<PAGE>

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                  ____________

                                   FORM 10-K

(Mark One)
[ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934
       For the fiscal year ended November 4, 2000

                                      or

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934
       For the transition period from ____ to ____

Commission file number 0-23440

                         MCNAUGHTON APPAREL GROUP INC.
                      (formerly Norton McNaughton, Inc.)
            (Exact name of registrant as specified in its charter)

                            Delaware                          13-3747173
                 -------------------------------          -------------------
                 (State or other jurisdiction of            (I.R.S. Employer
                 incorporation or organization)           Identification No.)

                        463 Seventh Avenue
                           New York, NY                          10018
                 -------------------------------          -------------------
               (Address of principal executive offices)        (Zip Code)

      Registrant's telephone number, including area code:  (212) 947-2960

       Securities registered pursuant to Section 12(b) of the Act:  None

  Securities registered pursuant to Section 12(g) of the Act: Common Stock,
                                $0.01 par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes X  No ____
                                       ---

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of January 30, 2001, was approximately $84,212,100.

As of January 30, 2001, there were 9,839,498 shares of the registrant's Common
Stock outstanding.


                     Documents incorporated by reference:

Certain portions of the registrant's definitive proxy statement for the annual
meeting of stockholders to be held March 12, 2001, which will be filed with the
Commission subsequent to the date hereof pursuant to Regulation 14A of the
Securities Exchange Act of 1934, are incorporated by reference into Part III of
this report.
<PAGE>

                                    PART I

Item 1. Business

     McNaughton Apparel Group Inc. (the "Company") designs, sources, markets and
distributes women's and juniors' moderately-priced separates and collections of
career and casual clothing under such brand names as Norton McNaughton(R),
Erika(R) and Energie(R) through its wholly-owned subsidiaries. The Company's
primary design and merchandising strategies rely largely on interpretations of
popular designer fashions, avoiding fashion-forward designs that are subject to
rapidly changing trends. The Company's products are sold nationwide in over
8,000 individual stores, operated by over 1,500 department stores, national
chains, mass merchants, off-price retail chains and specialty retailers,
including J.C. Penney, May Company, Federated, Sears, Kohl's and T.J. Maxx. The
Company contracts for the manufacture of all of its products, principally
through an established network of foreign manufacturers and agents, thereby
avoiding significant capital expenditures for manufacturing facilities and the
costs of a large production work force.

     The Company's business is comprised of three groups of product offerings,
Jeri-Jo Knitwear, Inc. ("Jeri-Jo"), Norton McNaughton of Squire, Inc. ("Norton")
and Miss Erika, Inc. ("Miss Erika"); the Company acquired Miss Erika in
September 1997 and Jeri-Jo in June 1998.

     .  Jeri-Jo. Jeri-Jo designs, sources and distributes moderately-priced,
updated sportswear, knitwear and casual wear for juniors and misses (ages 12 to
35), a category which the Company believes presents significant growth
opportunities based upon the demographics and buying patterns of this segment.
First introduced in 1975, Jeri-Jo's products are sold under its brand names
Energie(R), Currants(R), Jamie Scott(R) and Polar 2000(R) and under private
labels to national chains, department stores, off-price retail chains, and mass
merchants.

     .  Norton. Norton designs, sources and distributes moderately-priced
separates and collections of career and casual clothing for women aged 25 to 55.
The Norton product lines were first introduced in 1981, and are sold under
Norton's brand names, including Norton McNaughton(R), Maggie McNaughton(R),
Norton Studio(R) and D.P.S.(R), primarily to department stores and national
chains.

     .  Miss Erika. Miss Erika designs, sources and distributes women's
moderately-priced casual separates. Miss Erika's target customer is a middle
income, budget-minded but fashionable woman ranging in age from 15 to 50 years
old. First introduced in 1968, Miss Erika sells its products under its brand
name Erika(R) and under private labels to national chains, department stores,
off-price retail chains, and specialty stores.

Business Strategies

     The Company's business strategies are to focus on increasing sales and
improving operating efficiencies in order to improve profitability. In order to
implement these strategies, the Company is pursuing the following:

     Growth of Existing Brands. The Company's strategy to increase sales
consists of increasing penetration through existing distribution channels and
opening new accounts for existing and new products. In furtherance of this
strategy, the Company has opened or further developed a number of new accounts.
For example, in the past four years, the Company's Kohl's account has grown from
less than 1% to approximately 9% of total net sales for fiscal 2000, making them
the Company's fourth largest customer. Through merchandising and promotional
strategies, including in-store shops, enhanced seasonal offerings and the launch
of an advertising campaign, the Company continues to build brand awareness.

     Acquisitions which Diversify Product Lines and Distribution Channels. The
Company has adopted a disciplined and proven acquisition strategy focused on
acquiring businesses that meet the following criteria: (1) complementing and
diversifying its product offerings, distribution channels and sourcing
relationships, (2) gaining access to the talents of key management,
merchandising, design and sourcing personnel, (3) achieving acquisition prices
that yield an immediate accretion to earnings, and (4) realizing potential
synergies resulting from improvements in finance, management information systems
and other corporate overhead items, and consolidation and improvement in
warehousing and shipping operations.

     Further Develop and Expand Global Sourcing Capabilities. The Company
believes that developing the optimal number and geographic diversity of foreign
contractors and agents will maximize production flexibility and minimize the
risk of adverse consequences that could result from the termination or loss of a
particular contractor or agent. The Company will continue to seek contractors
and agents which provide the highest level of service and quality at the most
economical prices.

     Continuing Focus on Operating Efficiencies and Cost Reduction. The Company
will continue to focus on enhancing operating efficiencies and lowering costs.
In connection with this focus, in fiscal 2000 the Company relocated Norton's
warehousing and distribution activities from New Jersey to South Carolina, a
lower-tax and lower-cost state, where it now performs these operations in-house.
In addition, the Company believes that, over time, as a result of the
consolidation of the operations of its three

                                       2
<PAGE>

businesses, the Company will realize economies of scale associated with
sourcing, manufacturing, marketing, distribution and administration.

Products

     The Company's clothing collections are moderately-priced and are designed
for both career and casual women's and juniors' needs. All products are
fabricated from natural and synthetic fibers and blends, and many are
manufactured in petite and large sizes, in addition to misses. The introduction
of different collections in each season is staggered to ensure that consumers
are introduced frequently to fresh full-priced merchandise.

     The Company's Norton McNaughton(R) and Norton Studio(R) product lines are
marketed primarily as collections of related separates of updated jackets,
skirts, pants, shorts, blouses and knit products, which, while sold as
separates, are coordinated as to styles, colors and fabrics and are designed to
be merchandised and worn together. New collections of coordinated separates are
introduced in six principal selling seasons--spring, summer, transition, fall,
winter and holiday. Products sold under the Erika(R), Energie(R), Currants(R),
Jamie Scott(R), Polar 2000(R) and D.P.S.(R) labels are marketed primarily as
separates, and are introduced in four key selling seasons, namely, spring,
transition, fall and holiday.

