces The
North Face brand identity.  The Company also strives to offer products at more
moderate price-points that appeal to a broader consumer base, are higher in
quality than competitive products and that incorporate many of the features,
materials and technologies used in its most technically advanced designs.    As
a result of the more than 30 years of experience gained as a provider of outdoor
apparel and equipment to many of the world's most challenging high altitude and
polar expeditions, Management believes that The North Face(R) has achieved the
highest  level of authenticity in the outdoor apparel and equipment industry.
Management believes that its dedication to producing high-quality, innovative
and technically sophisticated products is exemplified by its marketing
statement, "For over thirty years, individuals whose lives depend on the
performance of their gear consistently choose The North Face," which
differentiates The North Face from any other company in the outdoor apparel and
equipment industry.

     The North Face(R) products are original designs and most carry a lifetime
warranty for the original owner against defects in materials and workmanship.
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%, of net sales, respectively.  In 1997, sales of outerwear,
equipment, Tekware, snowsports gear, Ascentials and other products represented
approximately 48%, 20%, 12%, 9%, 6%, and 5%, of net sales, respectively.  In
1998, sales of outerwear, equipment, Tekware, Ascentials, snowsports gear, and
other products represented approximately 50%, 15%, 13%, 9%, 8%, and 5%, of net
sales, respectively.  As of the spring season of 1999, the Company began to
offer rugged footwear under The North Face brand.

OUTERWEAR

     The Company's outerwear products are organized into two categories,
Expedition System Outerwear and Technical Outerwear. The Company's outerwear is
designed to provide protection from various combinations of cold, wet and windy
conditions and to accommodate the range of motion required for the most extreme
outdoor activities. In addition, many of the Company's outerwear products are
designed to adapt to varying conditions and situations, taking into account the
unpredictability of the weather and the fact that some outdoor activities
alternate between periods of extreme exertion and total rest, requiring a proper
balance between ventilation and insulation.  Each year, the Company enhances its
outerwear lines by adding new products and design innovations.  For example, in
1999 the Company added WL Gore Paclite(R), a two-ply waterproof fabric that is
15% lighter than the product it replaced, and Malden Aircore(R) fleece, a
warmer, reduced-weight fleece material, to its range of technologically superior
products.  In addition, in 1999 the Company introduced an advanced "core
venting" air circulation and ventilation system to its range of technologically

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superior design features.  In a May 1998 BACKPACKER Magazine survey, The North
Face(R) was ranked as a leading brand in the outerwear category by 64% of the
respondents, significantly more than any other brand.

EXPEDITION SYSTEM OUTERWEAR

     Expedition System Outerwear(R) is an advanced, integrated cold-weather
clothing system in which several pieces, including full-body suits, pants,
jackets, vests, anoraks and accessories, work together in layers to provide
warmth, protection and safety for the wearer.  This category utilizes
lightweight,  advanced fabric technologies and designs developed in conjunction
with the Company's suppliers and elite athletes sponsored or employed by the
Company.  The Expedition System Outerwear(R) category represents the most
technically advanced outerwear produced by The North Face.

TECHNICAL OUTERWEAR

     The Company's Technical Outerwear category is comprised of the
Mountaineering Collection, the Trekking Collection, the High Aerobic Output
Series and the High Performance Fleece Series.

     The Mountaineering  Collection is a series of high performance, technically
advanced Gore-Tex(R) jackets and pants that are designed to provide protection
from very wet and windy conditions. Many of the products in the Mountaineering
Collection are designed to work together with the Company's other outerwear
products to provide adaptable protection from the elements.  The Mountaineering
Collection is designed for serious outdoor enthusiasts.

     The Trekking Collection is a series of parka's, jackets and pants which
represent a new generation of weatherproof shells, designed as a moderately
priced alternative to the Company's Gore-Tex(R) shells.  This collection
features products that utilize Hydroseal(R), The North Face's proprietary
waterproof/breathable laminated fabric.  This collection of seam sealed shells
extends the reach of the Company's outerwear products to a broader group of
consumers.

     The High Aerobic Output Series consists of jackets and pants designed to
provide protection in conditions of wind and light rain.  These products feature
The North Face's proprietary Hydrenaline(R) fabric, and are designed for a wide
range of aerobic activities  including running, mountain biking and hiking.

     The High Performance Fleece Series consists of jackets, vests, sweatshirts
and pants made from advanced Polartec(R) polyester knitted fabrics.  Included
among these products are the Company's best selling, 300 weight Denali Jacket
and its innovative bi-component UltraWick(R) garments.

EQUIPMENT

     The Company offers three lines of technical outdoor equipment:  tents,
sleeping bags and backpacks (including daypacks).  Equipment is integral to The
North Face brand identity and helps define the Company's position in the
marketplace.  Equipment is critical to The North Face(R) image and reputation
and plays an extremely important role in the Company's research, development,
field-testing and marketing activities.

     Tents.   The Company offers an extensive line of tents, which are designed
to suit a wide variety of weather conditions and applications.  The Company
offers a number of expedition-quality tents, including models such as the VE-25,
long renowned as the world's finest base camp tent, and the Mountain Tent, rated
by CLIMBING MAGAZINE in 1995 as the best two-person expedition tent.  In January
1998, BACKPACKER Magazine awarded the Company one of its Silver Service Awards,
which pay tribute to innovations, people, and organizations that have had a
significant, positive impact on the state of backpacking during the past 25
years, citing the Company's Oval Intention tent, the "geodesic dome tent" that
revolutionized tent design.  The crossed pole structure pioneered in the Oval
Intention makes shelters self-standing and more wind resistant. Additionally,
BACKPACKER Magazine awarded the Company a 1998 Editor's Choice Award for its
Soloist Bivy, a bivy bag with crisscrossing poles to provide tent-like shelter
for the soloist outdoor athlete.  In addition, in a May 1998 BACKPACKER Magazine
consumer survey, The North Face(R) was ranked as a leading brand in the tent
category by 65% of the respondents surveyed, more than any other brand. The
Company's best selling tents are its three season and recreational tents that
also offer a number of advanced features and are used by a wide range of
consumers for backpacking and camping.

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     Sleeping Bags.   The Company offers a wide variety of sleeping bags for
mountaineering and backpacking that feature different shell fabrics and linings,
providing varying degrees of insulation.  The Company offers sleeping bags with
both goose down and synthetic insulation, which are designed to provide comfort
in temperatures ranging from -35F to +40F as well as in differing climatic
conditions. Many of the Company's sleeping bags feature proprietary designs and
materials.  For example, in the fall season of 1996, the Company introduced
synthetic sleeping bags filled with Polarguard 3D, a high-performance product
developed by Hoechst Corporation ("Hoechst") which provides superior wet weather
protection and comfort. In a May 1998 BACKPACKER Magazine consumer survey, The
North Face(R) was ranked as a leading brand in the sleeping bag category by 70%
of the respondents surveyed, more than any other brand.

     Backpacks.   The Company offers a line of backpacks grouped into three
categories: (i) large volume, internal-frame packs for extended backcountry
trips; (ii) "tech packs" for specific sport activities; and (iii) day packs.
The large-volume, internal-frame pack category consists of three different lines
based on differing load-carrying efficiencies.  These packs are made in a range
of torso lengths and in sizes to fit both men and women. The "tech pack" line
consists of a number of models of sport-specific packs designed with the
participation of the Company's teams of climbers, explorers and extreme skiers
for specific activities, such as high altitude climbing, ice climbing, rock
climbing, and backcountry skiing and snowboarding.  The Company's daypack line
is comprised of a series of high quality, small-volume packs that offer a number
of advanced features over a wide range of price points.

TEKWARE

     In 1996, the Company entered the broader casual sportswear market with its
introduction of TekwareTM, a line of high-performance functional sportswear made
from a new generation of synthetic fabrics and developed in collaboration with
E.I. DuPont de Nemours & Co. ("DuPont") and other companies.  Tekware is offered
in three lines: (i) Bouldering/Climbing; (ii) Trail Running/Performance; and
(iii) Trekking/Adventure Travel. Each line offers styles for men and women and
features a collection of pants, shorts, shirts, pullovers, fleece garments, wind
jackets, vests, tank tops and tights.  The synthetic fabrics from which the
Company's Tekware products are made offer significant advantages such as rapid
drying and resistance to shrinking, tearing, fading, staining, mildewing and
wrinkling.

     Tekware is designed for serious outdoor pursuits but is also functional for
everyday use.  Management believes that, as demand for Tekware increases and
more Summit Shops are opened, the Company will increasingly be shipping Tekware
on a year-round basis, thereby providing a complement to the Company's other
product offerings.

ASCENTIALS

     Ascentials is comprised of the Company's line of technical apparel and
equipment accessories,  including a range of lumbar packs, cargo bags, T-shirts,
high-performance thermal underwear, hats and gloves/mittens, which have been
tested extensively in extreme conditions by the Company's team of elite
athletes.  In 1998 the Company introduced ballistics luggage and other
accessories targeted at a wide audience of hikers, students and travelers.

SNOWSPORTS GEAR - SKIWEAR AND SNOWBOARDWEAR

     The Company's snowsports gear is designed for backcountry skiing and
snowboarding. The North Face(R) snowsports gear products include parkas,
jackets, anoraks, ski pants, ski suits, gloves and other accessories.  The
Company's various snowsports gear collections include Steep Tech(R), Men's
Extreme(R) Gear, Women's Extreme(R) Gear, Men's Extreme(R) Light, Women's
Extreme(R) Light, E.G.- Tech, Roam and Chaos.  These products offer technically
advanced features for weather and water protection, freedom of movement and
appropriate ventilation.  Other features include the use of tough, abrasion-
resistant fabrics, like Kevlar, that are strategically overlaid or inset for
added protection in areas of excessive wear and tear, such as the shoulders and
elbows. While the design of these products is primarily geared toward extreme
users, they have become increasingly popular among recreational and more casual
users.

RUGGED FOOTWEAR

     The Company entered into the rugged footwear market in Spring 1999 with The
North Face branded products in two key categories: Trail Running and Trekking.
The Trekking category is the largest category of the rugged footwear business,
while the Trail Running category is the fastest growing segment.  In addition,
in 1998, the

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Company purchased a minority interest in La Sportiva S.p.A. and acquired La
Sportiva USA, the U.S. distributor for the La Sportiva brand (see discussion of
these acquisitions at Note 3 to Consolidated Financial Statements). The La
Sportiva brand is dominant in rock climbing shoes and mountaineering boots -
both highly technical product categories targeted to the extreme user. The La
Sportiva products add the extreme technical edge to round out The North Face
footwear line in a manner consistent with the Company's approach in apparel and
equipment.

RESEARCH, DESIGN AND DEVELOPMENT

     The Company's goal is to offer the most technically advanced products in
its industry and to establish the industry standard for quality and performance
in each of the Company's product categories. To remain on the leading edge of
product design and materials technology, the Company evaluates trends, monitors
the needs and desires of consumers and works internally and with its suppliers
to develop new materials and products and to enhance product designs.

     The Company regularly reviews its product lines and actively seeks input
from a variety of sources, including elite athletes, retailers, consumers and
suppliers.  At the forefront of the product development effort is a 41-member
product development team, which includes experts in textiles and design
engineering. The product development team works primarily with staff designers
and also with outside contract designers.  The Company's teams of climbers,
explorers and extreme skiers are important participants in the Company's
research, design and development effort.

     The product development cycle for a new products, from initial design to
product introduction, is generally 12 to 18 months. New designs are tested by
the Company's teams of climbers, explorers and extreme skiers and by in-house
and independent laboratories, as well as by other Company personnel.  The North
Face maintains an in-house materials testing laboratory to perform a variety of
tests, including water resistance, air permeability, tear strength and abrasion
resistance.

     Many of the Company's products are designed with materials that are
integral to their performance.  Most of these materials are developed in
collaboration with the Company's major suppliers, such as W. L. Gore &
Associates, DuPont, Hoechst, Malden Mills, Burlington Industries and Mitsui
Textiles. The Company works closely with these and other suppliers to develop
high-performance materials that result in lighter, stronger and more efficient
products.  With each innovative material, the Company generally seeks
proprietary use or an exclusivity period, usually one to two years. These
suppliers provide much of the funding for research and development of materials
used by the Company.  In addition, they frequently contribute to the costs of
promoting products incorporating their material.

MARKETING AND PROMOTION

     The Company's goal is to increase brand awareness by projecting a high-
quality, technically sophisticated and authentic image that appeals to
professionals and serious outdoor enthusiasts as well as to a broader segment of
consumers. The Company conveys such an image by featuring world-class climbers,
explorers, skiers and snowboarders using the Company's products on high
altitude, polar or backcountry expeditions.  The Company's marketing materials
utilize language and images that, while directed to the extreme athlete, appeal
to a broader segment of consumers.

     The Company believes that it has obtained a high level of brand awareness
and loyalty from the extreme users of its products.  In order to bolster brand
loyalty and to further enhance its authentic image, the Company is increasing
its support of selected outdoor sporting events, high altitude and polar
expeditions and the teams of climbers, explorers and skiers it sponsors.  The
North Face(R) has been a supplier of outerwear and equipment to many of the
world's most challenging expeditions for over 30 years.  A small sampling of
these expeditions includes the 1969 Arctic Institute of North America Altitude
Expedition; the 1978 American Woman's Himalayan Expedition; the 1987
International K-2 Expedition; the 1989 Trans-Antarctica Expedition; the 1992
American Gasherbrum IV Expedition; the 1994 Sagmartha Environmental Expedition;
the 1995 Ak-Su Kyrgyzstan Expeditions; the 1996 Shipton Spire Expeditions; the
1997 Women's Morocco Expedition; the 1997 Queen Maud Land Expedition; the 1998
Mt. McKinley Women's Expedition for Survivors of Breast Cancer; and the 1998
Baffin Island Expedition.

     Recognizing that the product choices of professional athletes influence
consumer preferences, the Company employs or sponsors several world-class
professional climbers, including Conrad Anker, Kitty Calhoun, Greg Child, 

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Lynn Hill, Alex Lowe, Pete Athans, Peter Croft, Yuji Hirayama, Nancy Feagin, Jay
Smith, Katie Brown and Thomas Huber; extreme skiers Scot Schmidt, Rick
Armstrong, Rob and Eric DesLauriers, Kasha Rigby and Jeremy Nobis; and
backcountry snowboarders Stephen Koch, John Griber, Jim Zellers, Jay Nelson and
Megan Pishke. These athletes are integral to the Company's product research,
design and testing. In addition, they participate in promotional activities on
behalf of the Company, including product demonstrations and appearances at
exhibitions, tradeshows, retailer clinics and promotional events, and appear in
photographs to promote the Company in catalogs, advertisements, posters and
videos. The Company also has relationships with the Professional Ski Instructors
of America, the National Ski Patrol, and the American Association of Snow Board
Instructors, pursuant to which each of these organizations endorses the
Company's snowsports gear.

     The Company's advertising campaign is targeted to certain outdoor and ski
publications, including  OUTSIDE MAGAZINE, CLIMBING MAGAZINE, BACKPACKER
MAGAZINE and POWDER MAGAZINE. This campaign was expanded in 1998 to include more
broad-based consumer magazines such as MEN'S HEALTH, MEN'S JOURNAL and CONDE
NAST SPORTS FOR WOMEN. Through partnerships with outdoor filmmakers and
magazines like OUTSIDE and NATIONAL GEOGRAPHIC, the Company continues to see an
increase in non-paid media coverage.  For the second year in a row, a North Face
expedition and North Face(R) products were featured prominently in NATIONAL
GEOGRAPHIC MAGAZINE.  The Company's  advertising campaign is designed to
reinforce The North Face's position with serious outdoor enthusiasts while
appealing to a broader segment of consumers. In addition to the Company's
advertising campaign, the Company provides a wide assortment of point-of-
purchase advertising support to retailers, including catalogs, descriptive
product hangtags and visual aids, many of which are integrated into the
Company's Summit Shops (described below).

SALES AND DISTRIBUTION

     The Company currently sells its products primarily to a select group of
specialty outdoor, premium-sporting goods and major outdoor specialty retail
customers such as Recreational Equipment, Inc. ("REI") and Eastern Mountain
Sports, Inc.  To preserve the integrity of The North Face(R) brand identity,
the Company has historically limited its distribution to retailers that market
products that are consistent with the Company's quality standards and that
provide a high level of customer service and technical expertise.

Retail Customer Operations

     The Company sells its products to approximately 1,521 wholesale customers
in the United States, representing an estimated 2,108 storefronts.  In Europe,
the Company sells to approximately 1,197 wholesale customers, representing an
estimated 1,482 storefronts, and in Canada, the Company sells its products to
approximately 235 wholesale customers, representing an estimated 326
storefronts.