        The following table sets forth information concerning the Company's
product lines:

<TABLE>
<CAPTION>
  ----------------------------------------------------------------------------------------------------------------------------------
                                  Jeri-Jo                      Miss Erika                           Norton
  ----------------------------------------------------------------------------------------------------------------------------------
  <S>                   <C>                                  <C>                     <C>
    Brands                          Energie(R)                     Erika(R)                     Norton McNaughton(R)
                                   Currants(R)                                                  Maggie McNaughton(R)
                                  Jamie Scott(R)                                            Norton McNaughton(R) Petite
                                  Polar 2000(R)                                                   Norton Studio(R)
                                                                                                     D.P.S.(R)
  ----------------------------------------------------------------------------------------------------------------------------------
    First Established    Energie(R), Currants(R) and Jamie          1968                  Norton McNaughton(R) product line: 1981
                           Scott(R) product lines: 1975                               Maggie McNaughton(R) and Norton McNaughton(R)
                           Polar 2000(R) product line:                                        Petite product lines: 1982
                                      1999                                                  D.P.S.(R) product line: 1995
                                                                                        Norton Studio(R) product line: 1996
  ----------------------------------------------------------------------------------------------------------------------------------
    Products                   Moderately priced              Moderately priced             Moderately priced women's
                                  sportswear,                  women's casual               career and casual related
                          knitwear and casual wear for            separates                         separates
                              juniors' and misses
  ----------------------------------------------------------------------------------------------------------------------------------
    Age Category                    12 to 35                      15 to 50                           25 to 55
  ----------------------------------------------------------------------------------------------------------------------------------
    Price Points                   $10 to $40                    $10 to $50                         $20 to $75
  ----------------------------------------------------------------------------------------------------------------------------------
    Distribution                National Chains                National Chains                   National Chains
    Channels                   Department Stores              Department Stores                 Department Stores
                            Off-Price Retail Chains        Off-Price Retail Chains             Mass Merchants
                                Mass Merchants                 Specialty Stores
  ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Energie(R), Currants(R), Jamie Scott(R) and Polar 2000(R)

     The Energie(R), Currants(R) and Jamie Scott(R) product lines were first
introduced in 1975, and consist of juniors' and misses, moderately-priced
separates, including updated sportswear, knitwear and other casual wear. The
Polar 2000(R) product line was introduced in 1999 to broaden Jeri-Jo's product
offerings into different fabrications. The target consumers of these product
lines are teenaged girls and women aged 12 to 35 years old. The product lines
are distributed through a variety of distribution channels, including national
chains, department stores, off-price retailers and mass merchants.

Erika(R)

     The Erika(R) product line was first introduced in 1968 and consists of
women's moderately-priced separates, including knit tops and bottoms, sweaters,
dresses and jackets, and more casual apparel such as shorts, skirts, tank tops,
jumpers and other weekend wear. The target consumers are middle income, budget-
minded but fashionable women ranging in age from 15 to 50 years old. The product
line is distributed in a variety of retail channels, including national chains
and department stores.

                                       3
<PAGE>

Norton McNaughton(R) and Maggie McNaughton(R)

     The Norton McNaughton(R) product line was introduced in 1981, and features
moderately-priced color and style coordinated jackets, skirts, pants, shorts,
blouses and sweaters for the career woman. The product lines are sold in misses,
petite and large sizes under the Norton McNaughton(R), Norton McNaughton(R)
Petite, and Maggie McNaughton(R) labels to department stores and national
chains. The target consumers for these product lines are working women aged 25
to 55 with annual incomes of $20,000 to $50,000.

Norton Studio(R)

     The Norton Studio(R) product line was introduced in early 1996 and consists
of moderately-priced women's career and casual knitwear collections offered in
misses, petite and large sizes. The line is designed for the same target
consumer as the Norton McNaughton(R) product line and is sold in department
stores and national chains.

D.P.S.(R)

     The D.P.S.(R) product line was introduced in 1995 and offers a line of
moderately-priced weekend wear in misses, petite and large sizes. The line
consists of casual separates, including jumpers, sport dresses, pants, shirts,
skirts, shorts and jackets. The line is designed for the same target consumers
as the Erika(R) product line and is sold to department stores, national chains
and mass merchants.

Private label

     In addition to products sold under Norton's and Miss Erika's brand names,
Norton and Miss Erika consult with retailers to develop product lines sold under
private labels. Norton and Miss Erika coordinate with buyers to design and
manufacture private label products in specified colors, fabrics and styles.
These buyers may provide samples, select styles already offered by Norton or
Miss Erika or, together with Norton's or Miss Erika's designers, create their
own variations.

Customers

     The Company estimates that its products are sold nationwide in over 8,000
individual stores operated by over 1,500 department stores, national chains,
mass merchants, off-price retail chains and specialty retailers. The following
table sets forth approximate percentages of the Company's net sales to its three
largest customers for fiscal 2000, fiscal 1999 and fiscal 1998.



         Name                           Fiscal   Fiscal    Fiscal
         ----
                                         2000     1999     1998/(3)/
                                         ----     ----     ---------
         J.C. Penney.................     15%      20%       17%
         May Company/(1)/............     14       14        16
         Federated/(2)/..............     13       14        15
                                         ---      ---       ---
            Total....................     42%      48%       48%
                                         ===      ===       ===

__________________
(1)   Included in the May Company group are Hechts, Foley's, Robinsons-May,
      Kaufmann's, Filene's, Famous Barr and Meier & Frank.

(2)   Included in the Federated group are Macy's, Rich's, Burdines, Bon Marche
      and Stern's.

(3)   Reflects the acquisition of Jeri-Jo on June 18, 1998.

                                       4
<PAGE>

Sales and Merchandising

    The Norton, Miss Erika and Jeri-Jo non-commissioned sales forces are located
in their New York City showrooms. Members of the Company's senior management and
senior management of its subsidiaries are also actively involved in marketing
and selling efforts. The Company does not employ independent sales
representatives and does not maintain any regional showrooms. The Company
emphasizes the development of long-term customer relationships by consulting
with retailers concerning the style and coordination of clothing purchased by
the store, optimal delivery schedules, floor presentation, pricing and other
merchandising considerations. Frequent communication between the Company's
senior management and other sales personnel and their counterparts at various
levels in the buying organizations of the Company's retailers is an important
element of the marketing and sales efforts. These contacts often times allow the
Company to monitor retail sales volume and to adjust product mix and pricing in
an attempt to maximize sales at acceptable profit margins for both the Company
and its retailers. The Company's marketing efforts attempt to build upon the
success of prior selling seasons to encourage existing retailers to devote
greater selling space to the Company's product lines, to penetrate different
buying groups at large retailers, and to obtain additional retailers. As part of
the Company's strategy to increase brand awareness, a print advertising campaign
was launched for the Norton McNaughton(R) and Maggie McNaughton(R) product lines
in Spring of 2000.

    Norton has implemented merchandising initiatives which it believes will help
it achieve stronger sales to consumers with improved gross margin levels in its
Norton McNaughton(R) product lines. By capitalizing on product sourcing
opportunities, Norton has adopted a new pricing strategy emphasizing lower
retail prices, and a new product strategy by offering narrower product
assortments in its fashion groups. In addition, Norton is constructing "in-store
shops" for certain of its brand name products in a select number of stores of
its major retail customers. Norton has also implemented other initiatives such
as the development of merchandising plans to assist retailers in marketing
Norton's products, the redesign of product logos and labels, and the advertising
campaign discussed above. Similarly, Miss Erika has implemented merchandising
initiatives to broaden its product offerings to expand sales of its fall season
merchandise. In addition, Miss Erika is considering the introduction of "in-
store shops" into certain of its key customers in fiscal 2001.

Design

    The Company's design philosophy is to interpret popular designer fashions at
moderate prices. Each of its design teams is responsible for the creation,
development and coordination of product lines which mirror existing fashion
trends in better women's apparel. In the case of Norton's related separates
groups, the design team also seeks to enhance consumer appeal by combining
functional fabrics in creative looks and color schemes to encourage the
coordination of outfits, resulting in the purchase of more than one garment.
Through the Company's design and marketing staff, it actively monitors the sales
of its products to assess changes in consumer preferences, fashion trends and
the marketplace at large.

    The design process begins with the development of fashion concepts, color
schemes and fabric selections approximately six to twelve months before final
designs are produced. Once color schemes, fabric selections and other concepts
are developed, designs are finalized, fabric swatches and silhouettes are
selected, and finally, samples are produced. Approximately 3 to 9 months prior
to a product line's release, previews are held with the Company's major
retailers to exchange ideas and to review colors, patterns, fabrics, styling and
price points. These previews allow the Company to redesign and refocus the
components of its collections before significant fabric and production
commitments are made.

Sourcing and Manufacturing

    The Company contracts for the manufacture of all of its products. The
Company believes that contract manufacturing allows it to maximize production
flexibility, while avoiding significant capital expenditures for manufacturing
facilities and the fixed costs of managing a large production work force.

    The Company sources all of its products abroad. The Company attributes the
use of foreign production sources to lower manufacturing costs resulting in more
competitive pricing, the availability of a skilled and well-equipped labor
force, higher quality standards and changes in its product lines (e.g., toward
more knitwear) as dictated by fashion trends, including the increase in casual
dressing in the work place. While domestic contract manufacturing provides
shorter lead times between order and delivery, the Company believes that this
benefit is more than offset by the cost, diversity and quality considerations of
overseas production. The Company mitigates the longer lead time necessary for
foreign sourced production by early and timely attention to production planning.

    In fiscal 2000, the Company engaged the services of approximately 40 agents
and 200 sewing and knitting contractors in Central America, Far East, Middle
East and Europe. These contractors may in turn subcontract work to other sewing
or knitting contractors. The Company does not have any long-term supply
agreements with any of its agents or contractors.

    The Company contracts for the production of a significant portion of its
merchandise through a network of independent agents located overseas. Although
no long-term contractual obligations exist with any of these agents, in several
cases, the Company has

                                       5
<PAGE>

consistently ordered merchandise through them for over ten years. Although the
agents facilitate the procurement process, the Company also maintains
relationships with many factories. The Company also sources a large portion of
its products directly with factories, primarily through import programs, largely
in China. The total lead time for production in Far East, Middle East and
European countries ranges from four to ten months. The Company believes that the
number and geographical diversity of its agents and contractors minimize the
risk of adverse consequences that would result from the termination of a
particular agent or contractor and that replacements could be developed in a
timely manner if necessary.

    The Company also sources a portion of its products in Central America,
enabling it to take advantage of shorter lead times than Far and Mid East
production due to proximity. This region may also enable the utilization of
favorable "807" regulations, which provide that articles assembled abroad from
United States components may be exempt from United States duties on the value of
these components. Production in this location begins with on-site inspection of
fabrics from mills, converters and other fabric suppliers. The production
process for Central American sourcing takes approximately two to four months.

    The Company's quality control program monitors the manufacturing processes
of its contractors in order to ensure that they meet its quality control
standards. This includes the inspection of substantially all of its fabrics
prior to their being placed into production, as well as on-site inspections of
work in process and finished goods during the production process. Quality
control procedures may be performed by the Company's quality control personnel
or its agents. In addition, finished goods are inspected upon receipt into its
warehouses.

Distribution

    Finished goods are received into four distribution centers located in New
Jersey (Miss Erika and Jeri-Jo) and a distribution center located in South
Carolina (Norton), where incoming merchandise undergoes quality assurance
procedures and is stored by style number and color. Shipments are made to
retailers in quantities, at locations and in packaging as specified by
retailers.

Management Information Systems

    The Company maintains and is continually upgrading its management
information systems to control its purchasing, shipping, production and
financial functions. The Company also maintains an Electronic Data Interchange
program, which facilitates communications between the Company and the majority
of its major retailers, and enables it to comply with retailers' specific
requirements. This technology provides for the electronic exchange of purchase
orders, invoices and advanced shipping notices. In addition, the Company bar
codes all of its shipments and merchandise to allow retailers to track receipts
and sales at store registers, monitor inventory levels and provide timely
feedback.

    The Company operates separate management information systems for Norton,
Miss Erika and Jeri-Jo, each of which address the purchasing, shipping and
production functions in fully integrated applications. New systems developments
in fiscal 2000 included the implementation of a warehouse management system and
an automated materials handling system in Norton's new warehouse and
distribution facility in South Carolina. The Company is implementing a new
operating system which is anticipated to provide a corporate solution for
production, sales and order fulfillment functions. This operating system will
first be implemented at Miss Erika during mid-fiscal 2001, with anticipated
implementation at Norton and Jeri-Jo during late fiscal 2001 and fiscal 2002,
respectively.

Backlog

    At November 4, 2000, the Company had a total of approximately $237.1 million
of unfilled customer orders compared to approximately $180.4 million at November
6, 1999. The increase was primarily due to an increase in spring bookings for
Miss Erika and Norton products. These orders are generally scheduled for
delivery within one to two months after confirmation. The amount of unfilled
orders at a particular time is affected by a number of factors, including the
scheduling of the manufacturing and shipping of the products which, in many
instances, depends on retailers' demands. Accordingly, a comparison of orders
from period to period is not necessarily meaningful and may not be indicative of
eventual actual shipments. There can be no assurance that cancellations,
rejections and returns will not reduce the amount of sales realized from the
backlog of orders.

Competition

    There is intense competition in the women's and juniors' apparel industry.
The Company competes with numerous other manufacturers and distributors, many of
which are larger and have substantially greater resources. The Company believes
that it competes favorably on the basis of the style, quality and value of its
products, production and sourcing strengths, and the long-term customer
relationships which it has developed.

Employees

    The Company has approximately 540 full-time employees. None of its employees
are subject to a collective bargaining agreement. The Company considers
relations with its employees to be good.

                                       6
<PAGE>

Item 2.  Properties

The Company conducts its business from the following leased facilities:

<TABLE>
<CAPTION>
                                                                                                       Approximate
                                                                                                        Number of
             Facility                         Location                Lease Expiration Date             Square Feet
------------------------------       ----------------------       ----------------------------      ------------------
<S>                                  <C>                          <C>                               <C>
   Executive, production and         463 Seventh Avenue               July 31, 2008                       40,000
     design offices                  9th and 10th Floors
                                     New York, NY

   Showrooms                         1407 Broadway                    April 30, 2003                      14,600
                                     New York, NY
                                     4th Floor

                                     26th Floor                       January 31, 2004                    11,600

                                     28th and 29th Floors             January 31, 2004                    12,100

   Administrative offices and        333 North Street                 December 31, 2007/(1)/             220,000
     finished goods warehouses       Teterboro, NJ

                                     301 Mayhill Street               September 26, 2001                  62,000
                                     Saddle Brook, NJ/(2)/

                                     80 Carter Drive                  June 30, 2003                       93,100
                                     Edison, NJ/(3)/

                                     1020 Northpointe                 January 30, 2015                   300,000
                                     Industrial Boulevard
                                     Goose Creek, SC/(4)/
</TABLE>

   ____________
   (1) This lease has an early termination option on December 31, 2001 at a cost
       of $550,000 for which Miss Erika is fully reserved.

   (2) Miss Erika sublets this space.

   (3) This warehouse space is leased from a partnership of which certain
       partners are employees of Jeri-Jo. The lease has a five-year renewal
       option.

   (4) Norton commenced occupancy of this property in March 2000 and began
       warehousing and distribution activities there during the Company's third
       fiscal quarter of 2000.

   The Company believes that its existing facilities are well-maintained, in
good operating condition and will be adequate for its operations for the
foreseeable future.

                                       7
<PAGE>

Item 3.  Legal Proceedings

    The Company is involved in certain legal actions and claims arising in the
ordinary course of business. Management believes that such litigation and claims
will be resolved without material adverse effect on the Company's business,
financial condition, results of operations and cash flow. At November 4, 2000,
the Company had a reserve for litigation of approximately $200,000 in connection
with ongoing claims. The decrease in the reserve from fiscal 1999 to fiscal 2000
resulted primarily from the settlement of litigation for $300,000 which had been
reserved for approximately $900,000. See Notes 9 and 11 of the Company's
consolidated financial statements.

Item 4.  Submission of Matters to a Vote of Security Holders

    No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders through the solicitation of proxies
or otherwise.

                                       8
<PAGE>

                                    PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

    The Company's, $0.01 par value, common stock ("Common Stock") is traded on
the NASDAQ Stock Market ("NASDAQ") under the symbol MAGI. The table below sets
forth the high and low sales prices as reported by NASDAQ.


                          Fiscal 2000                    Fiscal 1999
                     --------------------            ------------------
                      High          Low               High         Low
                      ----          ---               ----         ---
1st quarter          $11.63        $ 6.50            $ 5.75       $2.25
2nd quarter          $ 9.75        $ 7.88            $ 6.13       $3.75
3rd quarter          $13.75        $ 8.00            $10.25       $5.13
4th quarter          $17.13        $10.50            $10.38       $7.25

    The closing sales price of the Company's Common Stock on January 24, 2001
was $13.25 per share.