     The Company's products are sold to retail customers in the United States by
employee sales representatives, and in Canada and Europe by both employee and
independent sales representatives.  Sales representatives conduct in-store
clinics to educate sales personnel on the technical qualities and uses of the
Company's products, provide customer support, review each retail account on a
periodic basis and assist the Company in forecasting levels of product needs.
Independent sales representatives in Canada and Europe are paid on a commission
basis.

     The Company maintains a specialty retailer and customer service department
to handle orders and consumer inquiries as well as a warranty department to
handle the repair or replacement of defective or damaged merchandise.  Most of
the Company's products are covered by a lifetime warranty, with the exception of
footwear and those products sold through the Company's outlet stores.

Summit Shops

     In 1996, the Company introduced Summit Shops, which are year-round concept
shops dedicated to The North Face(R) products and which are located within
certain of its retail customers' stores.  Summit Shops are intended to increase
sales at retailers carrying the Company's products by offering an attractively
designed, professionally merchandised, dedicated selling space featuring a wide
range of The North Face(R) products.  The objectives of the Summit Shops are to:
(i) provide year-round floor space within the Company's retail customers' stores
that is dedicated to The North Face(R) products; (ii) increase the Company's
control over the merchandising and appearance of the Company's products at the
retail level; (iii) create an increased awareness of the Company's products
among consumers; (iv) modernize the specialty retailers' approach to
merchandising The North Face(R) products; (v) provide the ability to closely
monitor retail sales at retailers; and (vi) maintain a consistent product

                                       8
<PAGE>
 
assortment and marketing presentation at the retail level.  The Company has
designed the appearance of each Summit Shop, including its fixtures, merchandise
displays, descriptive placards and graphic images, to increase consumer
awareness of The North Face(R) brand identity. The Company provides
merchandising support for the Summit Shops, while the retailer provides the
customer service, sales personnel and floor space.  The Company also provides
sales and product training for the retailers' personnel who work in the Summit
Shops.

     At the end of 1997, there were a total of 202 Summit Shops. At the end of
1998, there were a total of 394 Summit Shops. These shops ranged in size from
140 to 2500 square feet and averaged approximately 425 square feet.

Company Operated Retail Stores

     The Company's nine retail stores are an important component of its
marketing and product development strategies and provide a targeted environment
in which to merchandise and sell The North Face(R) product lines.  Located
primarily in high-end retail shopping districts and regional shopping malls,
these stores carry a broad range of The North Face(R) products and a small
offering of complementary products from other manufacturers.  The Company
believes that as a result of its ability to control the visual presentation and
product assortment in its retail stores, these stores help build brand awareness
and introduce consumers to a broad range of The North Face(R) products.  These
stores also provide a means for the Company to test the appeal of new products
and merchandising techniques.  By working closely with store personnel, many of
who are outdoor enthusiasts, the Company also obtains customer feedback that
influences product design and development.

                                       9
<PAGE>
 
The following table shows the approximate retail selling space at each of the
Company's nine retail stores:

                                   APPROXIMATE SELLING            
LOCATION                             SQUARE FOOTAGE            YEAR OPENED
--------                           -------------------         -----------
Denver, Colorado                         8,500                   1973
Boulder, Colorado                        3,400                   1982
Seattle, Washington                      4,600                   1985
Oakbrook, Illinois                       3,000                   1991
San Francisco, California                8,100                   1991
Schaumberg, Illinois                     3,400                   1991
Costa Mesa, California                   5,500                   1993
Palo Alto, California                    7,800                   1994
Chicago, Illinois                       12,000                   1995

     Although the Company considers its retail stores to be an important aspect
of its brand name strategy, the Company currently has no plans to open
additional retail stores.

Outlet Stores

     The Company operates nine outlet stores, located in Berkeley, San Francisco
and Carlsbad, California; Freeport, Maine; Woodbury, New York; Bend, Oregon;
Birch Run, Port Glasgow, Scotland and  Quebec, Canada. In 1999, the Company
plans to open two temporary and two permanent outlets.  Outlet stores serve as
an effective means to liquidate discontinued and excess wholesale merchandise.

Distribution

     The Company currently distributes its products in the United States from
its facility in Vacaville, California.  The Company has announced its intention
to outsource its U.S. distribution with a third-party effective approximately
July 1999.  In May 1998, the Company outsourced its Canadian warehousing and
shipping functions to a third-party distribution company with a warehouse in
Toronto, Ontario.  In Europe the Company operates a distribution and
administrative facility in Port Glasgow, Scotland.  All of the Company's
products are shipped by third-party carriers.

INTERNATIONAL OPERATIONS

     International sales accounted for approximately 25%, 26% and 24% of the
Company's net sales in 1998, 1997 and 1996 respectively.  The Company recently
changed its philosophy and now utilizes an integrated worldwide approach to
product development, sourcing and marketing in order to reduce costs, achieve
consistent Company-wide quality standards and create a unified global brand.  By
offering substantially the same product lines and promoting the same image in
catalogs, advertising and point of purchase materials, the Company has
positioned The North Face(R) brand in Europe to be consistent with the brand
image in the United States and Canada.

Europe

     The Company has operated in Europe for more than 15 years and believes that
it is recognized as a leader in the design, marketing and distribution of
technically sophisticated outdoor apparel and equipment. The Company's European
operations are headquartered in Port Glasgow, Scotland and the Company maintains
a Sales and Marketing office in Volpago del Montello, Italy. Its primary markets
are the United Kingdom, Germany, Italy, France, Spain, Sweden, Denmark and The
Netherlands. In May 1998, the Company closed its manufacturing operation in its
Scotland facility and converted the space to warehousing and distribution
facilities to support its European markets.

Canada

     The Company's Canadian operations are headquartered in Quebec, Montreal.
Since early 1995, the Company has sold its products in Canada through
independent sales representatives to customers located primarily in British
Columbia, Ontario and Quebec. Prior to 1995, the Company's products were sold in
Canada through a licensee. In May 1998, the Company consolidated certain of its
administrative and customer service functions of its

                                       10
<PAGE>
 
Canadian operations within the United States. In addition, the Canadian
distribution capabilities were outsourced to a third-party at that time.

Asia

     In Japan and Korea, substantially all of the Company's trademarks are owned
by Kabushiki Kaisah Goldwin ("Goldwin"), a leading manufacturer and distributor
of high-end sports and outdoor apparel and equipment.  The North Face(R) is a
leading high-performance outdoor brand in Japan.  The Company and Goldwin work
closely together in the areas of product design, sourcing and brand imaging.
The Company believes that Goldwin shares the Company's strategy of building a
unified global brand.  The Company benefits from this relationship by selling
certain products to Goldwin and by charging an administrative fee for orders,
which Goldwin adds to the Company's production in China and Southeast Asia.   In
Hong Kong and Macau, the Company's products are sold through a licensee, Mitsui
& Co., Ltd. ("Mitsui").  Effective in the fourth quarter of 1998, in the
territories of China and Nepal, the Company's products are sold through a
licensee, Youngone Corporation.  The Company plans to continue to pursue sales
opportunities in other Asian and Pacific Rim countries.

SOURCING AND MANUFACTURING

     The Company sources its products from approximately 50 unaffiliated
manufacturers in Asia, North America, and Europe, including Hong Kong, China,
Taiwan, Korea, Indonesia, Bangladesh, Thailand and Portugal. The Company
believes that it enjoys good relationships with its suppliers and manufacturers
and has the ability to secure the necessary capacity to meet any potential
increased demand for its products.

     To ensure that products manufactured for the Company are consistent with
its quality standards, the Company manages all key aspects of the production
process, including establishing product specifications, selecting the materials
to be used and the suppliers of such materials, and negotiating the prices for
such materials.  The Company maintains a staff of quality control specialists
which conducts on-site inspections throughout the production process, including
at the mills before the fabrics are shipped, at the factories as the products
are made and, finally, before the finished products are shipped. In connection
with these quality control efforts, in 1999 the Company opened an office in Hong
Kong, which management believes will facilitate more rapid product development,
prototyping and manufacturing and allow the Company to achieve higher levels of
quality control over products manufactured in Asia.

MANAGEMENT INFORMATION SYSTEMS

     The Company recognizes the important nature of information technology in
maintaining and improving its level of service, internal and external exchange
of data, and overall competitive position.  The Company's management information
and electronic data processing systems consist of a full range of financial,
distribution, merchandising, forecasting and retail systems.  The Company has
been analyzing its current and future systems requirements, including Year 2000
compliance issues.  Recently, the Company completed a thorough analysis of its
system requirements and implemented  plans to provide system enhancements and
upgrades which it believes will ensure such resources are satisfactory and
consistent with the Company's long-term growth plans.  The Company also plans on
extending its systems across the supply chain with business-to-business and
business-to-consumer Internet commerce.   Additionally, the Company has
continued the process of making its applications Year 2000 compliant and is on
target to be completed with this task by the end of November 1999 at an internal
cost of approximately $750,000. The Company expects to spend approximately $7.0
million on systems enhancement and the purchase of software packages and other
improvements in 1999 to enhance and support its strategic business objectives.
The Company believes that the improvements in 1999 and beyond, along with
routine upgrades and other enhancements, will be sufficient to accommodate the
Company's anticipated growth in sales and planned expansions for the foreseeable
future. However, there can be no assurance that any system implementation or
system upgrades will be completed in a timely manner, will be adequate to meet
the needs of the Company or will not strain the Company's financial resources.

     For additional information concerning the Company's management information
systems, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000," "Factors That May Affect the Company's
Business - Reliance on Management Information Systems" and "Factors That May
Affect the Company's Business - Year 2000 Compliance."

COMPETITION

                                       11
<PAGE>
 
     The markets for the Company's products are highly competitive, with
competition based primarily on price, quality, brand name and service.  The
recent growth in the outdoor apparel and equipment markets has encouraged the
entry of many new competitors as well as increased competition from established
companies. Although management believes that it does not compete directly with
any single company with respect to its entire range of products, the Company
does have significant competitors within each product category.  In addition, as
the Company expands its product lines and channels of distribution, and offers
products at a broader range of price points, it will likely come into
competition with additional outdoor apparel and equipment companies.

     Further, the Company has recently begun experiencing increased competition
from major brand-name apparel companies who are attempting to duplicate the
Company's styles, particularly in the area of functional sportswear, outerwear
and footwear.  These competitors are larger and have significantly greater
financial, marketing and other resources than the Company.  While the Company
believes that it has been able to compete successfully because of its heritage,
brand image and recognition, the broad range and quality of its products, and
its selective distribution and customer service policies, including the lifetime
warranty that most of its products carry, there can be no assurance that the
Company will be able to maintain or increase its market share in the future. The
failure of the Company to compete successfully would materially and adversely
affect the Company's business and results of operations.

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.

EMPLOYEES

     As of December 31, 1998, the Company had 587 full-time employees, of which
425 were employed in the United States, 140 in Europe,  17 in Canada and 5 in
Hong Kong.  None of these employees is currently covered by a collective
bargaining agreement.  The Company believes that its relations with its
employees are good.

FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS

     Tender Offer. On February 27, 1999, the Company entered into a Transaction
Agreement (the "Transaction Agreement") with 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. The
Transaction Agreement remains in full force and effect although, as of the date
hereof, LGP has informed the Company that they are reevaluating the transactions
contemplated by the Transaction Agreement. 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.

     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."

                                       12
<PAGE>
 
     Key Personnel. The Company's future success will depend upon the continued
services of its directors, the continued employment of its executive officers
and other key personnel, and upon the Company's ability to successfully recruit
and retain new directors, executive officers and other key personnel. There can
be no assurance that any of such persons will remain directors, executive
officers or employees of the Company in the future. The loss of one or more
directors, executive officers or other key personnel could have a significant
adverse effect on the Company's business. There can be no assurance that any
existing or newly hired director, executive officer or key employee can
successfully manage or contribute to the Company's operations.

     The Company recently announced that it would restate its 1997 financial
statements and certain of its 1998 quarterly financial statements and the
Company failed to file in a timely manner its 1998 Annual Report on Form 10-K.
In addition, the Company hired a new Chief Executive Officer and President in
May 1998 and appointed the Company's Controller to Acting Chief Financial
Officer in March 1999.  To the extent the Company is not successful in
retaining the services of any of its directors, executive officers or other key
personnel and recruiting and retaining the services of new directors, executive
officers or other key personnel, the Company may not be able to operate its
business which may, in turn, cause the Company's revenues and profits to
significantly and sharply decline and have a significant adverse effect on the
Company's valuation and market price of its Common Stock.

     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.  As of March 31, 1999, the Company's
directors, officers and certain other affiliates beneficially owned
approximately 6% of the outstanding shares of the Company's Common Stock.

     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.

     Wholesale Strategy.  The Company's wholesale customers currently consist,
primarily, of specialty outdoor product retailers.  The Company cannot assure
that its existing customers will increase their purchases of the Company's
products, that future preseason wholesale orders will increase, or that the
Company will be able to fill reorders during each season.  Because the Company
expects its wholesale business to constitute an increasing percentage of total
sales going forward as compared to its sales in Company-owned retail stores,
overall gross margins may decline in the future.  Sales returns in excess of
anticipated amounts could have an adverse effect on operations.  The Company's
wholesale strategy includes its ability to achieve increased sales through its
Summit Shop program.  Risks of this program include sourcing and managing higher
inventory levels, funding all or most of the cost of the Summit Shop fixtures
without assurance of additional sales and profits, and the need to supply
products that maintain consumer demand on a year-round basis.  There can be no
assurance that additional Summit Shops will be opened in a timely manner or that
their cost or performance will meet the Company's expectations.  If the Summit
Shop program is unsuccessful, the Company risks write-offs of inventory and
fixtures that could have a material adverse effect on the Company's business.

     Dependence on New Products.  To continue its growth, the Company must
successfully introduce new products and improvements to existing products on an
ongoing basis.  Risks of new product introductions include targeting new markets
involving more casual outdoor uses, offering products in wider price ranges,
product obsolescence, increased costs and competition, possible consumer
rejection of new products or styles and possible dilution of the Company's
product image.  In Spring 1999, the Company introduced rugged footwear under The
North Face(R)  brand name.  This represents the Company's initial entry into the
footwear market, which is highly competitive, and there can be no assurance
footwear will be a financial success.

     Reliance on Unaffiliated Manufacturers.  The Company currently relies on
approximately 50 unaffiliated manufacturers to produce nearly all of its
products, with ten of the manufacturers producing approximately 77% of the
Company's products for 1998.  The Company has no long-term contracts with its
manufacturing sources, and it 

                                       13
<PAGE>
 
competes with other companies for production facilities and import quota
capacity. Any disruption in the Company's ability to obtain manufacturing
services could have a material adverse effect on the Company's business. None of
the manufacturers used by the Company produce the Company's products
exclusively. The Company has occasionally received, and may in the future
receive, shipments of products from manufacturers that fail to conform to the
Company's quality control standards.

     The Company requires its independent manufacturers to operate in compliance
with applicable laws and regulations.  Although the Company's internal and
vendor operating guidelines promote ethical business practices and the Company's
sourcing personnel periodically visit and monitor the operations of its
independent manufacturers, the Company does not control these vendors or their
labor practices.  The violation of labor or other laws by an independent
manufacturer of the Company, or the divergence of an independent manufacturer's
labor practices from those generally accepted as ethical in the United States,
could result in adverse publicity for the Company and could have a material
adverse effect on the Company.

     Consumer Preferences.  Consumer demand for the Company's products may be
adversely affected if consumer interest in outdoor activities does not grow or
declines.  In addition, some competitors may have more resources to advertise
and market their products.  If the Company is unable to respond successfully to
changes in consumer preferences, or if consumer preferences shift toward
competing products or away from the Company's product categories altogether, the
Company's business would be adversely affected.  The Company cannot assure
future growth or consumer demand for its products.  If consumer interest in
outdoor activities grows, more competitors, who are better financed, may enter
the market.

     Risks Associated with Retail Strategy.  The Company plans to continue to
broaden its distribution to include larger retailers.  This strategy may
alienate specialty retailers that currently distribute the Company's products
causing such specialty retailers to (i) cancel orders of the Company's products
or (ii) refuse to sell the Company's products altogether, which could have a
material adverse effect on the Company's business.

     Managing Growth.  If the Company's business grows, the Company may have
increased difficulties in managing product design, hiring, marketing,
distribution, management information and other resources, and in obtaining
supplies, manufacturing services and working capital.  The Company's future
profitability will be critically dependent on its ability to achieve and manage
potential future growth effectively.  There can be no assurance that the Company
will be successful in obtaining adequate capital to finance its growth
strategies.

     Management of Inventory.  Success in the technical outdoor apparel industry
is dependent in part, on a company's ability to manage its inventory of
merchandise in proportion to the demand for such merchandise.  If the Company
miscalculates the consumer demand for its products it may be faced with
significant excess inventory and excess fabric for some products and missed
opportunities for others.  Weak sales and resulting markdowns and/or write-offs
could cause the Company's profitability to be significantly impaired and may
have a material adverse effect on the Company's financial condition and results
of operations.