    The Company has never paid cash or other dividends on its Common Stock. The
payment of dividends is within the discretion of the Company's Board of
Directors; however, in view of working capital needs and in order to finance
future growth, it is unlikely that the Company will pay any cash dividends on
its Common Stock in the foreseeable future. Pursuant to the Company's revolving
credit agreement and the indenture governing its senior notes, it may not pay
cash dividends without the prior written consent of the secured lenders and
unsecured noteholders so long as any principal of or interest on loans, letters
of credit or notes issued thereunder shall remain unpaid.

    On January 24, 2001, there were approximately 137 record holders of the
Company's Common Stock and, the Company estimates, approximately 1,000
beneficial holders of the Company's Common Stock.

                                       9
<PAGE>

Item 6.  Selected Financial Data

    The following selected consolidated financial data should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report on Form 10-K.

<TABLE>
<CAPTION>
                                                                                 Fiscal Year Ended/(1)/
                                                  ----------------------------------------------------------------------------------
                                                  November 4,         November 6,      October 31,      November 1,      November 2,
                                                     2000                1999              1998             1997            1996
                                                     ----                ----              ----             ----            ----
                                                                      (In thousands, except per share amounts)
<S>                                               <C>                 <C>              <C>               <C>               <C>
Income Statement Data:

Net sales                                          $506,289           $407,812         $344,604          $218,782          $220,823

Income (loss) from operations                        65,421             34,615           13,566            (5,773)/(3)/       4,781

Income (loss) before extraordinary item              26,881              8,531              448            (4,705)/(3)/       1,524

Net income (loss)                                    26,881              8,531             (713)/(2)/      (4,705)/(3)/       1,524

Basic Earnings Per Share:

Income (loss) before extraordinary item            $   3.39           $   1.15         $   0.06          $  (0.63)/(3)/    $   0.20
                                                   ========           ========         ========          ========          ========

Net income (loss)                                  $   3.39           $   1.15         $  (0.10)/(2)/    $  (0.63)/(3)/    $   0.20
                                                   ========           ========         ========          ========          ========

Weighted average number of common shares
outstanding                                           7,924              7,432            7,413             7,488             7,767
                                                   ========           ========         ========          ========          ========
Diluted Earnings Per Share:

Income (loss) before extraordinary item            $   3.05           $   1.11         $   0.06          $  (0.63)/(3)/    $   0.20
                                                   ========           ========         ========          ========          ========

Net income (loss)                                  $   3.05           $   1.11         $  (0.10)/(2)/    $  (0.63)/(3)/    $   0.20
                                                   ========           ========         ========          ========          ========

Weighted average number of common shares
outstanding assuming dilution                         8,802              7,708            7,432             7,488             7,781
                                                   ========           ========         ========          ========          ========
Balance Sheet Data:

Working capital                                      33,193           $ 93,607         $103,984          $ 39,312          $ 40,057

Total assets                                        431,312            228,098          201,589           118,762            61,109

Long-term debt, excluding current portion           194,000            125,000          125,000            12,000                 -

Stockholders' equity                                105,479             50,067           41,470            42,163            48,286
</TABLE>


(Footnotes on following page)

                                       10
<PAGE>

___________________
(1)  The Company operates on a 52 or 53-week fiscal year. The Company's fiscal
     year ends on October 31, if such date falls on a Saturday, or the first
     Saturday following October 31. Data for the fiscal year ended November 1,
     1997 reflects the acquisition of Miss Erika on September 30, 1997. Data for
     the fiscal year ended October 31, 1998 reflects the acquisition of Jeri-Jo
     on June 18, 1998. Data for all fiscal years shown include the results of
     operations for 52 weeks, except the fiscal year ended November 6, 1999,
     which was a 53-week fiscal year.

(2)  Reflects net loss after extraordinary item of approximately $1.2 million,
     or $0.16 per share. As a result of the repayment of long-term indebtedness
     in June 1998, the Company wrote off the remaining unamortized balance of
     deferred financing costs of approximately $2.0 million. This write-off was
     reflected as an extraordinary item, net of tax of $840,000, in the
     consolidated statement of operations for the fiscal year ended October 31,
     1998.

(3)  Loss from operations for fiscal year 1997 includes special charges of
     approximately $9.4 million. On an after-tax basis, such special charges
     aggregated $5.5 million, or $0.73 per share.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

General

     The Company's strategy is to build a portfolio of complementary apparel
brands, while at the same time increasing sales and improving profitability. In
connection with that strategy, the Company completed the Miss Erika (fiscal
1997) and Jeri-Jo (fiscal 1998) acquisitions. See "Acquisitions" below.

     The Company's continuing focus on improving profitability also led it to
undertake certain merchandising initiatives to improve gross profit and gross
profit margins with respect to the Norton product lines in fiscal 1999. The
Company reduced the number of products (i.e., reduced the number of SKUs)
offered in any particular collection of its Norton product lines in an effort to
minimize the number of unrelated items unsold by retailers at the end of a
selling period and to reduce any related sales allowances. In addition, by
taking advantage of product sourcing opportunities, the Company has been able to
offer higher quality and more diverse products to retailers at lower price
points in an effort to further enhance sales of its Norton products and to
further reduce sales allowances. As a result of these initiatives, the revenue
levels in its Norton product lines decreased in fiscal 1999 from those recorded
in fiscal 1998. However, the Company experienced an increase in revenue levels
in its Norton product lines in fiscal 2000.

     The Company continually monitors the success, in terms of sales,
profitability and customer acceptance, of its product lines. In the event that
one or more of its product lines does not meet its expectations, the Company
will discontinue their production. The Company also continually explores cost
savings opportunities in an attempt to reduce overhead and improve operating
income.

     In August 2000, the Company finalized the relocation to South Carolina of
the warehousing and distribution operations for its Norton product lines which
will enhance its operating efficiencies and lower costs. Norton began receiving
and shipping operations at this facility in May 2000. In August 1999, the
Company entered into an agreement with Railroad Enterprises, Inc. ("Railroad"),
previously Norton's distribution contractor, and Cutting Edge Services, Inc.
(formerly Toni-Linda Productions, Inc., "Cutting Edge"), previously Norton's
cutting contractor, which provided for the termination of a lawsuit brought
against the Company by these contractors and the termination of Norton's then
existing long-term agreements with these contractors. Under that agreement,
Norton purchased certain assets of Railroad and Cutting Edge, including fixed
assets, machinery and equipment at their facilities, and Railroad's and Cutting
Edge's rights under their existing agreements with Norton. Railroad agreed to
manage the assets the Company purchased and to perform Norton's receiving,
warehousing and distribution services from Railroad's New Jersey facilities
through August 11, 2000.

     As is the norm in the apparel industry, the Company engages in promotional
activity with its customers which affects its sales, gross profit and gross
profit margins. Accordingly, the Company's sales, gross profit and gross profit
margins vary from quarter to quarter and year to year. In addition, the Company
generally ships its products in accordance with normal apparel industry shipping
cycles. This may result in shipments to customers occurring before or after a
particular fiscal quarter end, which affects both fiscal quarter to quarter
comparisons and quarter to quarter results during a fiscal year.
Correspondingly, sales, gross profit and gross profit margins may be affected by
the timing of shipping cycles or the delivery of finished goods.

     The Company contracts for the manufacture of all of its products and all of
its products are produced overseas. Contract manufacturing allows the Company to
avoid significant capital expenditures for manufacturing facilities and the
fixed costs of maintaining a large production work force. Foreign contract
manufacturing allows the Company to take advantage of lower manufacturing costs,
which allows the Company to reduce prices to its customers. The Company believes
that foreign sourcing for moderately priced merchandise also allows the Company
to avail itself of a well-equipped and skilled labor force, which allows the
Company to produce a higher quality, better-valued product for its customers.
The Company mitigates the longer lead time necessary for foreign sourced fabrics
and manufacturing by early and timely attention to production planning.