     Key Supplies.  Certain important materials used in the Company's products
are only available from one or a limited number of independent suppliers.  The
Company's future success may depend upon the Company's continued ability to
purchase supplies of technically advanced textiles developed by third-parties.
There can be no assurance that the Company will be able to obtain adequate
supplies of technically advanced materials in the future or that favorable
purchase terms or other arrangements with suppliers (such as suppliers' funding
of development costs and co-operative advertising arrangements) will continue.

     Outsourcing of Distribution.  In May 1998, the Company initiated
outsourcing of distribution for its business in Canada. Also, the Company plans
to outsource its U.S. distribution in 1999.  There can be no assurance that the
Company will be successful in these efforts or that third-party outsourcing
partners will be able to service the Company's customers adequately in the
future.  In addition, the costs of outsourcing may be greater than anticipated.

     Fluctuations in Sales.   Sales of the Company's products historically have
fluctuated due to conditions, such as weather and economic recessions or other
conditions which reduce consumer spending, which are beyond the Company's
control.

     Risk Associated with Seasonality.  The Company's business, like other
retailers, is subject to seasonal 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 the first quarter, with the
exception of the first quarter of 1997.  

                                       14
<PAGE>
 
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, the timing of international licensing and royalty contracts, advertising
and marketing expenditures, increases in the number of employees and costs
associated with new growth and new store openings.

     The Company anticipates that it will continue to incur net losses during
the second calendar quarter 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.

     International Operations.   The Company's business is subject to the risks
generally associated with doing business abroad.  These risks include adverse
fluctuations in currency exchange rates (particularly those of the U.S. dollar
against certain foreign currencies), changes in import duties or quotas, the
imposition of taxes or other charges on imports, the impact of foreign
government regulation, political unrest, disruption or delays of shipment and
changes in economic conditions in countries in which the Company's suppliers are
located.  The Company imports approximately two-thirds of its merchandise from
contract manufacturers located outside of the United States, primarily in the
Far East.   A significant portion of the Company's products is produced in
China.  From time to time, the U.S. government has considered imposing punitive
tariffs on apparel and other exports from China. The imposition of any such
tariffs could disrupt the supply of the Company's products, which could have a
material adverse effect on the Company's results of operations.

     Competition and Trademarks.  The Company faces intense competition from
major brand-name apparel companies, other large companies, and smaller
businesses specializing in outdoor products.  There can be no assurance that the
Company's competition will not develop products that are superior to the
Company's products.  Furthermore, the Company owns and uses a number of
trademarks, some of which may be important in maintaining or creating a
competitive advantage and consumer demand.  Certain competitors in the United
States and abroad have copied and may in the future copy certain of the
Company's trademarks and designs.  The Company is also aware of certain
counterfeiting of the Company's products. There is no assurance that the
Company's efforts to stop or reduce the copying or counterfeiting of its
trademarks or products will be successful, that the Company's trademarks will
not violate the proprietary rights of others, or that the Company will be able
to avoid or successfully defend challenges to its trademarks or other
intellectual property in the United States or abroad.

     Effect of Certain Provisional Anti-Takeover Effects of Stockholders Rights
Plan, Certificate of Incorporation, Bylaws and Delaware Law.  The Company has
adopted a Stockholder Rights Plan to protect the Company's investors in the
event of an unfriendly takeover.  The Stockholder Rights Plan could have the
effect of making it more difficult for a third-party to acquire a majority of
the outstanding voting stock.  Further, certain provisions of Delaware law and
the Company's Certificate of Incorporation and Bylaws could delay or make more
difficult a merger, tender offer or proxy contest involving the Company.  While
such provisions are intended to maximize stockholder value, they may have the
effect of discouraging takeovers that could be in the best interest of certain
stockholders.  There is no assurance that such provisions will not have an
adverse effect on the market value of the Company's Common Stock.

     Product and Warranty Liability.  The Company's products are often used in
severe weather and other extreme conditions.  For example, in 1997, the Company
began selling portaledges used as sleeping platforms in big wall rock climbing.
There can be no assurance that insurance maintained by the Company will cover
possible future losses from product liability claims. The Company maintains a
warranty reserve for the lifetime warranty offered on many of its products, but
cannot assure that future claims will not exceed this reserve. Further, in the
event that the Company experiences problems with product quality or reliability,
its reputation as a provider of high-quality products could suffer, which could
have a material adverse effect on the Company's business.

     Reliance on Management Information Systems.  Currently, the Company is
upgrading its capabilities and systems associated with product acquisition,
merchandise allocation and financial accounting, which have not kept pace with
the Company's growth.  The Company intends to make significant investments to
improve existing management information systems and implement new systems in
these areas and to implement them during fiscal 1999.  There can be no assurance
that these improvements will be successfully implemented.  Failure to implement
and integrate such systems could have a material adverse effect on the Company's
business, financial condition and results of operations.

     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

                                       15
<PAGE>
 
distinguish 21st century dates from 20th century dates.  As a result, computer
systems and software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements.

     The Company has conducted an internal review of its information systems and
is involved in an enterprise wide project to upgrade or modify portions of its
software so that its computer systems will properly utilize dates beyond
December 31, 1999.  The Company has been using both external and internal
resources to reprogram or upgrade its software for the Year 2000 issue.  The
Company has completed the modifications and upgrades, including testing, of all
systems, excluding European systems, and plans to complete the modifications and
upgrades, including testing, of all systems by the end of November 1999. 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. The Company believes that with modifications
and upgrades to its software, the Year 2000 issue can be mitigated. However, if
such modifications and conversions are not properly made, or are not completed
timely, the Year 2000 issue could have a material impact on the operations of
the Company.

     The Company has surveyed significant vendors and others on whom it relies
to assure that their systems will be converted in a timely manner. The Company
is currently in the process of analyzing the responses to this survey.  There
can be no assurance that the systems of other companies will be converted on
time  or that a failure to convert by another Company would not have a material
adverse effect on the Company.  In addition, the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to upgrade their current software systems
for Year 2000 compliance.  These expenditures may result in reduced funds
available to purchase products such as those offered by the Company, which could
have a material adverse effect on the Company's business, operating results and
financial condition.

                                       16
<PAGE>
 
ITEM 2.  PROPERTIES.

     The principal executive and administrative offices of the Company are
located at 2013 Farallon Drive, San Leandro, California and 407 Merrill Avenue,
Carbondale, Colorado.  The general location, use and approximate size of the
Company's principal properties, all of which, other than the facility in
Scotland, are leased, are set forth below:

<TABLE>
<CAPTION>
LOCATION                             USE                                             APPROXIMATE SIZE
-----------------------------       ----------------------------------------      ----------------------
<S>                                 <C>                                           <C>
Carbondale, Colorado                Executive and administrative office                3.5 acres
                                    (temporary site)
San Leandro, California             Executive and administrative offices          151,085 square feet
Vacaville, California               Distribution Center                           250,445 square feet
San Francisco, California           Retail store                                   12,371 square feet
Palo Alto, California               Retail store                                   10,700 square feet
Costa Mesa, California              Retail store                                    7,083 square feet
Seattle, Washington                 Retail store                                    6,504 square feet
Denver, Colorado                    Retail store                                   17,000 square feet
Boulder, Colorado                   Retail store                                    4,342 square feet
Chicago, Illinois                   Retail store                                   15,192 square feet
Oakbrook, Illinois                  Retail store                                    4,000 square feet
Schaumberg, Illinois                Retail store                                    4,996 square feet
Berkeley, California                Outlet                                         14,150 square feet
San Francisco, California           Outlet                                         10,000 square feet
Freeport, Maine                     Outlet                                         10,070 square feet
Quebec, Canada                      Outlet                                          3,042 square feet
Woodbury, New York                  Outlet                                          3,780 square feet
Birch Run, Michigan                 Outlet                                          5,500 square feet
Bend, Oregon                        Outlet                                          5,940 square feet
Carlsbad, California                Outlet                                          6,428 square feet
Wrentham, Massachusetts             Outlet                                          6,252 square feet
Port Glasgow, Scotland              European headquarters, distribution            77,200 square feet
                                    center and outlet
Quebec, Canada                      Canadian administrative office                  4,568 square feet
Volpago del Montello, Italy         Sales and Marketing Center                     12,600 square feet
Boulder, Colorado                   Sales Office                                    4,300 square feet
Poolesville, Maryland               Sales Office                                    2,629 square feet
Seattle, Washington                 Sales Office                                      800 square feet
Carbondale, Colorado                A-5 administrative office                       1,131 square feet
Boulder, Colorado                   La Sportiva USA administrative office and       8,000 square feet
                                    distribution center
</TABLE>

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
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 

                                       17
<PAGE>
 
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.

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

     None.

PART II

ITEM 5.  MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     The Company's Common Stock is listed on the Nasdaq National Market and
trades under the symbol "TNFI." As of April 20, 1999, the Company's Nasdaq
trading symbol changed from "TNFI" to "TNFIE" because the Company failed to
timely file this Annual Report on Form 10-K. The Company anticipates that its
stock symbol will be changed back to "TNFI" shortly after the filing of this
Report on Form 10-K. As of April 30, 1999, there were approximately 160
stockholders of record. Information concerning certain dividend restrictions
under the Company's credit facility is set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operation-Liquidity and Capital
Resources" below. The Company does not anticipate paying any dividends in the
foreseeable future.

     Following are the high and low closing prices for the Company's Common
Stock for each of the four quarters of 1998 and 1997 and for the third and
fourth quarters of 1996:

     YEAR ENDED DECEMBER 31, 1998              HIGH               LOW
     ----------------------------              --------          ---------
     First Quarter                             $28.38            $20.75
     Second Quarter                            $26.13            $20.50
     Third Quarter                             $24.25            $ 9.50
     Fourth Quarter                            $14.38            $ 9.50
                                          
     YEAR ENDED DECEMBER 31, 1997              HIGH               LOW
     ----------------------------              --------          ---------
     First Quarter                             $21.75            $16.00
     Second Quarter                            $19.50            $13.63
     Third Quarter                             $26.88            $18.50
     Fourth Quarter                            $27.63            $18.75
                                          
     YEAR ENDED DECEMBER 31, 1996              HIGH               LOW
     ----------------------------              --------          ---------
     Third Quarter                             $32.00(1)         $15.25(1)
     Fourth Quarter                            $29.75            $19.25

(1)  The Company's Common Stock began trading on Nasdaq National Market on July
     3, 1996 at an initial price of $14 per share.

                                       18
<PAGE>
 
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                        --------------------------------------------------------
                                          1994           1995       1996       1997       1998
                                        --------       --------   --------   --------   --------
<S>                                     <C>            <C>        <C>        <C>        <C>
                                        (Pro Forma)(1)
Net sales                                 $89,187      $121,534   $158,226   $203,247   $247,096
Operating income                            7,334        10,524     13,544     16,133     10,686
Income before provision for taxes           2,680         5,583      9,275     13,146      5,843
 and extraordinary item                            
Income before extraordinary items           1,708         3,485      5,664      7,955      3,592
Income per share before                            
 extraordinary items:                              
 Basic                                                 $   1.07   $   0.84   $   0.70   $   0.30
 Diluted                                               $   0.47   $   0.62   $   0.69   $   0.29
Weighted average shares outstanding:               
 Basic                                                    3,249      6,742     11,297     12,121
 Diluted                                                  7,434      9,183     11,578     12,485
</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. The amounts assumes the acquisition occurred
    on January 1, 1994.

<TABLE>
<CAPTION>
                                                       AS OF DECEMBER 31,
                                        --------------------------------------------------
                                          1994      1995      1996       1997       1998
                                        --------  --------  --------   --------   --------
<S>                                     <C>       <C>       <C>        <C>        <C>
BALANCE SHEET DATA
 
Working capital                         $14,189   $22,668   $ 51,799   $ 61,995   $ 68,546
Total assets                             66,549    84,508    110,587    167,449    232,644
Short-term debt                           1,327     4,838         95     25,734     55,910
Long-term debt                           29,047    36,388        135      5,177      5,360
Stockholders' equity                     17,179    20,568     86,499    100,141    123,210
</TABLE>

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 A PERCENTAGE OF SALES
                                             YEARS ENDED DECEMBER 31,         (EXCEPT FOR INCOME TAXES)
                                         --------------------------------    ----------------------------
                                           1996        1997        1998        1996       1997      1998
                                         -------     --------    --------    --------   -------   -------
<S>                                      <C>         <C>         <C>         <C>        <C>       <C>
Net sales                                $158,226    $203,247    $247,096      100.0%    100.0%    100.0%
Gross profit                               70,031      92,483     111,962       44.3%     45.5%     45.3%
Operating expenses                         56,487      76,350      93,897       35.7%     37.6%     38.0%
Other operating expenses                       --          --       7,379         --        --       3.0%
Operating income                           13,544      16,133      10,686        8.6%      7.9%      4.3%
Interest income (expense)                  (4,625)     (2,238)     (4,907)      (2.9%)    (1.1%)    (2.0%)
Other income (expense), net                   356        (749)         64        0.2%     (0.4%)      -- 
Income before provision for taxes and       9,275      13,146       5,843        5.9%      6.5%      2.4%
 extraordinary items
Provision for income taxes                  3,611       5,191       2,251       38.9%     39.5%     38.5%
Income before extraordinary items        $  5,664    $  7,955    $  3,592        3.6%      3.9%      1.5%
</TABLE>

                                       19
<PAGE>
 
     The following table sets forth the Company's net sales by distribution
channel as well as domestic versus international net sales:
  
                                FOR THE YEARS ENDED DECEMBER 31,
                                ---------------------------------
                                  1996        1997         1998
                                --------     --------    -------- 
Wholesale customers             $125,458     $168,543    $202,747
Company-operated retail           32,768       34,704      44,349
                                --------     --------    -------- 
Total net sales                 $158,226     $203,247    $247,096
                                ========     ========    ======== 
                                                        
United States                   $120,027     $150,798    $186,443
International                     38,199       52,449      60,653
                                --------     --------    -------- 
Total net sales                 $158,226     $203,247    $247,096
                                ========     ========    ========  

                                       20
<PAGE>
 
GENERAL

     Investments in La Sportiva Businesses. On July 2, 1998, the Company
acquired a 20% interest in La Sportiva S.r.l., a premier manufacturer and
distributor of trekking, mountaineering, and climbing footwear located in Ziano
di Fiemme, Italy for a purchase price of $2.5 million, and incurred direct costs
of approximately $0.6 million, for a total purchase price of approximately $3.1
million. In August 1998, La Sportiva S.r.l. changed its name to La Sportiva
S.p.A. The majority shareholders of La Sportiva S.p.A. have a "put option" which
may require the Company to purchase, in a single transaction, an additional 31%
interest in La Sportiva S.p.A. for 6.8 billion lira ($4.1 million at December
31, 1998). This put option may be exercised at any time during the period
beginning on July 1, 2000 and ending on July 1, 2003. After the expiration of
the "put option" and until December 31, 2004, the Company may exercise a "call
option" which, if exercised, would require the majority shareholders of La
Sportiva S.p.A. to sell an additional 31% interest to the Company for 6.8
billion lira ($4.1 million at December 31, 1998). The Company has accounted for
its 20% interest in La Sportiva S.p.A. under the equity method. The purchase
price of La Sportiva S.p.A. exceeded the Company's proportionate share of the
net assets acquired by $2.4 million, which was recorded as goodwill and is being
amortized on a straight line basis over 40 years.

     In a related transaction on July 2, 1998, the Company acquired 100% of the
outstanding common stock of La Sportiva USA, (which owns the exclusive rights to
distribute footwear for La Sportiva S.p.A. in the United States) located in
Boulder, Colorado, for a purchase price of approximately $3.9 million.  The
purchase price includes $3.1 million which was paid in 133,335 shares of the
Company's Common Stock and additional $0.8 million in cash to be paid to the
former owners of La Sportiva USA over the next five years.

     The purchase price of La Sportiva USA exceeded the fair value of the net
assets acquired by approximately $3.8 million, which was recorded as goodwill
and is being amortized on a straight line basis over 40 years.  The fair value
of the net assets acquired is based on preliminary estimates, which are subject
to change. The acquisition was recorded under the purchase method of accounting.
The Company has consolidated the results of La Sportiva USA beginning on July 2,
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 1996, sales of outerwear, equipment, Tekware, snowsport
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, snowsport gear, Ascentials, and other
products represented approximately 48%, 20%, 12%, 9%, 6% and 5%, respectively,
of net sales.  In 1998, sales of outerwear, equipment, Tekware, snowsport gear,
Ascentials, and other products represented approximately 50%, 15%, 13%, 9%, 8%
and 5%, respectively, of net sales.

     Distribution.  The North Face is a global company with operations in the
United States, Europe and Canada. The Company sells its products to a select
group of mountaineering, backpacking and skiing retailers, premium sporting
goods retailers and major outdoor specialty retail chains. The Company sells its
products to approximately 2,953 wholesale customers representing approximately
3,916 store fronts.  Additionally, the Company's products are sold under
trademark licensing agreements in Hong Kong, China, Nepal and Macau.  In
addition, in Japan and Korea substantially all of the Company's trademarks are
owned by Goldwin.