                                       11
<PAGE>

Acquisitions

     On September 30, 1997, the Company completed the acquisition of
substantially all the assets and the assumption of substantially all the
liabilities of Miss Erika, a privately-held manufacturer of women's moderately
priced apparel. The purchase price of Miss Erika consisted of $24.0 million in
cash paid at the closing, the assumption of $2.5 million of indebtedness and
certain other contractual obligations. In addition, the Company agreed to pay an
additional contingent payment in cash and/or Common Stock in the event that
certain earnings targets were achieved by Miss Erika for the two fiscal years
ended November 6, 1999. On August 4, 1999, the Company retired, at a discount,
64.3% of the earn-out obligation payable to the sellers of Miss Erika for $10.0
million in cash. The remaining earn-out obligation of approximately $11.6
million, representing 35.7%, was paid in March 2000, approximately $9.6 million
of which was paid in cash and approximately $2.0 million of which was paid in
216,995 shares of Common Stock. No additional earn-out payments are payable in
connection with the Miss Erika acquisition. The additional consideration paid
for Miss Erika was accounted for as additional purchase price and reflected in
intangible assets.

     On June 18, 1998, the Company completed the acquisition of substantially
all of the assets and the assumption of substantially all the liabilities of
Jeri-Jo, a privately-held apparel importer of moderately priced juniors' and
misses' updated sportswear. The purchase price paid in the Jeri-Jo acquisition
was: (1) $55.0 million in cash at the closing of the acquisition; (2) the
assumption of funded indebtedness of $10.9 million; and (3) certain other
contractual obligations. In addition, the Company agreed to pay an additional
earn-out payment based upon certain earnings targets for Jeri-Jo for the two
years subsequent to the closing of the Jeri-Jo acquisition. This earn-out
payment totaled $190.0 million and has been paid in full by the payment of $95.0
million in cash, the issuance of the Company's $69.0 million three-year
subordinated promissory notes and the issuance of 2.0 million shares of Common
Stock (valued at $13.00 per share). The issuance of shares of Common Stock in
partial payment of the Jeri-Jo earn-out payment has resulted in dilution to the
Company's stockholders. The additional consideration paid for Jeri-Jo was
accounted for as additional purchase price and reflected in intangible assets.

Seasonality

     The Company experiences its highest sales in the second quarter and, to a
lesser extent, the fourth quarter of each fiscal year. This pattern results
primarily from the timing of shipments for each season, although the timing of
shipments can vary from quarter to quarter and season to season. Spring season
merchandise is generally shipped in the second fiscal quarter between February
and April, and fall season merchandise is generally shipped in the fourth fiscal
quarter between August and October.



     SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This Annual Report on Form 10-K, including this Management's Discussion
and Analysis of Financial Condition and Results of Operations, contains forward-
looking information about the Company's anticipated operating results. The
Company undertakes no obligation to correct or update any forward-looking
information, whether as a result of new information, future events or otherwise.
The Company's ability to achieve its projected results is dependent on many
factors, which are outside of management's control. Some of the most significant
factors would be a deterioration in retailing conditions for women's and
juniors' apparel, including as a result of any continued slowdown in the U.S.
economy, an increase in price pressures and other competitive factors, any of
which could result in an unanticipated decrease in gross profit margins,
unanticipated problems arising with the integration of Miss Erika's and Jeri-
Jo's businesses, the unanticipated loss of a major customer, contractor or
supplier, unanticipated problems arising out of Norton McNaughton of Squire's
relocation of its distribution function to South Carolina where the activities
are being performed "in-house", increases in interest rates, and weather
conditions which could impact retail traffic and the Company's ability to ship
on a timely basis. Accordingly, there can be no assurance that the Company will
achieve its anticipated operating results.

                                       12
<PAGE>

Results of Operations

      The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto included
elsewhere herein. The following table is derived from the Company's Consolidated
Statements of Operations and sets forth, for the periods indicated, selected
operating data as a percentage of net sales.

<TABLE>
<CAPTION>
                                                                                     Fiscal Year
                                                                       ----------------------------------------
                                                                          2000           1999         1998/(1)/
                                                                          ----           ----         --------
<S>                                                                     <C>            <C>            <C>
Net sales                                                                 100.0%         100.0%         100.0%
Cost of goods sold                                                         71.6           74.5           79.4
                                                                        -------        -------        -------
Gross profit                                                               28.4           25.5           20.6
Selling, general and administrative expenses                               13.3           15.7           16.0
Depreciation and amortization                                               2.2            1.3            0.7
                                                                        -------        -------        -------
Income from operations                                                     12.9            8.5            3.9
Interest expense and amortization of deferred
     financing costs                                                        4.0            4.6            3.5
Other income, net                                                          (0.1)          (0.1)          (0.1)
                                                                        -------        -------        -------
Income before provision for income taxes and
     extraordinary item                                                     9.0            4.0            0.5
Provision for income taxes                                                  3.7            1.9            0.4
                                                                        -------        -------        -------

Income before extraordinary item                                            5.3            2.1            0.1
Extraordinary item, net of tax                                                -              -           (0.3)
                                                                        -------        -------        -------

Net income (loss)                                                           5.3%           2.1%          (0.2)%
                                                                        =======        =======        =======
</TABLE>
____________________
(1)  Includes Jeri-Jo from June 18, 1998.

Fiscal Year Ended November 4, 2000 Compared to Fiscal Year Ended November 6,
1999

Net Sales

     Net sales were $506.3 million for fiscal 2000 compared to $407.8 million
for fiscal 1999. The increase in net sales of $98.5 million, or 24.1%, was
primarily attributable to an increase of $39.1 million in the Erika product
lines, an increase in net sales of $38.8 million in the Energie, Currants and
Jamie Scott product lines, and a net increase of $23.8 million in the Norton
McNaughton and Norton Studio product lines. These increases were offset in part
by a decrease in net sales in the DPS product line of $3.2 million.

Gross Profit

     The gross profit margin was 28.4% for fiscal 2000 compared to 25.5% for
fiscal 1999. The increase in gross profit margin was attributable to increases
in initial markup and decreases in sales allowances in the Norton McNaughton
product lines, as well as fewer closeouts in the Energie, Currants and Jamie
Scott product lines.

Selling, General and Administrative Expenses

     Selling, general and administrative expenses ("SG&A" expenses) were $67.5
million, or 13.3% of net sales, in fiscal 2000 as compared to $64.1 million, or
15.7% of net sales, in fiscal 1999. The increase in SG&A expenses of $3.4
million was due primarily to overhead associated with Norton's South Carolina
warehouse, including rent and salaries, which commenced operations during the
second quarter of fiscal 2000, increases in personnel costs resulting from
increases in headcount necessitated by an increase in the volume of products
shipped, as well as salary increases and contractual and other bonuses,
increases in advertising and merchandising expenses, and an increase in variable
distribution expense due to an increase in sales volume. These increases were
offset in part by a decrease in expenses caused by the absence of asset write-
offs experienced in fiscal 1999 and a decrease in professional fees. The
decrease in SG&A as a percentage of net sales was primarily attributable to the
spreading of the fixed component of SG&A expenses over higher net sales in
fiscal 2000.

Depreciation and Amortization

     Depreciation and amortization was $10.9 million for fiscal 2000 compared to
$5.3 million for fiscal 1999. The increase of $5.6 million was primarily
attributable to amortization of goodwill resulting from the Jeri-Jo earn-out
payment, which was recorded in June 2000, and the Miss Erika earn-out payment,
which resulted in an increase of about $4.0 million in the aggregate,
amortization of the intangibles resulting from the asset purchase agreement with
Norton's former shipping and cutting contractors entered into in August 1999 and
the write-off of fixed assets acquired in connection with such agreement.

                                       13
<PAGE>

Operating Income

     Operating income for fiscal 2000 was $65.4 million as compared to $34.6
million for fiscal 1999. The increase in fiscal 2000 operating income of
approximately $30.8 million resulted primarily from the increase in net sales,
the improvement in gross profit margins and the decrease in SG&A expenses as a
percentage of net sales discussed above.


Interest Expense

      Interest expense increased to $20.2 million in fiscal 2000 from $18.7
million in fiscal 1999. The increase of $1.5 million was due primarily to higher
borrowings resulting from the payment of the cash portion of the Jeri-Jo earn-
out, higher amortization of deferred financing costs resulting from amendments
to the Company's prior credit agreement and the Indenture (the "Indenture")
governing the Company's Senior Notes due 2005 (the "Senior Notes") and accrued
interest on the cash portion of the Jeri-Jo earn-out that was deferred, as well
as interest on the subordinated promissory notes issued in partial payment of
the Jeri-Jo earn-out.