     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. Preseason orders for the 1999 Spring season increased in excess of
20% over preseason orders for the 1998 Spring season, excluding footwear.

     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 will continue to maintain higher levels of
inventories.

     Summit Shops.  At the end of 1997, there were a total of 202 Summit Shops.
These shops averaged approximately 430 square feet in size. At the end of 1998,
there was a total of 394 Summit Shops. The additional shops were added 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

                                       21

 


<PAGE>
 
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 a 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.  As of December 31, 1998, the Company
operated nine full-price retail stores and nine outlets.  Subsequent to
December 31, 1998, the Company opened one outlet store in Wrentham,
Massachusetts.  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 full-price 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 Sales.  The North Face historically has produced tents and other
products 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 affect
the Company's quarterly results.  Sales from government contracts totaled $1.8
million in 1998 compared to $0.3 million in 1997. There can be no assurance that
the Company will obtain any additional contracts to produce products for the
government in the future.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

     Net Sales.   Net sales increased by 21.6% to $247.1 million for 1998
compared to 1997.

     Net sales to wholesale customers increased by 20.3% to $202.7 million from
$168.5 million for 1998 compared to 1997.  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 new products
within the Outerwear and Tekware(TM) categories; (ii) significant growth in
sales of Outerwear products, which accounted for approximately 50% of total
sales in 1998 as compared to 48% in 1997; (iii) continued strong growth of
existing products; (iv) continued growth in international sales; and (v) the
opening of new summit shops during 1998.

     Company-operated retail and outlet store sales increased by 27.8% to $44.3
million from $34.7 million for 1998 compared to 1997.  This increase was
attributable to comparable store sales increases as well as the opening of five
new outlet stores: Quebec in February; Woodbury Common, New York in May; Bend,
Oregon in July; Carlsbad, California in August and Birch Run, Michigan in
September.

     Gross Profit.  Gross profit as a percentage of net sales declined from
45.5% in 1997 to 45.3% in 1998 primarily due to consignment sales with lower 
gross margins, primarily in the third quarter. 

     Operating Expenses.  Operating expenses include selling, marketing, and
general and administrative expenses. Operating expenses increased by 23.0% to
$93.9 million in 1998 from $76.3 million compared to 1997, primarily as a result
of increases in variable and fixed costs to support the growth of the Company's
business.

     Other Operating Expenses.  During the year ended December 31, 1998, the
Company recorded charges of $1.7 million, related to the closing of a
manufacturing facility in Scotland, the closure of its Canadian distribution
facility and the termination of its German sales agent.  Such costs included
employee termination costs, relocation costs and the write-off of property and
equipment.

     Also, during the year ended December 31, 1998, the Company recorded
expenses of $5.7 million, related primarily to (i) relocating a portion of its
corporate headquarters to Carbondale, Colorado; (ii) the realignment of its San
Leandro, California administrative facility; and (iii) establishing a Hong Kong
operation to facilitate its sourcing of products in Asia.  Such costs consist
primarily of employee termination costs, relocation and travel costs, temporary
facility costs and the write-off of property and equipment.

     Interest Expense.  Interest expense increased to $4.9 million from $2.2
million for 1998 compared to 1997 primarily as a result of higher borrowings
from the Company's $130 million credit facility established in September 1998 to
support expansion and working capital requirements.

                                       22
<PAGE>
 
     Provision For Income Taxes.  Provision for income taxes as a percent of
pretax income was approximately 38.5% for 1998 compared to 39.5% for 1997. This
decrease in the effective income tax rate reflects the application of tax
credits for research and developments activities 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, 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
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.

                                       23
<PAGE>
 
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.

                                       24
<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, 1998. The operating
results for any quarter are not necessarily indicative of results for any future
period.

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31, 1998
                                           ------------------------------------------------
(In thousands)                                Q1            Q2          Q3           Q4
                                           ---------     --------     --------    --------- 
<S>                                        <C>           <C>          <C>         <C>
Net sales                                  $45,704       $43,171      $93,645     $64,576
Gross profit                                19,925        18,910       41,242      31,885
Operating income (loss)                       (400)       (3,861)      13,368       1,579
Net income (loss)                             (843)       (2,579)       7,229        (215)
Net income (loss) per share:                                                    
      Basic                                $ (0.07)      $ (0.22)     $  0.58     $ (0.02)
      Diluted                              $ (0.07)      $ (0.22)     $  0.57     $ (0.02)
Weighted average shares outstanding:                                          
       Basic                                11,539        11,968       12,481      12,491
       Diluted                              11,539        11,968       12,752      12,491
</TABLE> 
 
<TABLE> 
<CAPTION> 
                                                     YEAR ENDED DECEMBER 31, 1997
                                           ------------------------------------------------
                                              Q1            Q2          Q3           Q4
                                           ---------     --------     --------    --------- 
<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
</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.

     The Company's business, like other retailers, is subject to seasonal 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.

                                       25
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

     Throughout 1998, 1997 and 1996, the Company used cash of approximately
$14.5 million, $21.3 million and $6.2 million, respectively,  for operating
activities,  primarily due to increased levels of inventory and accounts
receivable.  The Company also used $17.2 million for purchases of property and
equipment in 1998. 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 capital resources.  As a result of increases in its
credit facility, 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 $130.0 million under its $115.0 million
revolving line of credit and $15.0 million term facility On May 3, 1999, the
Company received a written waiver from the financial institutions granting the
credit facility with respect to certain of the Company's non-financial covenants
as set forth in the agreements relating to the credit facility.

     The Company estimates that its capital expenditures in 1999 will be
approximately $12.0 to $15.0 million.  This amount will be used principally for
investing in Summit Shops, the upgrade of management information systems, the
opening of outlet stores and store upgrades, and other activities.

     The Company anticipates that cash available under the Company's 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 PRONOUNCEMENTS

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

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The Company is exposed to market risks, which include foreign currency
risks, interest rate risks and inflation risk.  The Company does not engage in
financial transactions for trading or speculative purposes.

     Foreign Currency Exchange Rate Risk.   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 sources product in U.S. dollars and sells product throughout
the world, but primarily in the United States, Canada and Europe.  To reduce the
Company's exposure to changes in the U.S. dollar value of foreign sales and
receivables the Company enters into forward options and contracts.  This hedging
of foreign exchange risk is carried out on a seasonal basis with each season
running for six months of the year, spring being January through June and Fall
being July through December.  In general, the Company hedges for the current
season and the next season.  At December 31, 1998, the Company held the
following foreign currency derivatives:

                                       26
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                     Currency Value Expiration Dates
                           OPEN CONTRACT          OPEN CONTRACT                      -------------------------------
CURRENCY                  CURRENCY VALUE         U.S. DOLLAR VALUE     FAIR VALUE         1999              2000
-------------------       --------------        ------------------     ----------    --------------     ------------ 
(In thousands)
<S>                       <C>                    <C>                   <C>           <C>                <C> 
Contracts:
 
Euro                            33,276              $39,202              $ 199            28,362           4,914
Swedish Kroners                 25,143                3,260                159            20,943           4,200
Danish Kroners                  27,934                4,414                 20            27,934              --
Swiss Francs                     3,178                2,348                 37             3,178              --
Canadian Dollars                12,500                8,126                (42)           12,500              --
British Pounds                  10,307               16,931               (405)           10,307              --
                                                                                   
Options:                                                                           
                                                                                   
Canadian Dollars                 3,375                2,375                170             3,375              --
                               -------              -------              -----           -------           -----
Total                          115,713              $76,656              $ 138           106,599           9,114
                               =======              =======              =====           =======           =====
</TABLE>

     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 hedged any
forward transactions; (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.

     Interest Rate Risk.  The interest payable on the Company's bank line of
credit is based on variable interest rates and therefore affected by changes in
market interest rates.  If interest rates on existing variable rate debt rose 73
basis points, the Company's results from operations and cash flows would have
been impacted by approximately $415,000.

     Inflation Risk.  The Company believes that the relatively moderate rates of
inflation over the last two years 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 this has
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
negotiation, increasing selling prices or changing suppliers.

                                       27
<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,
                                                          ------------------------------------------------ 
                                                              1998               1997             1996
                                                          ------------       -----------        ----------
<S>                                                       <C>                <C>                <C>
Net sales                                                    $247,096           $203,247          $158,226
Cost of sales                                                 135,134            110,764            88,195
                                                             --------           --------          --------
    Gross profit                                              111,962             92,483            70,031
Operating expenses                                             93,897             76,350            56,487
Other operating expenses (Note 4)                               7,379                 --                --
                                                             --------           --------          --------
     Operating income                                          10,686             16,133            13,544
Interest expense                                               (4,907)            (2,238)           (4,625)
Other income (expense), net                                        64               (749)              356
                                                             --------           --------          --------
Income before provision for income taxes                                                   
  and extraordinary items                                       5,843             13,146             9,275
Provision for income taxes                                      2,251              5,191             3,611
                                                             --------           --------          --------
Income before extraordinary items                               3,592              7,955             5,664
Extraordinary items - losses on extinguishments                                             
  of debt, net of income taxes of $575                             --                 --              (863)
                                                             --------           --------          --------
Net income                                                   $  3,592           $  7,955          $  4,801
                                                             ========           ========          ========
Income per share before extraordinary items:                                               
  Basic                                                      $   0.30           $   0.70          $   0.84 (1)
  Diluted                                                    $   0.29           $   0.69          $   0.62 
Net income per share:                                                                      
  Basic                                                      $   0.30           $   0.70          $   0.71 (1)
  Diluted                                                    $   0.29           $   0.69          $   0.52 
Weighted average shares outstanding:                                                       
  Basic                                                        12,121             11,297             6,742
  Diluted                                                      12,485             11,578             9,183
</TABLE>
          See accompanying notes to consolidated financial statements.


(1)  See Note 2 to the Consolidated Financial Statements.

                                       28
<PAGE>
 
                              THE NORTH FACE, INC.
                          CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                                            --------------------------
                                                                              1998             1997
                                                                            ---------        ---------
<S>                                                                         <C>               <C>
ASSETS                                                             
Current assets:                                                    
 Cash and cash equivalents                                                   $ 13,452            $  4,511
 Trade accounts receivable, net                                                71,460              48,745
 Other receivables                                                             10,069               6,112
 Inventories                                                                   57,457              46,682
 Deferred taxes                                                                 3,661               2,865
 Other current assets                                                           8,820               9,046
                                                                             --------            --------
  Total current assets                                                        164,919             117,961
Property and equipment, net                                                    25,916              17,524
Trademarks and intangibles, net                                                33,975              29,066
Debt issuance costs, net                                                        1,730                  27
Other assets                                                                    6,104               2,871
                                                                             --------            --------
  Total assets                                                               $232,644            $167,449
                                                                             ========            ========
                                                                   
LIABILITIES AND STOCKHOLDERS' EQUITY                               
Current liabilities:                                                
 Accounts payable                                                            $ 22,773            $ 18,113
 Accrued employee expenses                                                      5,063               2,917
 Short-term borrowings and current portion of long-term                      
     debt and capital lease obligations                                        55,910              25,734
 Income taxes payable                                                           1,508               2,077
 Other current liabilities                                                     11,119               7,125
                                                                             --------            --------
  Total current liabilities                                                    96,373              55,966
Long-term debt and capital lease obligations                                    5,360               5,177
Other long-term liabilities                                                     7,000               6,165
                                                                             --------            --------
  Total liabilities                                                           108,733              67,308
                                                                             --------            --------
                                                                   
Minority interest                                                                 701                  --
Commitments and contingencies (Notes 11, 12 and 15)                                --                  --
                                                                   
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 12,494,000 and 11,502,000, respectively                   31                  29
 Additional paid-in capital                                                   101,049              81,727
 Retained earnings                                                             21,660              18,068
 Accumulated other comprehensive income - cumulative translation    
   adjustments                                                                    470                 317
                                                                             --------            --------
 Total stockholders' equity                                                   123,210             100,141
                                                                             --------            --------
 Total liabilities and stockholders' equity                                  $232,644            $167,449
                                                                             ========            ========
</TABLE>

          See accompanying notes to consolidated financial statements.
        

                                       29
<PAGE>
 
                             THE NORTH FACE, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)

<TABLE>
<CAPTION>
                                                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                                                           --------------------------------
                                                                                              1998        1997       1996
                                                                                           ---------   ---------   --------
<S>                                                                                        <C>         <C>         <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................  $ 3,592     $ 7,955     $ 4,801
Adjustments to reconcile net income to cash used in operating activities:                                          
  Depreciation and amortization...........................................................    7,728       5,130       3,595
  Loss on disposal of property and equipment..............................................    2,235       2,869          --
  Adjustment to warranty accrual..........................................................      (90)       (895)         --
  Deferred income taxes...................................................................     (796)       (375)       (260)
  Extraordinary items - losses on extinguishment of debt..................................       --          --         863
  Provision for doubtful accounts.........................................................      799         278         427
  Tax benefit of exercise of stock options................................................    1,285       4,803       3,595
  Other...................................................................................      (43)         --          --
Changes in operating assets and liabilities (net of effects of acquisition):                                       
  Accounts receivable.....................................................................  (22,849)    (27,618)     (7,994)
  Inventories.............................................................................   (9,717)    (15,207)    (10,427)
  Income tax receivable...................................................................     (671)         --          --
  Other assets............................................................................   (5,279)    (11,714)     (2,054)
  Accounts payable, accrued liabilities and other liabilities.............................    9,272      13,435       1,290
                                                                                            -------     -------     ------- 
NET CASH USED IN OPERATING ACTIVITIES.....................................................  (14,534)    (21,339)     (6,164)
                                                                                            -------     -------     ------- 
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                              
Cash acquired as a result of the purchase of La Sportiva USA..............................      235          --          --
Investment in La Sportiva, S.r.l..........................................................   (3,086)         --          --
Purchases of property and equipment.......................................................  (17,236)    (13,935)     (4,621)
Other.....................................................................................       43                
                                                                                            -------     -------     -------
NET CASH USED IN INVESTING ACTIVITIES.....................................................  (20,044)    (13,935)     (4,621)
                                                                                            -------     -------     ------- 
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                              
Long-term debt proceeds...................................................................       --       6,826       2,825
Repayments of long-term debt..............................................................     (348)       (546)    (32,009)
Proceeds from revolver, net...............................................................   30,707      24,400     (11,812)
Payment of debt issuance costs............................................................   (1,915)        (94)       (262)
Collection of note receivable.............................................................    6,549          --          --
Proceeds from issuance of stock...........................................................    8,373         889      56,884
                                                                                            -------     -------     ------- 
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................................   43,366      31,475      15,626
                                                                                            -------     -------     ------- 
Effect of foreign currency fluctuations on cash...........................................      153          (5)        651
                                                                                            -------     -------     ------- 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..........................................    8,941      (3,804)      5,492
                                                                                                                   
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..............................................    4,511       8,315       2,823
                                                                                            -------     -------     ------- 
CASH AND CASH EQUIVALENTS, END OF YEAR....................................................  $13,452     $ 4,511     $ 8,315
                                                                                            =======     ========    =======
NONCASH INVESTING ACTIVITY--ISSUANCE OF COMMON STOCK                                                               
   FOR THE ACQUISITION OF LA SPORTIVA USA:                                                                         
Purchase of working capital...............................................................  $  (798)    $    --     $    -- 
Purchase of property and equipment........................................................      (28)         --          --
Purchase of other long-term assets........................................................      (34)         --          --
Assumption of other long-term liabilities.................................................      702          --          --
Excess purchase price over the fair value of net assets acquired..........................   (3,835)         --          --
Redeemable preferred stock................................................................      876                
                                                                                            -------     -------     ------- 
TOTAL ISSUANCE OF COMMON STOCK FOR THE ACQUISITION OF                                                              
   LA SPORTIVA USA........................................................................  $(3,117)    $    --     $    -- 
                                                                                            =======     =======     ======= 




SUPPLEMENTAL CASH FLOW INFORMATION:                                                                                
                                                                                                                   
Cash paid for:                                                                                                     
     Interest............................................................................. $ 3,934      $ 2,136     $ 4,859
     Income taxes......................................................................... $ 4,398      $ 4,488     $ 1,302
Noncash financing activities:                                                                                      
     Conversion of preferred stock into common stock...................................... $    --      $    --     $15,075
     Issuance of common stock for note receivable......................................... $ 6,549      $    --     $    --

</TABLE> 
         See accompanying notes to consolidated financial statements.

                                       30
<PAGE>
 
                             THE NORTH FACE, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                (In thousands)

<TABLE>
<CAPTION>
                                                                   
                                                                            COMMON STOCK         CUMULATIVE   
                                                  PREFERRED STOCK     -------------------------  PREFERRED                  
                                                  ---------------                    ADDITIONAL  DIVIDENDS   SUBSCRIPTIONS
                                                  SHARES   AMOUNT     SHARES  AMOUNT   CAPITAL    ACCRUED     RECEIVABLE  
                                                  ------   ------     ------  ------ ----------  ----------  -------------
<S>                                               <C>      <C>        <C>     <C>   <C>          <C>         <C>          
January 1, 1996..................................  1,936   $ 12,267    2,902   $ 7  $    645     $  2,049     $  (142) 
 Net income......................................     --         --       --    --        --           --          -- 
 Other comprehensive income - translation                           
  adjustments....................................     --         --       --    --        --           --          --  
 Comprehensive income                                               
                                                                    
 Stock dividends on preferred stock..............     --         --       --    --        --          759          -- 
 Declaration of preferred dividends..............    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           --          17
 Sale of common stock............................     --         --    3,829    10    56,578           --          --
 Cancellation of restricted stock................     --         --     (131)   --       (30)          --          30
                                                  ------   --------   ------   ---  --------     --------     -------  
December 31, 1996................................     --         --   11,200    29    76,130           --         (95)
 Net income......................................     --         --       --    --        --           --          --  
 Other comprehensive income - translation                           
  adjustments....................................     --         --       --    --        --           --          --  
 Comprehensive income............................                   
                                                                    
 Exercise of stock options including tax benefit.     --         --      286    --     5,354           --          95
 Sale of common stock............................     --         --       --    --        --           --          --
 Employee stock purchase plan....................     --         --       16    --       243           --          --
                                                  ------   --------   ------   ---  --------     --------     ------- 
December 31, 1997................................     --         --   11,502    29    81,727           --          --
 Net income......................................     --         --       --    --        --           --          --
 Other comprehensive income - translation                           
  adjustments....................................     --         --       --    --        --           --          --  
 Comprehensive income............................                   
                                                                    
 Exercise of stock options including tax benefit.     --         --      177    --     1,867           --          -- 
 Sale of common stock............................     --         --      665     2    14,048           --          -- 
 Shares issued for acquisition of La Sportiva                       
  USA............................................     --         --      133    --     3,117           --          -- 
 Employee stock purchase plan....................     --         --       17    --       290           --          -- 
                                                  ------   --------   ------   ---  --------     --------     -------  
December 31, 1998................................     --   $     --   12,494   $31  $101,049     $     --     $    -- 
                                                  ======   ========   ======   ===  ========     ========     =======  
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       31
<PAGE>
 
<TABLE>
<CAPTION>
                                                                             ACCUMULATED
                                                                                OTHER
                                                                            COMPREHENSIVE
                                                                            INCOME (LOSS)-
                                                                             CUMULATIVE
                                                  RETAINED  COMPREHENSIVE    TRANSLATION    
                                                  EARNINGS     INCOME        ADJUSTMENTS      TOTAL   
                                                  --------  -------------   --------------  --------
<S>                                               <C>       <C>             <C>             <C>        
January 1, 1996.................................. $ 6,071                   $  (329)         $ 20,568
 Net income......................................   4,801   $ 4,801              --             4,801
 Other comprehensive income - translation         
  adjustments....................................      --       651             651               651
                                                            -------                                   
 Comprehensive income............................           $ 5,452
                                                            =======
 Stock dividends on preferred stock..............    (759)                       --                --
 Declaration of preferred dividends..............      --                        --                -- 
 Conversion of preferred stock...................      --                        --                -- 
 Exercise of stock options including tax benefit.      --                        --             3,891 
 Sale of common stock............................      --                        --            56,588 
 Cancellation of restricted stock................      --                        --                -- 
                                                  -------                   -------          --------  
December 31, 1996................................  10,113                       322            86,499 
 Net income......................................   7,955   $ 7,955              --             7,955
 Other comprehensive income - translation         
  adjustments....................................      --        (5)             (5)               (5)
                                                            -------                 
 Comprehensive income............................           $ 7,950
                                                            =======
 Exercise of stock options including tax benefit.      --                        --             5,449
 Sale of common stock............................      --                        --                -- 
 Employee stock purchase plan....................      --                        --               243 
                                                  -------                   -------          --------   
December 31, 1997................................  18,068                       317           100,141 
 Net income......................................   3,592   $ 3,592              --             3,592
 Other comprehensive income - translation          
  adjustments....................................     --        153             153               153
                                                            ------- 
 Comprehensive income............................           $ 3,745
                                                            =======
 Exercise of stock options including tax benefit.      --                        --             1,867
 Sale of common stock............................      --                        --            14,050   
 Shares issued for acquisition of La Sportiva     
  USA............................................      --                        --             3,117   
 Employee stock purchase plan....................      --                        --               290
                                                  -------                   -------          --------
December 31, 1998................................ $21,660                   $   470          $123,210
                                                  =======                   =======          ========
</TABLE>

                                       32
<PAGE>
 
                             THE NORTH FACE, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

1.  BUSINESS AND BASIS OF PRESENTATION

    The North Face, Inc. 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, La Sportiva(R) USA, and its affiliate, La 
Sportiva(R) 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 sells its products to select specialty retailers
throughout the United States, Europe and Canada. As of December 31, 1998 the
Company also operated 9 retail stores and 9 outlets. Subsequent to December 31,
1998, the Company opened one outlet store in Wrentham, Massachusetts.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Principles of Consolidation.  The consolidated financial statements include
the financial statements of The North Face, Inc. and its subsidiaries.  All
significant 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
1998, 1997 and 1996 were $(192,000), $(698,000) and $173,000, respectively.

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

    Accounts Receivable from wholesale customers are recorded upon the sale of
inventory to independent retailers and distributors net of provision for
estimated returns.  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 retailers 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 consist primarily of trademarks and goodwill and
are being amortized on a straight-line basis over forty years.  Accumulated
amortization at December 31, 1998 and 1997 was approximately $3.6 million and
$2.8 million, respectively.  Amortization expense was $860,000, $785,000 and
$783,000 for the years ended December 31, 1998, 1997 and 1996, respectively.

                                       33
<PAGE>
 
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:

    Leasehold improvements                              5 - 10 years
    Machinery and equipment                                  5 years
    Furniture, fixtures and office equipment            3 -  7 years

    Expenditures for replacements and improvements are capitalized; maintenance
and repairs are expensed as incurred.

    Investment in La Sportiva S.p.A.  The Company accounts for its 20% interest
in La Sportiva S.p.A. using the equity method and the investment is included in
other assets in the accompanying balance sheet.

    Product Warranty.  Substantially all of the Company's products, except
footwear, 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 or replaces items returned under
warranty.  The Company's estimated liability for future warranty claims related
to past sales at December 31, 1998, and 1997 is approximately $4.1 million and
$4.2 million, respectively, of which the non-current portion of $3.0 million is
classified as other long-term liabilities as of December 31, 1998 and 1997,
respectively.  The current portion of the warranty liability is $1.1 million and
$1.2 million and is classified as other current liabilities as of December 31,
1998 and 1997, respectively.  Warranty expense was approximately $1,504,000,
$1,496,000 and $1,711,000 for the years ended  December 31, 1998, 1997 and 1996,
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.

    Minority Interest.  Minority interest represents redeemable preferred stock
of La Sportiva USA owned by the majority shareholders of La Sportiva S.p.A.  The
redeemable preferred stock has a 1% cumulative dividend and is redeemable in
minimum increments of $50,000 per year.

    Earnings Per Share.  Basic earnings per share (EPS) is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share is computed by dividing net earnings by the
diluted weighted average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur upon exercise of
outstanding stock options.

                                       34
<PAGE>
 
   The following is a summary of the calculation of the number of shares used
in calculating basic and diluted EPS (in thousands):

                                              Years Ended December 31,
                                              ------------------------
                                               1998     1997    1996
                                              ------   ------   -----
Shares used to compute basic EPS              12,121   11,297   6,742
Add effect of dilutive securities:        
      Stock options                              364      281     436
      Convertible preferred stock                 --       --   2,005
                                              ------   ------   -----
Shares used to compute diluted EPS            12,485   11,578   9,183
                                              ======   ======   =====


    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 pro forma basic earnings per
share calculations for the year ended December 31, 1996, reflect this conversion
as of the beginning of the year. Pro forma basic earnings per share for the year
ended December 31, 1996 was $0.55.

    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 Employee", 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 13. 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.

    Comprehensive Income.  In the first quarter of 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income," which established standards for
reporting and displaying comprehensive income and its components in financial
statements.  Comprehensive income is defined as net income and all non-owner
changes in stockholders' equity.  Accumulated other comprehensive income
consists entirely of foreign currency translation adjustments and is presented
in the statement of shareholders equity.

    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 values of cash and cash
equivalents, accounts receivable and accounts payable approximates their
estimated fair values due to the short-term nature of those instruments.  The
carrying value of the Company's debt approximates its estimated fair value based
on interest rates available to the Company and debt instruments with similar
terms.

    Segment Data.  During the year ended December 31, 1998, the Company adopted
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131).  SFAS 131 supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise", replacing the "industry segment" approach
with the "management" approach.  The management approach designates the internal
reporting that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments.  SFAS
131 also requires disclosures about products and services, geographic areas and
major customers.  The adoption of SFAS 131 did not affect results of operations
or the financial position of the Company but did affect the disclosure of
segment information.

    New Accounting Pronouncement.   In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133).  SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.  The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value.  This statement is effective for fiscal years beginning after
June 15, 1999 and is not to be applied retroactively to financial statements for
prior periods.  Management is in the process of evaluating the impact, if any,
SFAS 133 will have on the Company's financial statements.

                                       35
<PAGE>
 

 
    Reclassifications.  Certain amounts in the 1997 and 1996 financial
statements have been reclassified to conform with the 1998 presentation.  Such
reclassifications had no effect on earnings.

3.  INVESTMENTS IN LA SPORTIVA BUSINESSES

    On July 2, 1998, the Company acquired a 20% interest in La Sportiva S.r.l.,
a premier manufacturer and distributor of trekking, mountaineering, and climbing
footwear located in Ziano di Fiemme, Italy for a purchase price of $2.5 million,
and incurred direct costs of approximately $0.6 million, for a total purchase
price of approximately $3.1 million.  In August 1998, La Sportiva S.r.l. changed
its name to La Sportiva S.p.A.  The majority shareholders of La Sportiva S.p.A.
have a "put option" which may require the Company to purchase, in a single
transaction, an additional 31% interest in La Sportiva S.p.A. for 6.8 billion
lira ($4.1 million at December 31, 1998).  This put option may be exercised at
any time during the period beginning on July 1, 2000 and ending on July 1, 2003.
After the expiration of the "put option" and until December 31, 2004, the
Company may exercise a "call option" which, if exercised, would require the
majority shareholders of La Sportiva S.p.A. to sell an additional 31% interest
to the Company for 6.8 billion lira ($4.1 million at December 31, 1998).  The
Company has accounted for its 20% interest in La Sportiva S.p.A. under the
equity method.  The purchase price of La Sportiva S.p.A. exceeded the Company's
proportionate share of the net assets acquired by $2.4 million, which was
recorded as goodwill and is being amortized on a straight line basis over 40
years.

    In October 1998, the Company entered into a foreign exchange contract,
whereby it hedged the potential future payment of the put and call options of
6.8 billion lira ($4.1 million in December 31, 1998).  In connection with that
transaction, in the fourth quarter of 1998 the Company recorded a $231,000
foreign exchange loss in its statement of operations.

    Summary financial information for La Sportiva S.p.A. as of December 31,
1998 and for the period from July 2, 1998 to December 31, 1998 is as follows (in
thousands):
 
     Current assets                                              $ 6,253
     Noncurrent assets                                             6,339
                                                                 -------
     Total assets                                                $12,592
                                                                 =======
  
     Current liabilities                                         $ 4,701
     Noncurrent liabilities                                        4,170
                                                                 -------
     Total liabilities                                             8,871
     Shareholders' equity                                          3,721
                                                                 -------
     Total liabilities and shareholders' equity                  $12,592
                                                                 =======
 
     Net sales, including sales to La Sportiva USA of $1,013     $ 4,474
     Income before income taxes                                       85
     Net income                                                       14
 
    In a related transaction on July 2, 1998, the Company acquired 100% of the
outstanding common stock of La Sportiva USA, (which owns the exclusive rights to
distribute footwear for La Sportiva S.p.A. in the United States) located in
Boulder, Colorado, for a purchase price of approximately $3.9 million.  The
purchase price includes $3.1 million which was paid in 133,335 shares of the
Company's common stock and additional $0.8 million in cash to be paid to the
former owners of La Sportiva USA over the next five years.

    The purchase price of La Sportiva USA exceeded the fair value of the net
assets acquired by approximately $3.8 million, which was recorded as goodwill
and is being amortized on a straight line basis over 40 years.  The fair value
of the net assets acquired is based on preliminary estimates, which are subject
to change. The acquisition was recorded under the purchase method of accounting.
The Company has consolidated the results of La Sportiva USA beginning on July 2,
1998.

    Pro forma financial information is not presented for the acquisition of La
Sportiva USA as the effect of the acquisition would not have been material to
the consolidated results of operations of the Company for the years ended
December 31, 1998 and 1997.

4.  OTHER OPERATING EXPENSES

                                       36
<PAGE>
 
 
    During the year ended December 31, 1998, the Company recorded expenses of
$7.4 million, related to the closing of an out-dated manufacturing facility in
Scotland; the closure of its Canadian distribution facility; the termination of
its German sales agent; relocating a portion of its corporate headquarters to
Carbondale, Colorado; the realignment of its San Leandro, California
administrative facility; and establishing a Hong Kong operation to facilitate
sourcing of products in Asia.  Such costs consisted primarily of employee
termination costs, relocation and travel costs, temporary facility costs and the
disposal of property and equipment. Such costs were expensed as incurred.  The
Company expects to incur another approximately $1.3 million in operating
expenses related to the relocation of a portion of its corporate headquarters
and the establishment of its Hong Kong operation in 1999.

5.  ACCOUNTS RECEIVABLE

    The allowance for doubtful accounts was $1,743,000, $1,321,000 and
$1,282,000 as of December 31, 1998, 1997 and 1996, respectively.  Write-offs to
accounts receivable during the years ended December 31, 1998, 1997 and 1996 were
approximately $377,000, $239,000 and $212,000, respectively.

    During the years ended December 31, 1998, 1997 and 1996, no customer
accounted for more than 10% of net sales.

6.  INVENTORIES

    Inventories as of December 31, 1998 and 1997 consist of (in thousands):

                                           1998                1997
                                         -------             -------
Finished goods                           $51,655             $41,637
Work in progress                             239                 789
Raw materials                              5,563               4,256
                                         -------             -------
Total inventories                        $57,457             $46,682
                                         =======             =======

7.  PROPERTY AND EQUIPMENT
 
    Property and equipment as of December 31, 1998 and 1997 consist of (in
thousands):

                                                    1998             1997
                                                  --------         -------
Leasehold improvements                            $ 10,500         $ 7,287
Furniture, fixtures and office equipment            27,167          16,630
Machinery and equipment                              2,578           1,965
                                                  --------         -------
                                                    40,245          25,882
Less accumulated depreciation and amortization     (14,329)         (8,358)
                                                  --------         -------
Total property and equipment, net                 $ 25,916         $17,524
                                                  ========         =======

    Depreciation and amortization expense related to property and equipment was
$6,637,000, $4,218,000, and $2,302,000 for the years ended December 31, 1998,
1997 and 1996, respectively.  Maintenance and repair expense was $740,000,
$648,000 and $671,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.

    In December 1997, in connection with the decision to abandon an information 
system project, the Company wrote off capitalized system implementation costs of
$2.9 million.

                                       37
<PAGE>
 
8.  INCOME TAXES

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

                     FOR THE YEARS ENDED DECEMBER 31,
                     --------------------------------
 
                         1998     1997      1996
                        ------   -------   ------
          U.S.          $2,127   $ 8,582   $6,332
          Foreign        3,716     4,564    2,943
                        ------   -------   ------
                        $5,843   $13,146   $9,275
                        ======   =======   ======

    The provision for income taxes consists of the following (in thousands):

                             For the Years Ended December 31,
                            ---------------------------------
                              1998        1997        1996
                             ------      ------      ------
Federal:                  
 Current                     $1,261      $2,698      $2,514
 Deferred                      (434)         61        (338)
State:                                               
 Current                        374         632         679
 Deferred                      (257)        240         (80)
Foreign:                                             
 Current                      1,600       1,805         879
 Deferred                      (293)       (245)        (43)
                             ------      ------      ------
                             $2,251      $5,191      $3,611
                             ======      ======      ======

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

                                               For the Years Ended December 31,
                                               --------------------------------
                                                   1998     1997     1996
                                                   ----     ----     ----
Statutory rate                                     34.0%    34.0%    34.0%
State income taxes, net of federal benefit          3.1%     4.3%     4.3%
Other                                               1.4%     1.2%     0.6%
                                                   ----     ----     ----
Effective income tax rate                          38.5%    39.5%    38.9%
                                                   ====     ====     ====

    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.