Income Taxes

      The provision for income taxes in fiscal 2000 included an additional
provision of approximately $500,000 for audit exposures.

Cash Earnings Per Share

      Cash earnings, or earnings before goodwill amortization, increased in
fiscal 2000 to $3.42 per diluted share, from $1.21 per diluted share in fiscal
1999.

Fiscal 1999 Compared to Fiscal 1998

Net Sales

      Net sales increased by $63.2 million, or 18.3%, to $407.8 million for
fiscal 1999 compared to $344.6 million for fiscal 1998. The increase in net
sales was attributable to incremental net sales from the Energie, Currants
and Jamie Scott product lines of $74.1 million following the acquisition of
Jeri-Jo on June 18, 1998 and an increase in net sales in the Erika product
lines of $17.1 million. These increases were offset in part by a planned
decrease in net sales of $15.8 million in the Norton McNaughton product
lines, a decrease in net sales of $7.6 million in the Norton Studio product
line and a decrease in net sales of $4.7 million in the D.P.S. product line.

Gross Profit

      Gross profit margin was 25.5% for fiscal 1999 compared to 20.6% for fiscal
1998. The increase in gross profit margin was primarily due to the addition of
higher gross profit margins from the Energie, Currants and Jamie Scott product
lines following the acquisition of Jeri-Jo on June 18, 1998, as well as gross
margin improvements in those product lines.

Selling, General and Administrative Expenses

      SG&A expenses were $64.1 million, or 15.7% of net sales in fiscal 1999,
compared to $55.0 million, or 16.0% of net sales, in fiscal 1998. The increase
in these expenses of $9.1 million resulted primarily from the incremental
expenses of $7.4 million from the Energie, Currants and Jamie Scott
product lines following the acquisition of Jeri-Jo on June 18, 1998. In
addition, $2.8 million of this increase was due to an increase in personnel
expenses resulting primarily from additions to headcount in the production and
shipping areas as a result of increased sales volume in the Erika product
lines, the non-recurrence of certain significant bad debt recoveries experienced
in fiscal 1998, an increase in outside shipping services, an increase in
contractual bonus expense, the write-off of certain assets and an increase in
professional fees resulting from litigation. These increases were offset in part
by a decrease in expenses of approximately $1.0 million with respect to Norton's
shipping and cutting contractors and a decrease in shipping rates under an
agreement with a shipping contractor. The decrease in SG&A expenses as a
percentage of net sales resulted primarily from the spreading of the fixed
component of these expenses over higher net sales in fiscal 1999.

Depreciation and Amortization

      Depreciation and amortization was $5.3 million in fiscal 1999 compared to
$2.4 million in fiscal 1998. The increase was primarily due to the amortization
of goodwill resulting from the Jeri-Jo acquisition, Miss Erika's early
discounted earn-out payment, which increased goodwill, and the amortization of
intangible assets acquired in connection with the asset purchase agreement with
Norton's former shipping and cutting contractors.

Operating Income

      Operating income for fiscal 1999 was $34.6 million as compared to $13.6
million for fiscal 1998. The increase in fiscal 1999 operating income of
approximately $21.0 million resulted primarily from the increase in net sales
from the acquisition of Jeri-Jo on June 18, 1998 and the improvement in gross
profit margins discussed above.

Interest Expense

      Interest expense increased to $18.7 million in fiscal 1999 compared to
$11.8 million in fiscal 1998. The increase of $6.9 million was primarily
attributable to the incremental interest cost of the Senior Notes that replaced
revolving credit loans which had lower interest rates, as well as the inclusion
of a full year of interest expense and amortization of deferred financing costs
from the Jeri-Jo acquisition.

                                       14
<PAGE>

Income Taxes

      The provision for income taxes in fiscal 1999 included an additional
provision of approximately $400,000 for audit exposures. The provision for
income taxes in fiscal 1998 included an additional provision of $600,000 in
connection with the resolution of certain Federal income tax audits covering
fiscal years 1991 through 1996 and the corresponding impact on state and local
taxes.

Cash Earnings Per Share

      Cash earnings, or earnings before goodwill amortization, increased in
fiscal 1999 to $1.21 per diluted share, from a loss per diluted share of $0.04
in fiscal 1998.

Liquidity and Capital Resources

      The Company is highly leveraged. On November 4, 2000, the Company had
$125.0 million of Senior Notes outstanding, $65.8 million outstanding under the
then existing credit agreement and letters of credit outstanding in the
aggregate face amount of approximately $100.8 million. As of November 4, 2000,
the Company had total available credit of approximately $16.1 million under its
credit agreement (pursuant to the borrowing base formula set forth in that
agreement), including an overadvance facility, cash and cash equivalents.

      The Company's liquidity requirements arise from (i) working capital needs,
primarily inventory and accounts receivable, and the payment of interest on
indebtedness and (ii) planned capital expenditures. The Company's borrowing
requirements for working capital purposes are seasonal, with peak working
capital needs generally arising at the end of the first fiscal quarter and
extending through the second and third fiscal quarters. As the Company's
business expands, the need for additional working capital will also increase.
The Company's primary sources of working capital are cash flow from operations
and advances under its senior secured credit agreement.

      The Company had working capital of approximately $33.2 million at November
4, 2000 as compared to working capital of approximately $93.6 million at
November 6, 1999. The decrease in working capital resulted primarily from the
payment and accrual of the cash portion of the Jeri-Jo earn-out payment which
totaled $95.0 million (this amount has subsequently been paid in full, see
"Acquisitions" above) and capital expenditures of $6.4 million, as offset by net
income for fiscal 2000.

      The Company's capital expenditures were approximately $6.4 million and
$4.0 million in fiscal 2000 and fiscal 1999, respectively. The Company
anticipates that it will incur capital expenditures of approximately $5.0
million to $6.0 million in fiscal 2001. The capital expenditures during fiscal
2000 resulted primarily in connection with Norton's new warehouse and
distribution facility in South Carolina. Anticipated capital expenditures for
fiscal 2001 relate primarily to new management information systems, which will
address production, sales and order fulfillment functions. The new systems will
first be implemented at Miss Erika during mid-fiscal 2001, with anticipated
implementation at Norton and Jeri-Jo during late fiscal 2001 and fiscal 2002,
respectively. In addition, the Company is considering the possibility of a new
warehouse and distribution facility for Miss Erika, including related
expenditures for an automated materials handling system, machinery and
equipment, and furniture and fixtures. If the Company decides to pursue the new
facility for Miss Erika, it is anticipated that it would incur incremental
capital expenditures of approximately $2.0 million to $3.0 million. The Company
expects to finance its capital expenditures from internally generated funds and
advances under its credit agreement.

      In June 1998, the Company issued the $125.0 million Senior Notes due 2005.
The proceeds of the Senior Notes were used to finance the Jeri-Jo acquisition
and to refinance a portion of the Company's then existing indebtedness and
indebtedness of Jeri-Jo. The Company's obligations under the Senior Notes are
unsecured and are guaranteed by all of the Company's subsidiaries. The Indenture
governing the Senior Notes contains a number of restrictive covenants, including
limitations on the incurrence of liens and indebtedness (including a limit on
the amount of indebtedness for money borrowed), limit transactions with
affiliates, sales of assets, investments and other restricted payments.

      In December 2000, the Company made the final payment under the Jeri-Jo
earn-out obligation by issuing $59.0 million of its subordinated notes. The
Company had previously issued $10.0 million of its subordinated notes in August
2000 as another partial payment of that obligation. The notes are subordinated
to the Company's senior secured credit facility and Senior Notes, mature on
November 30, 2003, bear interest at a floating rate for non-overadvance
revolving credit borrowings under the credit agreement (currently 9.3% per
annum), and require quarterly principal repayments following the repayment of
overadvances under the credit agreement, subject to limits imposed by the credit
agreement.