                                       38
<PAGE>
 
    Significant components of the net deferred tax assets as of December 31,
1998 and 1997 are as follows (in thousands):

                                                 1998                1997
                                               -------             -------
Deferred tax assets:                       
Inventory costs not yet deductible             $ 2,281             $ 1,691
Depreciation                                       657                 599
Liabilities not yet deductible for tax           3,356               3,030
                                               -------             -------
                                                 6,294               5,320
                                               -------             -------
Deferred tax liabilities:                     
Depreciation                                        --                 (97)
Intangibles                                     (4,154)             (3,758)
Liabilities deductible for tax not book         (1,143)               (822)
                                               -------             -------
                                                (5,297)             (4,677)
                                               -------             -------
Net deferred tax assets                        $   997             $   643
                                               =======             =======
Current asset                                    3,793               2,865
Long-term liability                             (2,796)             (2,222)
                                               -------             -------
                                               $   997             $   643
                                               =======             =======

    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, is approximately $12.0 million at December 31, 1998.

9.  EMPLOYEE BENEFIT PLANS

    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.

    Net pension plan expense (income) consisted of the following for the years
ended December 31 (in thousands):

                                               1998          1997         1996
                                              -----         -----        -----
Service cost                                  $ 100         $ 101        $  76
Interest cost                                   358           291          222
Expected return on plan assets                 (324)         (269)        (101)
Recognized net actuarial gain                  (186)          (14)        (101)
                                              -----         -----        -----
Net pension plan expense (income)             $ (52)        $ 109        $  96
                                              =====         =====        =====

                                       39
<PAGE>
 

 
    The changes in the projected benefit obligation and plan assets for the
years ended December 31 were as follows (in thousands):

                                                          1998         1997
                                                        ------       ------
Changes in projected benefit obligation:                         
Projected benefit obligation at beginning of year       $3,981       $3,118
Service cost                                               100          101
Interest cost                                              358          291
Actuarial loss (gain)                                     (195)         843
Benefits paid                                             (163)        (372)
                                                        ------       ------
Projected benefit obligation at end of year              4,081        3,981
                                                        ------       ------
Changes in plan assets:                                          
Fair value of plan assets at beginning of year           3,600        2,571
Actual return on plan assets                               257          944
Employer contributions                                     355          399
Employee contributions                                      58           58
Benefits paid                                             (163)        (372)
                                                        ------       ------
Fair value of plan assets at end of year                 4,107        3,600
                                                        ------       ------
Pension asset (liability)                               $   26       $ (381)
                                                        ======       ======

    The weighted average assumptions for 1998 and 1997 were as follows:
 
    Discount rate                             9%
    Expected return on plan assets            9%
    Rate of compensation increase             7%

    Effective January 1998, the Company has made 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 with the terms of
the plan for the year ended 1998. The Company's matching contribution for the
year ended December 31, 1998 was $130,000.

    The Company's subsidiary, La Sportiva USA, also has a 401(k) plan.  La
Sportiva USA makes discretionary matching contributions up to 15% of the
participant's annual salary.  Employee contributions are 100% vested.  Company
matching contributions made by La Sportiva USA vest over a period of six years.
La Sportiva USA made discretionary contributions for the period from July 2,
1998 through December 31, 1998 in the amount of $44,000.

10. DEBT

    Total debt as of December 31, 1998 and 1997 consists of the following (in
thousands):

                                              1998                   1997
                                           --------               -------- 
Revolving line of credit                   $ 55,107               $ 24,400
Term note                                     5,000                  5,000
Mortgage                                         72                     96
Notes payable                                   499                    962
                                           --------               --------
Total                                        60,678                 30,458
Less:  current portion                      (55,778)               (25,639)
                                           --------               --------
Long-term debt                             $  4,900               $  4,819
                                           ========               ========

    Aggregate principal payments for the next five years subsequent to December
31, 1998 are as follows:

             1999                       $55,778
             2000                         1,130
             2001                         1,020
             2002                         1,000
             2003                         1,750
                                        -------
                                        $60,678
                                        =======

                                       40
<PAGE>
 
    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 a 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 that existed at that date.

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

    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 noncash extraordinary loss of $677,000, net of tax benefits of
$451,000, representing the write off of the remaining deferred debt issuance
costs.

11. LEASES

    The Company leases buildings, equipment and vehicles under non-cancelable
lease agreements that expire at various dates through 2006. 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, 1998 are as
follows (in thousands):

                                                  CAPITAL     OPERATING
YEARS ENDING DECEMBER 31,                         LEASES       LEASES
-------------------------                         -------     ---------
1999                                                $ 217      $ 6,305
2000                                                  350        5,885
2001                                                  137        4,488
2002                                                   15        2,923
2003                                                   --        1,689
Thereafter                                             --        2,354
                                                    -----      -------
Minimum lease commitments                             719      $23,644
                                                               =======
Less:  amount representing interest                  (127)
                                                    -----
Present value of net minimum lease payments           592
Less:  current portion                               (132)
                                                    -----
Long-term portion                                   $ 460
                                                    =====

                                       41
<PAGE>
 
    The cost of property under capitalized leases was $636,000 and $468,000, as
of December 31, 1998 and 1997, respectively, and primarily represents furniture,
fixtures and office equipment. Accumulated amortization related to these leases
was approximately $350,000 and $303,000 as of December 31, 1998 and 1997,
respectively.

    Rental expense for operating leases was as follows (in thousands):

                                     1998            1997           1996
                                    ------          ------         ------
Minimum rentals                     $5,375          $4,651         $3,783
Contingent rentals                     215              90             98
                                    ------          ------         ------
                                    $5,590          $4,741         $3,881
                                    ======          ======         ======

12. 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 $46.2 million and $50.2
million of purchase commitments as of December 31, 1998 and 1997, 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 10.

    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 enter into forward
exchange contracts and options (hedging instruments) to hedge their foreign
denominated accounts receivable, matched firm orders and anticipated orders.  At
December 31, 1998, the Company held the following foreign currency derivatives:

                         OPEN        OPEN               CURRENCY VALUE       
                       CONTRACT    CONTRACT            EXPIRATION DATES 
                       CURRENCY   U.S. DOLLAR  FAIR    ----------------
CURRENCY                VALUE       VALUE      VALUE    1999      2000 
--------------         --------   -----------  -----    ------    -----
(In thousands)                                                
                                                              
Contracts:                                                    
                                                              
Euro                   33,276      $39,202     $ 199    28,362    4,914
Swedish Kroners        25,143        3,260       159    20,943    4,200
Danish Kroners         27,934        4,414        20    27,934       --
Swiss Francs            3,178        2,348        37     3,178       --
Canadian Dollars       12,500        8,126       (42)   12,500       --
British Pounds         10,307       16,931      (405)   10,307       --
                                                                  
Options:                                                          
                                                                  
Canadian Dollars        3,375        2,375       170     3,375       --
                      -------      -------     -----   -------    -----
Total                 115,713      $76,656     $ 138   106,599    9,114
                      =======      =======     =====   =======    =====
 
                                       42
<PAGE>
 
13.  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.

     On May 13, 1998, an employment agreement was executed between the Company
and James G. Fifield, its Chief Executive Officer, President and Director.  In
connection with the employment agreement in May 1998, the Company sold 665,060
shares of its common stock to Mr. Fifield for $21.125 per share for a total of
$14,049,000.  Mr. Fifield pledged 310,030 shares of the common stock in
connection with a full recourse promissory note in favor of the company for the
principal sum of $6,549,000.  In June 1998, the promissory note plus interest at
an annual rate of 5.43% was repaid by Mr. Fifield and the 310,030 pledged shares
of common stock were issued to Mr. Fifield.   In connection with the same
employment agreement, the Company granted  Mr. Fifield options to purchase
900,000 shares of the Company's common stock.

     Preferred Share Purchase Rights.  The Company has 4,000,000 shares of
authorized preferred stock of which 100,000 shares have been designated as
Series A participating preferred stock.  On July 6, 1998, pursuant to a
Preferred Shares Rights Agreement between the Company and American Stock
Transfer & Trust, Co. as Rights Agent, the Company's Board of Directors declared
a dividend of one right (a "Right") to purchase one one-thousandth of a share of
the Company's Series A participating preferred stock, $1.00 par value per share,
("Series A Preferred") for each outstanding share of common stock, $0.0025 par
value per share, of the Company.  The dividend was provided to stockholders of
record as of the close of business on July 20, 1998.  Each Right entitles the
registered holder to purchase from the Company, under certain circumstances, one
one-thousandth of a share of Series A preferred at an exercise price of $140.00
subject to adjustment.  Each share of Series A participating preferred stock
entitles the holder to 1,000 votes on all matters submitted  the vote of the
shareholders.

     Preferred Stock.  Upon consummation of the Company's initial public
offering, all outstanding shares of the Company's Preferred Stock, including
accrued dividends, were converted into 4,220,808 shares of Common Stock.
Preferred Shareholders were entitled to dividends of 10% of the face value
payable quarterly in either cash or additional shares of 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, 1998, 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 1,524,820 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
granted under the 1996 Plan to employees vest over 4 years and expire on June 7,
2004.  In the first quarter of 1998 an amendment to the Company's 1996 Plan was
ratified by shareholders to increase the number of shares of common stock
reserved for issuance by 600,000 shares. The Company currently does not
anticipate making additional grants under the 1995 Plan.

                                       43
<PAGE>
 
     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.

     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.

     1998 Nonstatutory Stock Option Plan.  The Company's 1998 Nonstatutory Stock
Option Plan was adopted in May 1998 and amended in September 1998.  A maximum of
1,700,000 shares have been reserved for issuance pursuant to options granted
under the Plan.  NQSO's granted under the 1998 Plan vest as determined by the
Plan Administrator.  The term of the Plan is ten years and should expire in
March 2008.

     Activity for all of the Company's stock option plans from January 1, 1996
through December 31, 1998 was as follows:

<TABLE>
<CAPTION>
                                     1998                    1997                    1996
                             ---------------------   ---------------------   ---------------------
                                          WEIGHTED                WEIGHTED                WEIGHTED
                                          AVERAGE                 AVERAGE                 AVERAGE
                                          EXERCISE                EXERCISE                EXERCISE
                              Shares       PRICE       SHARES      PRICE       SHARES      PRICE
                             --------     --------   ---------    --------   ---------    --------
<S>                         <C>           <C>        <C>          <C>        <C>          <C>
Outstanding, beginning of    
 year                        1,146,666      $12.41   1,069,602      $ 6.60   1,080,008      $ 0.90 
  Granted                    4,368,400       15.03     492,600       18.52     431,430       14.52
  Exercised                   (177,018)       3.27    (286,011)       1.93    (379,450)       0.73
  Cancelled                 (2,089,739)      19.18    (129,525)      10.84     (62,386)       0.23
                            ----------               ---------               ---------
Outstanding, end of year     3,248,309      $12.08   1,146,666      $12.41   1,069,602      $ 6.60
                            ==========               =========               =========
Options exercisable at      
 year end                      498,572      $ 6.12     390,071      $ 4.31     533,833      $ 1.09
                            ==========      ======   =========      ======   =========      ====== 
Weighted average fair                       
 value of options                           
 granted during the year                    $ 8.12                  $ 7.35                    5.05
                                            ======                  ======                  ====== 
</TABLE>

     The following table summarizes additional information about stock options
outstanding at December 31, 1998.
<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                              ------------------------------------   ----------------------
                                             WEIGHTED
                                              AVERAGE     WEIGHTED                 WEIGHTED
                                             REMAINING    AVERAGE                  AVERAGE
       RANGE OF                 SHARES      CONTRACTUAL   EXERCISE     SHARES      EXERCISE
    EXERCISE PRICES           OUTSTANDING      LIFE        PRICE     OUTSTANDING    PRICE
    ---------------           -----------   -----------   --------   -----------   --------
<S>                           <C>           <C>           <C>        <C>           <C>           
$0.22    To   $ 3.38              252,490          5.44     $ 1.36       220,865     $ 1.22
 9.56    To    14.38            2,149,444          9.44       9.77       273,082       9.79
18.22    To    25.63              846,375          9.29      21.12         4,625      23.20
                                ---------                                -------
$0.22    To   $25.63            3,248,309          9.09      12.08       498,572       6.12
                                =========                                =======
</TABLE>

                                       44
<PAGE>
 
     In September 1998, options to purchase 1,803,650 shares of common stock
were repriced from a weighted average exercise price of $19.65 to a weighted
average exercise price of $9.625 which was equal to market value at the date of
repricing.  Options issued to certain of the Company's outside Directors and
certain other individuals were not included in the repricing.

     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 1998 and 1997, employees purchased
approximately  17,100 and 15,800 shares respectively at an average price of
$15.28 and $15.95 respectively.  At December 31, 1998, 112,006 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.

     Had compensation cost for the Company's stock-based compensation plans been
recorded in accordance with the fair value method of SFAS 123, the Company's net
income and earnings per share for 1998, 1997 and 1996 would approximate the
following pro forma amounts (in thousands, except per share data):

                                       1998          1997          1996
                                      ------        ------        ------ 
Net income:                                                 
 As reported                          $3,592        $7,955        $4,801
 Pro forma                            $1,442         6,957         4,595
                                                            
Diluted net income per share:                               
 As reported                          $ 0.29        $ 0.69        $ 0.62
 Pro forma                            $ 0.13        $ 0.61        $ 0.51

     For purposes of computing the above pro forma amounts, the fair value of
each option granted during 1998, 1997, and 1996 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 1998, 1997 and 1996; (ii) expected
volatility of  78.5% for 1998, 58.6% for 1997, and 45% (for options granted
subsequent to the filing of the S-1 in connection with the initial public
offering through December 31, 1996); (iii) risk-free interest rate of 5.32%,
6.56% and 6.38% for 1998, 1997 and 1996 respectively; and (iv) expected life
from vesting to exercise of 6 months for 1998, 1997 and 1996.  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.


14.  SEGMENT INFORMATION

     The Company manages its business segments primarily based on sales
distribution channels.  The Company's reportable segments are wholesale and
Company-operated retail.  Sales to wholesale customers include sales to the
U.S. government.  Both operating segments sell products as further described
in Note 1.

     The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies" in Note 2.  The Company
evaluates the performance of its segments based solely on net sales and gross
profit.  The Company does not separately identify assets or liabilities of the
segments for management reporting purposes.

                                       45
<PAGE>
 
     Summary information by segment for the years ended December 31, 1998, 1997
and 1996 is as follows (in thousands):

                                      1998           1997           1996
                                    --------       --------       -------- 
Net sales:                                                        
 Wholesale                          $202,747       $168,543       $125,458
 Company-operated retail              44,349         34,704         32,768
                                    --------       --------       -------- 
  Total                             $247,096       $203,247       $158,226
                                    ========       ========       ========
Gross profit:                                                     
 Wholesale                          $ 88,542       $ 73,542       $ 51,760
 Company-operated retail              23,420         18,941         18,271
                                    --------       --------       --------
  Total                             $111,962       $ 92,483       $ 70,031
                                    ========       ========       ========

     Net sales and long-lived assets related to operations in the United States,
Canada and Europe as of and for the years ended December 31, 1998, 1997 and 1996
are as follows (in thousands):

                               1998                1997                1996
                             --------            --------            --------
Net sales:          
 United States               $186,443            $150,798            $120,027
 Canada                        14,546              12,661               9,462
 Europe                        46,107              39,788              28,737
                             --------            --------            -------- 
  Total                      $247,096            $203,247            $158,226
                             ========            ========            ========
Long-lived assets:  
 United States               $ 63,319            $ 46,195            $ 41,088
 Canada                         1,798               1,665                 802
 Europe                         2,608               1,628                 750
                             --------            --------            --------
  Total                      $ 67,725            $ 49,488            $ 42,640
                             ========            ========            ========

  Net sales relating to major product types for the years ended December 31,
1998, 1997 and 1996 are as follows (in thousands):

                      1998                1997                1996
                    --------            --------            -------- 
Outerwear           $123,212            $ 98,291            $ 81,862
Equipment             35,829              40,235              39,829
Tekware(R)            33,072              24,130              10,302
Other                 54,983              40,591              26,233
                    --------            --------            -------- 
                    $247,096            $203,247            $158,226
                    ========            ========            ========

                                       46
<PAGE>
 
15.  SUBSEQUENT EVENTS

     On January 11, 1999, the Company issued 206,188 shares of common stock at
$12.125 per share as consideration for the purchase of land to be used for its
new corporate headquarters in Carbondale, Colorado.