      On November 29, 2000, the Company entered into a $210.0 million senior
secured credit facility with a bank group which replaced the then existing
$175.0 million senior secured credit facility. This new credit facility provides
for an increase to $225.0 million during its term and includes a $125.0 million
sublimit for revolving credit borrowings, a sublimit for the issuance of standby
and documentary letters of credit ranging from $120.0 million to $135.0 million
and, initially, a $35.0 million sublimit for overadvances (that is, revolving
credit borrowings in excess of the borrowing base formula set forth in the new
credit facility). On January 17, 2001, the facility was increased to $220.0
million. Under the new credit facility, the aggregate credit available to the

                                       15
<PAGE>

Company equals the lesser of (a) $220.0 million (which may increase to $225.0
million during the term) and (b) the sum of 85% of eligible accounts receivable
and 60% of eligible inventory, plus an overadvance amount ranging from zero to
$35.0 million depending on the fiscal month and the time in that fiscal month.
In addition, the new credit facility (1) has a three year maturity, (2) bears
interest, at the Company's option, at fluctuating interest rates based upon
various margins in excess of LIBOR or the prime rate of Bank of America N.A.,
depending on the level of the leverage ratio (the interest rates payable under
the new credit facility are higher than those payable under the previous credit
facility), (3) is secured by substantially all of its assets and the assets of
the Company's subsidiaries, and (4) contains a number of financial and other
restrictive covenants, including covenants which limit incurrence of liens and
indebtedness, limit transactions with affiliates, acquisitions, sales of assets,
investments and other restricted payments, and requires the Company to maintain
certain fixed charge coverage, cash flow coverage and leverage ratios and meet
specified minimum levels of net worth.

      Based upon current and anticipated levels of operations, the Company
believes that the new credit facility, coupled with cash flow from operations,
will be adequate to meet liquidity requirements for the foreseeable future. The
Company's ability to make scheduled payments of principal of, to pay the
interest on, to increase availability of or to refinance, as needed,
indebtedness, and to fund working capital requirements and planned capital
expenditures, will depend, in part, on future performance, which, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond the Company's control.

      The Company sells its accounts receivable to a factor without recourse, up
to a maximum established by the factor for each customer. Receivables sold in
excess of these limitations are subject to recourse in the event of nonpayment
by the customer. The factor receives a commission for all purchased accounts
receivable based on the net amount of gross sales less sales discounts.

      The Company's Board of Directors has authorized a stock repurchase
program, under which the Company may repurchase up to $11.5 million of its
common stock. The Company expects that the shares may be purchased from time to
time in the open market and in block transactions. To date, the Company has
purchased a total of 868,800 shares at an aggregate cost of approximately $7.4
million. The Company's ability to repurchase shares of common stock is
restricted by the Indenture and the Company's senior secured credit agreement.

      The moderate rate of inflation over the past few years has not had a
significant impact on the Company's sales or profitability. Inflation is not
expected to have a significant impact on its business.

                                       16
<PAGE>

Item 7a.  Quantitative and Qualitative Disclosures About Market Risk

      The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flows and weighted-average
interest rates by expected maturity dates.

<TABLE>
<CAPTION>
                                                                                 Fiscal Year
                                            ----------------------------------------------------------------------------------------
                                                       2001        2002        2003        2004         2005          Total
                                                       ----        ----        ----        ----         ----          -----
                                                                             (Dollars In Thousands)
<S>                                                    <C>         <C>         <C>         <C>          <C>           <C>
Short-term debt:
   Revolving credit advances                           $65,820           -           -           -             -       $ 65,820
   LIBOR plus 300 basis points on LIBOR
   borrowings and prime plus 175 basis points
   on prime-based borrowings/(1)/                          9.9%          -           -           -             -            9.9%

Long-term debt:
    Senior notes                                             -           -           -           -      $125,000       $125,000
    Fixed interest rate                                  12.50%      12.50%      12.50%      12.50%        12.50%         12.50%

   Subordinated promissory notes/(2)/                        -           -     $69,000           -             -       $ 69,000
   Floating rate on non-overadvance revolving
   credit advances/(1)/                                   9.30%       9.30%       9.30%          -             -           9.30%
</TABLE>
___________________
      (1)Prior to November 29, 2000, the rate was prime less 125 basis points.

      (2)$59.0 million of these subordinated promissory notes were issued on
December 1, 2000.

      For more information concerning the Company's debt obligations, see Notes
10 and 14 to the Company's consolidated financial statements.

                                       17
<PAGE>

                                    PART III

Item 8.  Financial Statements & Supplementary Data

      Information called for by this Item 8 is included following the "Index to
Consolidated Financial Statements, Financial Statement Schedule and
Supplementary Data" appearing at the end of this Annual Report on Form 10-K
beginning on page F-1.

Item 9.  Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

      Not Applicable.

Item 10. Directors and Executive Officers of the Registrant

      Information which is called for by this Item 10 is incorporated by
reference to the information set forth under the heading "Election of Directors"
in the Company's Proxy Statement relating to its 2001 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A (the "Company's 2001 Proxy
Statement").

Item 11. Executive Compensation

      Information called for by this Item 11 is incorporated by reference to the
information set forth under the headings "Executive Compensation", "Compensation
of Directors" and "Employment Agreements" in the Company's 2001 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

      Information called for by this Item 12 is incorporated by reference to the
information set forth under the heading "Information Concerning Certain
Stockholders" in the Company's 2001 Proxy Statement.

Item 13. Certain Relationships and Related Transactions

      Information called for by this Item 13 is incorporated by reference to the
information set forth under the headings "Election of Directors" and "Certain
Relationships and Related Transactions" in the Company's 2001 Proxy Statement.

                                       18
<PAGE>

                                    PART IV

Item 14.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)    The following documents are filed as part of this report:

1. and 2. See "Index to Consolidated Financial Statements, Financial Statement
Schedule and Supplementary Data" on page F-1.

3.     The Exhibits required to be filed as part of this Annual Report on Form
       10-K are listed on the Exhibit Index on page E-1. Exhibits 10.1, 10.1(a),
       10.3, 10.4, 10.5, 10.6, 10.7, 10.8, 10.9, 10.9(a) and 10.9(b), 10.10,
       10.10(a), 10.10(b), 10.10(c) and 10.10(d), 10.11, 10.12 and 10.12(a),
       10.38, 10.39, 10.40, 10.41 and 10.42 are the management contracts and
       compensatory plans or arrangements required to be filed as part of this
       Annual Report on Form 10-K.

(b)    The Registrant filed three Current Reports on Form 8-K during the
       thirteen-weeks ended November 4, 2000. The Registrant filed two Current
       Reports on Form 8-K subsequent to November 4, 2000.

                                       19
<PAGE>

                         McNaughton Apparel Group Inc.
                                 Exhibit Index

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

     2.1x       Agreement of Purchase and Sale made as of the 29th day of
                August, 1997 by and among Miss Erika, Inc., a Delaware
                corporation; Terbem Limited, a British Virgin Islands
                corporation, Bobst Investment Corp., a British Virgin Islands
                corporation, TCRI Offshore Partners C.V., a Netherlands Antilles
                corporation and TCR International Partners L.P., a Delaware
                limited partnership, Triumph Capital, L.P. II, a Delaware
                limited partnership, Stuart Bregman, Howard Zwilling, Sidney
                Goldstein, Christian Baillet, ME Acquisition Corp., a Delaware
                corporation, and Norton McNaughton, Inc., a Delaware
                corporation. Schedules to this Agreement have been omitted and
                the Company shall furnish to the Securities and Exchange
                Commission a copy of any omitted schedule as supplemental
                information upon request.

     2.1(a)++   Amendment dated as of September 25, 1997 to Agreement of
                Purchase and Sale dated as of the 29th day of August, 1997 by
                and among Miss Erika, Inc.; Terbem Limited, Bobst Investment
                Corp., TCRI Offshore Partners C.V., and TCR International
                Partners L.P., Triumph Capital, L.P. II, Stuart Bregman, Howard
                Zwilling, Sidney Goldstein, Christian Baillet, ME Acquisition
                Corp., and Norton McNaughton, Inc.