     In February 1999, the Company entered into an interim agreement with a
logistics company to outsource the distribution of its products in the United
States.  In February 1999, the Company announced that it would be closing its
leased Vacaville, California distribution center in July 1999 and will move its
primary U.S. distribution center to Lenexa, Kansas.  In February 1999, the
Company notified the employees of the Vacaville distribution center that their
employment with the Company would be terminated in July 1999.  The Company also
notified each employee in February 1999 of the amount of their severance pay.
The Company anticipates that it will incur employee termination costs in
connection with the Vacaville distribution center closure of approximately
$250,000 in 1999.

     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 the 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 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.

                                       47
<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, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998.  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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.


/s/ Deloitte & Touche LLP


Deloitte & Touche LLP
San Francisco, California
May 6, 1999

                                       48
<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 statement in conformity with
generally accepted accounting principles. These systems are supplemented by the
selection and training of 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 & President        Acting Chief Financial Officer

                                       49
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

DIRECTORS AND EXECUTIVE OFFICERS OF THE NORTH FACE, INC.

NAME                            AGE   POSITION
-----------------------         ----  ------------------------------------------
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

     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 and CEO and Director of the Company since
May, 1998 and a Director of the Company since September 1996.  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.  Mr. Crawford was
Chief Financial Officer of Vermont Castings, Inc., which was acquired by CFM
Majestic in 1996.  Prior to that period, 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

                                       50
<PAGE>
 
from Lewis and Clark Law School and a Bachelor of Science degree from California
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 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 he 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.

     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.

                                       51
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION.

EXECUTIVE OFFICER COMPENSATION

     The following table sets forth information regarding the annual
compensation of the Company's Chief Executive Officer and the additional four
most highly compensated executive officers of the Company (collectively, the
"Named Executive Officers") for fiscal 1998.

<TABLE>
<CAPTION>
                                                                                     LONG TERM
                                                                                   COMPENSATION
                                                                                      AWARDS          
                                                                                 ------------------
                                                ANNUAL COMPENSATION                  NUMBER OF        
   NAME AND PRINCIPAL                        --------------------------             SECURITIES              ALL OTHER   
        POSITION               YEAR          SALARY               BONUS          UNDERLYING OPTIONS        COMPENSATION 
   ------------------          ----          ------               -----          ------------------        ------------
<S>                           <C>          <C>                 <C>               <C>                       <C>
James G. Fifield                1998       $305,769 (5)         $255,769 (2)               900,000          $    415  (1)
 President & CEO                1997       $     --             $     --                        --          $     --
                                1996       $     --             $     --                        --          $     --
                                                                       
William N. Simon                1998       $190,385 (6)               --                    40,000          $    864  (1)
 President & CEO                1997       $370,800             $147,949 (2)                50,000          $  1,200  (1)
                                1996       $360,000             $ 95,760 (3)                    --          $  1,200  (1)
                                                           
Karl Heinz Salzburger           1998       $391,678             $240,000 (2)                30,000          $  2,206  (10)
 CEO of The North Face          1997       $138,716             $ 43,312 (7)                    --          $121,054  (7)
 (Europe) Ltd.                  1996       $     --             $     --                    80,000          $     --
 
Christopher F. Crawford         1998       $205,153 (14)        $164,123 (2)                70,000          $ 15,639  (9)
 General Manager                1997       $ 61,192             $ 24,605 (3)                30,000          $    222  (1)
 California Operations          1996       $     --             $     --                        --          $     --
                                                      
Todd Katz                       1998       $360,000             $163,803 (2)                57,450          $ 88,706 (11)
 Vice President of Sales        1997       $158,769                                         37,000          $253,833 (1)(8)
 
Tucker Hacking                  1998       $195,878             $ 62,960 (2)                70,000          $ 18,974 (12)
 Vice President Product         1997       $150,000             $ 45,000 (3)                12,000          $    756 (1)
 Acquisition                    1996       $125,000             $ 27,000 (4)                 5,500          $    700 (1)
</TABLE>

(1)   Represents life insurance premiums paid by the Company.

(2)   Paid in 1999 for service in 1998.

(3)   Paid in 1998 for service in 1997.

(4)   Paid in 1997 for service in 1996.

(5)   Mr. Fifield became an employee of the Company on May 18, 1998.  Mr.
      Fifield's salary was paid in 1998 for service from his date of hire to
      December 31, 1998.  Mr. Fifield's annual salary is $500,000.

(6)   Mr. Simon served as president and CEO until May, 1998 at which point Mr.
      Fifield became President and CEO. Mr. Simon's salary was paid in 1998 for
      service from January 1998 through May 1998. Mr. Simon's annual salary was
      $450,000.

(7)   Mr. Salzburger became an employee of the Company on April 1, 1997.  Mr.
      Salzburger's compensation includes director fees of $12,500 per month (for
      a total of 9 months) for services rendered as a director of The North Face
      (Europe) Ltd., usage of an automobile having an annual value of
      approximately $8,710 and a hiring bonus of $43,312.   Mr. Salzburger's
      annual salary is $250,000.  Certain portions of Mr. Salzburger's
      compensation are denominated in Italian Lira and are set forth above in
      U.S. Dollars based upon year end exchange rates.

                                       52
<PAGE>
 
(8)   Mr. Katz became an employee of the Company on  January 1, 1997.  Prior to
      becoming an employee, Mr. Katz was associated with the Company as the sole
      proprietor of a contracted sales agency.  In 1997, the Company paid Mr.
      Katz $252,969 for activities performed in 1996. These payments represented
      gross revenue earned by Mr. Katz's sales agency.

(9)   Represents amounts paid for an auto allowance in 1998.

(10)  In 1998, Mr. Crawford received $15,333 for relocation reimbursement and
      $306 for life insurance premiums.

(11)  In 1998, Mr. Katz received $75,842 in relocation reimbursement, $12,000 in
      auto allowance and $864 in life insurance premiums.

(12)  Mr. Hacking received $18,656 in relocation reimbursement and $318 in life
      insurance premiums.

(13)  Mr. Crawford was Chief Financial Officer of the Company from August 29,
      1997 to March 30, 1999.

OPTION GRANTS

The following table provides information with respect to the stock option grants
made to each Named Executive Officer during 1998:

<TABLE>
<CAPTION>
                                 NUMBER OF         % OF TOTAL       EXERCISE                    VALUE OF ASSUMED ANNUAL
                                 SECURITIES     OPTIONS GRANTED    PRICE PER                  RATES OF STOCK PRICE APPRE-
                                 UNDERLYING       TO EMPLOYEES       SHARE      EXPIRATION    CIATION FOR OPTION TERM (2)
NAME                           OPTION GRANTED   IN FISCAL YEAR        (1)          DATE             5%             10%
----------------------------   --------------   ----------------   ---------    ----------    ------------    ----------- 
<S>                            <C>              <C>                <C>          <C>          <C>             <C>
William N. Simon  (3)                  40,000               1.6%     $ 9.625      09/04/08     $  212,261     $   522,810
James G. Fifield  (3)                 500,000              19.5%     $21.313      05/18/08     $5,875,229     $14,470,970
                                      400,000              15.6%     $ 9.625      05/18/08     $2,122,614     $ 5,228,099
Karl Heinz Salzburger  (4)             30,000               1.2%     $ 9.625      09/04/08     $  159,196     $   392,107
Todd Katz  (4)                         25,000               1.0%     $ 9.625      09/04/08     $  132,663     $   326,756
                                       32,450               1.3%     $ 9.625      09/04/08     $  172,197     $   424,129
Christopher F. Crawford  (4)           45,000               1.8%     $ 9.625      09/04/08     $  238,794     $   588,161
                                       25,000               1.0%     $ 9.625      09/04/08     $  132,663     $   326,756
Tucker Hacking  (4)                    25,000               1.0%     $ 9.625      09/04/08     $  132,663     $   326,756
                                       45,000               1.8%     $ 9.625      09/04/08     $  238,794     $   588,161
</TABLE>

(1) All options that were granted will exercise prices equal to the fair market
    value of the Common Stock on the date of the grant.

(2) The potential realizable value through the expiration date of the options
    has been determined on the basis of the fair market value of the shares at
    the time the options were granted, compounded annually over the term of the
    option, net of the price.  These values have been determined based upon
    assumed rates of appreciation and are not intended to forecast the possible
    future appreciation, if any, of the price or value of the Company's Stock.

(3) The options become exercisable on 5/19/08 unless certain targets are met as
    determined by the Company's Board of Directors, in which case the options
    vest as specified in the employment agreement dated as of 5/13/98.

(4) The options become exercisable on 9/04/08 unless certain financial targets 
    are met as determined by the Company's Board of Directors, in which case the
    options vest one quarter each year, over four years beginning 1999. Such
    targets were met with respect to 1998, and one quarter of such options shall
    vest in September 1999 according to the terms of the option vesting
    schedule.

                                       53
<PAGE>
 
OPTION EXERCISES AND VALUE

     The following table summarizes the number of options exercised in 1998, the
number of securities underlying unexercised options and the value of such
options on an aggregated basis held by each Named Executive Officer at December
31, 1998:

<TABLE>
<CAPTION>
                           AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
                                                                                                     VALUE OF UNEXERCISED
                              SHARES                               NUMBER OF UNEXERCISED             IN-THE MONEY OPTIONS
                             ACQUIRED                          OPTIONS AT FISCAL YEAR-END            AT FISCAL YEAR END(1)
                                ON             VALUE                                         
  NAME                       EXERCISE       REALIZED (2)       EXERCISABLE     UNEXERCISABLE     EXERCISABLE     UNEXERCISABLE
---------                   ----------   ------------------   -------------   ---------------   -------------   ---------------
<S>                         <C>          <C>                  <C>             <C>               <C>             <C>
James G. Fifield                     -                   -                -           900,000               -        $1,350,000
                                                                                             
William N. Simon               100,000          $2,440,247          222,706            40,000      $2,219,444        $  135,000
                                                                                             
Karl Heinz Salzburger                -                   -           40,000            70,000      $  135,000        $  236,250
                                                                                             
Christopher F. Crawford              -                   -            7,500            92,500      $   25,313        $  312,188
                                                                                             
Todd Katz                        2,776          $   77,034           10,637            86,587      $   47,688        $  304,019
                                                                                             
Tucker Hacking                  21,038          $  554,818            6,938            81,774      $   75,619        $  276,057
</TABLE>
-----------------------
(1)  Based on the difference between the closing market price of the Common
     Stock at December 31, 1998, which was $13.00, and the option exercise
     price. The actual value of unexercised options fluctuates with the market
     price of the Common Stock.
(2)  Based on the difference between the fair market value of the Common Stock 
     at the date of exercise and the exercise price.

                                       54
<PAGE>
 
REPORT ON REPRICING OF OPTIONS

     The following table contains information about adjustments made by the
Company in the last ten years to the exercise prices of outstanding options held
by the Company's executive officers.  All adjustments were done by cancellation
of the original options and the grant of a new option with exercise prices equal
to the fair market value of the Common Stock on the date of grant.

                           TEN YEAR OPTION REPRICINGS

<TABLE>
<CAPTION>
                                                                                                                     LENGTH OF  
                                                       NUMBER OF        MARKET                                        ORIGINAL  
                                                       SECURITIES      PRICE OF                                     OPTION TERM 
                                                       UNDERLYING      STOCK AT     EXERCISE PRICE       NEW        REMAINING AT
                                       DATE OF          OPTIONS        TIME OF        AT TIME OF       EXERCISE        DATE OF  
NAME AND PRINCIPAL POSITION           REPRICING         REPRICED      REPRICING        REPRICING        PRICE        REPRICING    
---------------------------           ---------        ----------     ---------     --------------     --------     -------------
<S>                               <C>                  <C>            <C>            <C>               <C>          <C>
James  G. Fifield                 September 4, 1998      300,000         $9.625           $20.938        $9.625       9.8 years
     President & CEO(1)           September 4, 1998      100,000         $9.625           $20.938        $9.625       9.8 years
                                                                                                                          
                                                                                                                          
William N. Simon                  September 4, 1998       50,000         $9.625           $20.875        $9.625       8.3 years
     President & CEO(1)           September 4, 1998       40,000         $9.625           $20.500        $9.625       9.8 years
                                                                                                                    
                                                                                                                    
Karl Heinz Salzburger             September 4, 1998       80,000         $9.625           $20.340        $9.625       8.3 years
      CEO of The North Face       September 4, 1998       30,000         $9.625           $20.500        $9.625       9.8 years
       ( Europe ) Ltd.                                                                                              
                                                                                                                    
Christopher F. Crawford           September 4, 1998       30,000         $9.625           $22.188        $9.625       8.9 years
    General Manager               September 4, 1998       45,000         $9.625           $19.250        $9.625       9.8 years
    California Operations         September 4, 1998       25,000         $9.625           $20.500        $9.625       9.8 years
                                                                                                                    
Todd Katz                         September 4, 1998       37,000         $9.625           $18.220        $9.625       8.3 years
      Vice President of Sales     September 4, 1998       25,000         $9.625           $20.500        $9.625       9.8 years
                                  September 4, 1998       32,450         $9.625           $19.250        $9.625       9.8 years
                                                                                                                    
Tucker Hacking                    September 4, 1998       25,000         $9.625           $20.500        $9.625       9.8 years
      Vice President Product      September 4, 1998        9,000         $9.625           $18.220        $9.625       8.3 years
       Acquisition
</TABLE>
------------------
(1)  Mr. Simon served as President and Chief Executive Officer until May 1998, 
     at which point Mr. Fifield became President and Chief Executive Officer.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The compensation committee of the Board of Directors currently consists of
Messrs. Doyle (Chairman), and Bunje.  No member of the Compensation Committee or
executive officer of the Company has a relationship that would constitute an
interlocking relationship with executive officers or directors of another
entity.

     The following report of the Compensation Committee and Performance Graph
are not considered filed with the Securities and Exchange Commission and are not
considered to be incorporated by reference into any filings with the Securities
and Exchange Commission, whether the filing is made before or after the date of
this Report on Form 10-K, and irrespective of any general language otherwise
incorporating filings by the Company.

                                       55
<PAGE>
 
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

     The Compensation Committee (the "Committee") of the Company's Board of
Directors currently consists of Messrs. Doyle (Chairman), and Bunje, each of
whom is a non-employee director of the Company.  The Committee was established
in early 1996, and its members made recommendations concerning executive
compensation matters to the Board of Directors during 1998.

General Policies

     Executive compensation policies and decisions were conceived by the Board
of Directors prior to the Company's initial public offering in 1996.  The
policies and decisions for 1998 were based primarily upon goals of attracting
and retaining executive officers who are motivated to contribute to the
Company's growth and business objectives, and offering competitive compensation
to these officers based upon their individual contributions and the overall
performance of the Company.  Compensation is offered in the form of base
salaries intended to reflect competitive salaries at comparable companies, cash
bonuses based primarily on corporate performance, and stock options intended to
align the interests of executive officers and stockholders.

     Base salaries for the executive officers reflect the historic salary
structure for the levels of executive responsibility at the Company and the
recommendations of the Committee members as to appropriate salary levels and
competitive factors, including salaries believed necessary to employ certain
executive officers who joined the Company during 1998.

     Upon the recommendations of the Committee members, the Board of Directors
approved cash bonuses to all of the Company's officers for 1998 based primarily
upon the fact that the Company's 1998 normalized earnings per share exceeded a
target recommended by the Committee members and adopted by the Board of
Directors.  The Board of Directors also considered relative base salaries and
each officer's individual performance in determining specific cash bonuses for
1998.  The Company's Board of Directors has approved that cash bonuses paid for
year ended December 31, 1998 will not change as a result of the restated
results.

     All executive officers received grants of stock options in 1998.
Individual grants in 1998 were allocated by the Board of Directors under the
Company's 1996 Stock Incentive Plan as recommended by the Committee members,
based on (i) goals of providing potential stock ownership in order to align the
interests of management and stockholders and to motivate officers to achieve
earnings per share and other goals set by the Company, (ii) individual and
Company performance prior to the dates of grant in the case of officers employed
prior to 1998, and (iii) overall cash compensation and potential stock ownership
believed to be needed in the case of officers first employed by the Company in
1998.  The Company's 1998 Nonstatutory Stock Option Plan was adopted in May 1998
and amended in September 1998.  A maximum of 1,700,000 shares have been reserved
for issuance pursuant to options granted under the Plan.  Non-Qualified Stock
Options granted under the 1998 Plan vest as determined by the Plan
Administrator.  The term of the Plan is ten years and will expire in March 2008.
The exercise price of options granted under this plan was the fair market value
of the underlying stock on the date of grant.  The option agreements provide
that options vest in 2004 if the individual is then employed, with earlier
accelerated vesting on an annual basis based on certain criteria established by
the Board of Directors.

     In September 1998, the Company's Board of Directors approved an option
exchange program whereby all active employees that held options with exercise
prices in excess of $9.625 per share were offered the opportunity to exchange
such options for new options at $9.625 per share, which was the fair market
value of the Common Stock on the date of the exchange program.  Employees were
allowed to restart the vesting period for their options such that the vesting
commencement date would remain unchanged from original option grant date.  The
Board undertook this action in light of the then recent reduction in the trading
price of the Company's Common Stock and in consideration of the importance to
the Company of retaining its employees by offering them appropriate equity
incentives.  The Board also considered the highly competitive environment for
obtaining and retaining qualified employees and the overall benefit to the
Company's stockholders from a highly motivated group of employees.

     Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to a publicly held corporation to the extent that more than $1 million
is paid to any of its chief executive officer and four other most highly
compensated executive officers employed at the end of any fiscal year.  The
Committee believes it unlikely that cash compensation paid for 1998 to any of
these officers would exceed $1 million.  The Committee does not 

                                       56
<PAGE>
 
expect that the limitation of Section 162(m) as now in effect will apply to
awards of stock or stock options previously made to these individuals. The
Committee may adopt a policy concerning this limitation when the Committee
considers a policy to be necessary or appropriate.

Compensation of CEO and President

     William N. Simon (who served as Chief Executive Officer until May 1998 and
is now Vice Chairman and a director), and James G. Fifield (who was appointed
President and Chief Executive Officer in May 1998 in addition to his position as
a director) received an annual base cash salary of $450,000 and $500,000 in
1998, respectively.  The Board of Directors believes that these two officers
made substantial contributions to increases in sales, income and earnings per
share and otherwise strong performance by the Company in 1998, and worked well
as a team through the Trademark License Agreements and the acquisition of La
Sportiva USA and La Sportiva S.p.A.  The base salaries for these two officers
were established by the Board of Directors under the policies described above.
Mr. Fifield also earned a cash bonus for 1998 based on the cash bonus policies
described above. In May 1998, Messrs. Simon and Fifield were granted options to
purchase 40,000 and 900,000 shares of Common Stock, respectively. The Board of
Directors exercised its judgment to determine the compensation for these
officers based on the above factors and the policies described above.

                                COMPENSATION COMMITTEE


                                Michael F. Doyle
                                Robert P. Bunje

                                       57
<PAGE>
 
PERFORMANCE GRAPH

     The following graph shows a comparison of cumulative returns for the
Company's Common Stock, the Nasdaq National Market Composite Index, and the S&P
Textile (Apparel Manufacturers) Index beginning July 2, 1996, when the Company's
Common Stock commenced public trading, and ending March 19, 1999.  This
information assumes investments of $100 at the beginning of that period in the
Company's Common Stock at the initial public offering price of $14.00 and in
these indexes, and assumes reinvestment of dividends where applicable.  This
information is not necessarily indicative of future price performance.

                       [PERFORMANCE GRAPH APPEARS HERE]

<TABLE> 
<CAPTION> 
                                                    Nasdaq
 Measurement Period                             National Market   S&P Textile (Apparel
(Fiscal Year Covered)    The North Face, Inc.   Composite Index   Manufacturers) Index
---------------------    --------------------   ----------------  ---------------------
<S>                      <C>                    <C>               <C> 
Measurement Date
July 2, 1996                  $ 100.00              $ 100.00          $ 100.00

Fiscal Year Ended
December 31, 1996             $ 137.50              $ 108.80          $ 120.25

Fiscal Year Ended
December 31, 1997             $ 157.14              $ 133.16          $ 128.09

Fiscal Year Ended
December 31, 1998             $  92.86              $ 186.75          $ 109.32

Fiscal Year Ended
December 31, 1999             $  90.18              $ 206.20          $ 109.37
</TABLE> 

                                       58
<PAGE>
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

          STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table and footnotes set forth certain information regarding the
beneficial ownership of the Company's Common Stock as of the Record Date, by (i)
each director and nominee for director who owned shares as of that date, (ii)
each of the executive officers named in the Summary Compensation Table set forth
in the above, (iii) all executive officers and directors of the Company as a
group, and (iv) each person known by the Company to be the beneficial owner of
more than 5% of the outstanding shares of Common Stock:

<TABLE>
<CAPTION>
 
                                                        SHARES
                                                     BENEFICIALLY       PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER (1)(2)           OWNED  (3)     OF TOTAL  (3)
--------------------------------------------------   -------------   -------------
<S>                                                  <C>             <C>
James G. Fifield (8)(10)(11)                            1,620,060            12.0%
Lone Pine Capital LLC (4)(9)                            1,552,261            12.2%
     2 Greenwich Plaza, 2nd Floor
     Greenwich, CT 06830

Lord Abbett & Co. (5)                                   1,422,737            11.3%
     767 5th Ave
     NY, NY  10153

Cardinal Investment Company, Inc(7)                     1,131,300             8.9%
     Dallas, TX

TCW Group, Inc. (6)                                       763,200             6.0%
     865 South Figueroa St.
     Los Angeles,  CA  90017

Marsden S. Cason (8)(11)                                  300,324             2.3%
William N. Simon (8)(11)                                  262,706             2.0%
Michael F. Doyle (8)(11)                                   65,000              *
Karl Heinz Salzburger (8)(12)                              75,000              *
Christopher F. Crawford (8)(12)                            45,185              *
Robert P. Bunje (8)(11)                                    26,000              *
Michael J. Solomon (8)(11)                                 34,000              * 

All directors and executive officers as a group
(8 persons)                                             2,414,525            16.9%

</TABLE> 
---------------
 *   Less than 1%

(1)  Determined in accordance with Rule 13d-3 under the Securities Exchange Act
     of 1934, as amended.  Under this rule, a person is deemed to be the
     beneficial owner of securities that can be acquired by such person within
     60 days from April 30, 1999 upon the exercise of options.  Each beneficial
     owner's percentage ownership is determined by assuming that all options
     held by such person (but not those held by any other person) that are
     exercisable within 60 days from that date have been exercised.  Unless
     otherwise noted, the Company believes that all persons named in the table
     have sole voting and investment power with respect to all shares of Common
     Stock beneficially owned by them.

(2)  Unless otherwise indicated, the address of each of the persons named above
     is in care of the Company at 2013 Farallon Drive, San Leandro, California
     94577.

(3)  12,712,140 shares of Common Stock were outstanding on the Record Date.
     Applicable percentage ownership for each shareholder is based on 12,712,140
     shares of Common Stock outstanding as of  February 28, 1999, together with
     applicable options for such shareholder that are exercisable within 60 days
     of February 28, 1999.

(4)  Based solely on information contained in a Schedule 13G filed 2/12/99.

(5)  Based solely on information contained in a Schedule 13G filed 2/16/99.

(6)  Based solely on information contained in a Schedule 13G filed 2/12/99.

(7)  Based solely on information contained in a Schedule 13D filed 4/5/99.

(8)  Includes shares issuable upon exercise of options exercisable within 60
     days of April 30, 1999.  Beneficially owned shares by Messrs. Fifield,
     Cason, Simon, Doyle, Salzburger, Crawford, Bunje and Solomon include
     options of 900,000, 300,000, 262,706, 35,000, 67,500, 38,935, 25,000 and
     25,000, respectively.

                                       59
<PAGE>
 
(9)  The shares owned by Lone Pine Capital are derived from Form 13G as follows:
 
          Lone Spruce, LP                  22,806
          Lone Balsam, LP                  55,591
          Lone Sequoia, LP                 48,464
          Lone Pine Associates LLC        126,861
          Lone Pine Capital LLC           585,839
          Stephen F. Mandel, Jr.          712,700
          Total                         1,552,261

     Lone Pine, the General Partner of Lone Spruce, Lone Sequoia and Lone
     Balsam, has the power to direct the affairs of Lone Spruce, Lone Sequoia
     and Lone Balsam, including decisions respecting the disposition of the
     proceeds from the sale of shares. Mr. Mandel is the Managing Member of Lone
     Pine and in that capacity directs its operations. Lone Cypress, a client of
     Lone Pine Capital of which Mr. Mandel is the Managing Member, has the power
     to direct the receipt of dividends from or the proceeds of the sale of
     shares. The 13G makes no mention as to the relation of Lone Pine
     Associates, LLC.

(10) Mr. Fifield's shares include 10,000 purchased under his spouse's name.

(11) Assumes the acceleration of all options held by such individuals pursuant
     to the proposed tender offer.

(12) Assumes the acceleration of  52,500 cumulative options held by such
     individuals pursuant to the proposed tender offer

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Pursuant to an Employment Agreement between the Company and James G.
Fifield, dated May 13, 1998, the Company sold 665,060 shares of its Common Stock
to Mr. Fifield for an aggregate purchase price of $14,049,392.50.  Mr. Fifield
pledged 310,030 shares of the Common Stock in connection with a Full Recourse
Promissory Note in favor of the Company for the principal sum of $6,549,392.50.
As of June 18, 1998, the Full Recourse Promissory Note plus interest at an
annual rate of 5.43% was fully repaid by Mr. Fifield and the 310,030 pledged
shares of Common Stock were issued to Mr. Fifield.

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, 1998 and 1997
    Consolidated Statements of Income for the
       Years Ended December 31, 1998, 1997 and 1996
    Consolidated Statements of Shareholders' Equity for the
       Years Ended December 31, 1998, 1997 and 1996
    Consolidated Statements of Cash Flows for the
       Years Ended December 31, 1998, 1997 and 1996
    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
condensed consolidated financial statements and notes thereto.

   3. Exhibits

Exhibit No.                             Description
-------------------------------------------------------------------------------
2.1(6)    Stock Purchase Agreement, dated as of July 1, 1998, among The North
Face, Inc. and  La Sportiva USA, Inc..

2.2(6)    Registration Rights Agreement dated as of July 1, 1998, among The
North Face, Inc. and the stockholders of La Sportiva USA, Inc.

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

3.2(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(7)** Management Stock Pledge Agreement, dated as of May 13, 1998, among
The North Face, Inc., and James G.  Fifield.

10.3(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.

10.4(1)   Securityholders 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.

                                      60



<PAGE>
 
10.5(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.

10.6(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.

10.6A(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.

10.6B(3)   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.

10.7(2)**  TNF Holdings Company, Inc.* 1994 Stock Incentive Plan, as amended.

10.8(5)**  The North Face, Inc. 1995 Stock Incentive Plan, as amended.

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

10.9A**    The North Face, Inc. 1996 Stock Incentive Plan, as amended September
1, 1998.

10.10(1)** The North Face, Inc. 1996 Employee Stock Purchase Plan.

10.11(1)** The North Face, Inc. 1996 Directors' Stock Option Plan.

10.12(9)** The North Face, Inc. 1998 Nonstatutory Stock Option Plan.

10.13(1)   Trademark License, dated October 29, 1993, between The North Face
and W.L. Gore & Associates, Inc.

10.14      Trademark License, dated September 30, 1998, between The North Face,
Inc. and Youngone Corporation.

10.15(8)   Loan Agreement dated as of September 2, 1998 (the "Loan Agreement")
between The North Face, Inc., The North Face (Europe) Limited and The North
Face, Hong Kong, Limited as Borrowers, The Industrial Bank of Japan, Limited,
New York Branch and IBJ Schroder Business Credit Corporation as Arrangers, The
Industrial Bank of Japan, Limited, New York Branch as Syndication Agent,
Documentation Agent and as a Lender, IBJ Schroder Business Credit Corporation as
Administrative Agent, Collateral Agent and as a Lender, and Certain Financial
Institutions.

10.15A(8)  Amendment to the Loan Agreement, dated as of September 11, 1998.

10.16(4)   First Amendment and Purchase Agreement dated June 15, 1998 by and
between The North Face, Inc., Gianinetti Investment Corp., R.P. Sewell &
Company, a Colorado Partnership, Richard Bradley and David F. Baggerman and
Agreement to Amend/Extend Contract dated December 24, 1998 by and between The
North Face, Inc., Gianinetti Investment Corp., R.P. Sewell & Company, a Colorado
Partnership, Richard Bradley and David F. Baggerman.

21.1       List of Subsidiaries of The North Face, Inc.

23.1       Consent of Deloitte & Touche LLP.


<PAGE>
 
27.1       Financial Data Schedule.

(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, 1997 filed with the Securities and
    Exchange Commission on March 6, 1998.

(4) Incorporated by reference to the Company's Registration Statement on Form S-
    3 (No. 333-70405) filed with the Securities and Exchange Commission on
    January 11, 1999.

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

(6) Incorporated by reference to the Company's Registration Statement on Form S-
    3 (No. 333-58629) filed with the Securities and Exchange Commission on July
    7, 1998.

(7) Incorporated by reference on Schedule 13D  filed with the Securities and
    Exchange Commission on May 13, 1998.

(8) Incorporated by reference to the Company's  Report on Form 10-Q for the
    period ended September 30, 1998 filed with the Securities and Exchange
    Commission on November 13, 1998.

(9) Incorporated by reference to the Company's Registration Statement on Form S-
    8 (No. 59003) filed with the Securities and Exchange Commission on July 14,
    1998.

(b) Reports on Form 8-K: as filed with the Securities and Exchange
    Commission on July 7, 1998.
(c) Reports on Form 8-K/A: as filed with the Securities and Exchange Commission
    on July 21, 1998.

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

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

*   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.

<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 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> 

                                       61



<PAGE>
 
                                 EXHIBIT INDEX


Exhibit No.                             Description
-------------------------------------------------------------------------------
2.1(6)    Stock Purchase Agreement, dated as of July 1, 1998, among The North
Face, Inc. and  La Sportiva USA, Inc..

2.2(6)    Registration Rights Agreement dated as of July 1, 1998, among The
North Face, Inc. and the stockholders of La Sportiva USA, Inc.

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

3.2(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(7)** Management Stock Pledge Agreement, dated as of May 13, 1998, among
The North Face, Inc., and James G.  Fifield.

10.3(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.

10.4(1)   Securityholders 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.

                                       64
<PAGE>
 
10.5(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.

10.6(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.

10.6A(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.

10.6B(3)   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.

10.7(2)**  TNF Holdings Company, Inc.* 1994 Stock Incentive Plan, as amended.

10.8(5)**  The North Face, Inc. 1995 Stock Incentive Plan, as amended.

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

10.9A**    The North Face, Inc. 1996 Stock Incentive Plan, as amended September
1, 1998.

10.10(1)** The North Face, Inc. 1996 Employee Stock Purchase Plan.

10.11(1)** The North Face, Inc. 1996 Directors' Stock Option Plan.

10.12(9)** The North Face, Inc. 1998 Nonstatutory Stock Option Plan.

10.13(1)   Trademark License, dated October 29, 1993, between The North Face
and W.L. Gore & Associates, Inc.

10.14      Trademark License, dated September 30, 1998, between The North Face,
Inc. and Youngone Corporation.

10.15(8)   Loan Agreement dated as of September 2, 1998 (the "Loan Agreement")
between The North Face, Inc., The North Face (Europe) Limited and The North
Face, Hong Kong, Limited as Borrowers, The Industrial Bank of Japan, Limited,
New York Branch and IBJ Schroder Business Credit Corporation as Arrangers, The
Industrial Bank of Japan, Limited, New York Branch as Syndication Agent,
Documentation Agent and as a Lender, IBJ Schroder Business Credit Corporation as
Administrative Agent, Collateral Agent and as a Lender, and Certain Financial
Institutions.

10.15A(8)  Amendment to the Loan Agreement, dated as of September 11, 1998.

10.16(4)   First Amendment and Purchase Agreement dated June 15, 1998 by and
between The North Face, Inc., Gianinetti Investment Corp., R.P. Sewell &
Company, a Colorado Partnership, Richard Bradley and David F. Baggerman and
Agreement to Amend/Extend Contract dated December 24, 1998 by and between The
North Face, Inc., Gianinetti Investment Corp., R.P. Sewell & Company, a Colorado
Partnership, Richard Bradley and David F. Baggerman.

21.1       List of Subsidiaries of The North Face, Inc.

23.1       Consent of Deloitte & Touche LLP.

                                       65
<PAGE>
 
27.1       Financial Data Schedule.

(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, 1997 filed with the Securities and
    Exchange Commission on March 6, 1998.

(4) Incorporated by reference to the Company's Registration Statement on Form S-
    3 (No. 333-70405) filed with the Securities and Exchange Commission on
    January 11, 1999.

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

(6) Incorporated by reference to the Company's Registration Statement on Form S-
    3 (No. 333-58629) filed with the Securities and Exchange Commission on July
    7, 1998.

(7) Incorporated by reference on Schedule 13D  filed with the Securities and
    Exchange Commission on May 13, 1998.

(8) Incorporated by reference to the Company's  Report on Form 10-Q for the
    period ended September 30, 1998 filed with the Securities and Exchange
    Commission on November 13, 1998.

(9) Incorporated by reference to the Company's Registration Statement on Form S-
    8 (No. 59003) filed with the Securities and Exchange Commission on July 14,
    1998.

(b) Reports on Form 8-K:   as filed with the Securities and Exchange
    Commission on July 7, 1998.
(c) Reports on Form 8-K/A: as filed with the Securities and Exchange Commission
    on July 21, 1998.

*   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.

                                       64