     2.1(b)     Amendment to Agreement of Purchase and Sale dated as of June 30,
                1999 to the Agreement of Purchase and Sale dated as of August
                29, 1997 by and among Miss Erika, Inc., now known as Old ME
                Corp., Terbem Limited, Bobst Investment Corp., TCRI Offshore
                Partners C.V., TCR International Partners L.P., Triumph Capital
                II, L.P., Stuart Bregman, Howard Zwilling, Sidney Goldstein,
                Christian Baillet, ME Acquisition Corp., now known as Miss
                Erika, Inc., and Norton McNaughton, Inc., now known as
                McNaughton Apparel Group Inc. (incorporated herein by reference
                to the Exhibits to the Registrant's Current Report on Form 8-K
                filed August 12, 1999). Schedules to this Agreement have been
                omitted and the Company shall furnish to the Securities and
                Exchange Commission a copy of any omitted schedule as
                supplemental information upon request.

     2.2        Agreement of Purchase and Sale dated as of April 15, 1998 by and
                among Jeri-Jo Knitwear Inc., Jamie Scott, Inc., the Stockholders
                of Jamie Scott, Inc., JJ Acquisition Corp. and Norton
                McNaughton, Inc. (incorporated herein by reference to Exhibit
                2.1 to Registrant's Current Report on Form 8-K filed April 22,
                1998). Schedules to this Agreement have been omitted and the
                Company shall furnish to the Securities and Exchange Commission
                a copy of any omitted schedule as supplemental information upon
                request.

     2.2(a) ++  Amendment No. 1 dated as of May 27, 1998 to Agreement of
                Purchase and Sale dated as of April 15, 1998 by and among Jeri-
                Jo Knitwear Inc., Jamie Scott, Inc., the Stockholders of Jamie
                Scott, Inc., JJ Acquisition Corp. and Norton McNaughton, Inc.

     2.2(b) ++  Amendment No. 2 dated as of June 18, 1998 to Agreement of
                Purchase and Sale dated as of April 15, 1998 by and among Jeri-
                Jo Knitwear Inc., Jamie Scott, Inc., the Stockholders of Jamie
                Scott, Inc., JJ Acquisition Corp. and Norton McNaughton, Inc.

                                      E-1
<PAGE>

                         McNaughton Apparel Group Inc.
                           Exhibit Index (continued)


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

     2.2(c)      Amendment dated as of June 17, 1999 to Agreement of Purchase
                 and Sale dated as of April 15, 1998 by and among JJ Acquisition
                 Corp., now known as Jeri-Jo Knitwear, Inc., Norton McNaughton,
                 Inc., now known as McNaughton Apparel Group Inc., Jeri-Jo
                 Knitwear, Inc. now known as JJK II, Inc., Jamie Scott, Inc.,
                 now known as JJK III, Inc. and the stockholders of JJK III,
                 Inc. (incorporated herein by reference to the Exhibits to the
                 Registrant's Current Report on Form 8-K filed August 12, 1999).

     2.2(d)      Amendment, dates as of August 3, 2000, to Purchase and Sale
                 Agreement dated as of April 15, 1998, as amended, by and among
                 JJ Acquisition Corp. (now Jeri-Jo Knitwear, Inc., Norton
                 McNaughton, Inc. (now McNaughton Apparel Group Inc.), Jeri-Jo
                 Knitwear, Inc., Jamie Scott, Inc. and the Stockholders of Jamie
                 Scott, Inc. (incorporated by reference to Exhibit 10.1 of the
                 Registrant's Current Report on Form 8-K filed August 23, 2000).

     2.2(e)      Amendment dated August 29, 2000 to the Agreement of Purchase
                 and Sale dated as of April 15, 1998, as amended, by and among
                 JJ Acquisition Corp. (now Jeri-Jo Knitwear, Inc.), Norton
                 McNaughton, Inc. (now McNaughton Apparel Group Inc.), Jeri-Jo
                 Knitwear, Inc., Jamie Scott, Inc. and the Stockholders of Jamie
                 Scott, Inc. (incorporated herein by reference to Exhibit 10.2
                 of the Registrant's Form 10-Q for the quarter ended August 5,
                 2000).

     2.2(f)      Amendment dated September 28, 2000, of Purchase and Sale
                 Agreement dated as of April 15, 1998, as amended, by and among
                 JJ Acquisition Corp. (now Jeri-Jo Knitwear, Inc.), Norton
                 McNaughton, Inc. (now McNaughton Apparel Group Inc.), Jeri-Jo
                 Knitwear, Inc., Jamie Scott, Inc. and the stockholders of Jamie
                 Scott, Inc. (incorporated herein by reference to Exhibit 10.1
                 of the Registrant's Current Report on Form 8-K filed October 6,
                 2000).

     2.2(g)      Subordinated Promissory Note of McNaughton Apparel Group Inc.
                 made as of December 1, 2000 in favor of Leonard Schneider for
                 the original principal amount of $23,600.000 (incorporated
                 herein by reference to Exhibit 10.1 of the Registrant's Current
                 Report on Form 8-K filed December 13, 2000).

     2.2(h)      Subordinated Promissory Note of McNaughton Apparel Group Inc.
                 made as of December 1, 2000 in favor of Susan Schneider for the
                 original principal amount of $14,160,000 (incorporated herein
                 by reference to Exhibit 10.2 of the Registrant's Current Report
                 on Form 8-K filed December 13, 2000).

     2.2(i)      Subordinated Promissory Note of McNaughton Apparel Group Inc.
                 made as of December 1, 2000 in favor of Leslie Schneider for
                 the original principal amount of $14,160.000 (incorporated
                 herein by reference to Exhibit 10.3 of the Registrant's Current
                 Report on Form 8-K filed December 13, 2000).

     2.2(j)      Subordinated Promissory Note of McNaughton Apparel Group Inc.
                 made as of December 1, 2000 in favor of Scott Schneider for the

                                      E-2
<PAGE>

                         McNaughton Apparel Group Inc.
                           Exhibit Index (continued)


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

                 original principal amount of $7,080,000 (incorporated herein by
                 reference to Exhibit 10.4 of the Registrant's Current Report on
                 Form 8-K filed December 13, 2000).

     3.1         Certificate of Incorporation of Norton McNaughton, Inc., as
                 amended (incorporated herein by reference to Exhibit 3 to the
                 Registrant's Quarterly Report on Form 10-Q for the quarter
                 ended May 5, 1995).

     3.1(a)      Certificate of Ownership and Merger of McNaughton Apparel Group
                 Inc. into Norton McNaughton, Inc. (incorporated herein by
                 reference to Exhibit 3.3 of the Registrant's Form 10-Q for the
                 quarter ended January 30, 1999).

     3.1(b)      Certificate of Amendment of Certificate of Incorporation of
                 McNaughton Apparel Group Inc. (incorporated herein by reference
                 to Exhibit 3.1 of the Registrant's Form 10-Q for the quarter
                 ended January 30, 1999).

     3.1(c)      Certificate of Second Amendment of Certificate of Incorporation
                 of McNaughton Apparel Group Inc. (incorporated herein by
                 reference to Exhibit 3.1 of the Registrant's Form 10-Q for the
                 quarter ended February 5, 2000).

     3.2++++     By-Laws of the Company amended as of September 28, 2000.

     4.1*        Specimen form of Common Stock Certificate.

     4.2         Rights Agreement between Norton McNaughton, Inc. and American
                 Stock Transfer and Trust Company dated as of January 19, 1996
                 (incorporated herein by reference to Exhibit 4.1 to
                 Registrant's Current Report in Form 8-K filed January 26,
                 1996).

     4.2(a)      First Amendment dated as of August 2, 2000 to Shareholder
                 Rights Plan dated January 19, 1996 between McNaughton Apparel
                 Group Inc. (formerly known as Norton McNaughton, Inc.) and
                 American Stock Transfer & Trust Company (incorporated herein by
                 reference to Exhibit 10.4 of the Registrant's Form 10-Q for the
                 quarter ended August 5, 2000).

     4.3         Indenture dated as of June 18, 1998 between Norton McNaughton,
                 Inc., the Subsidiary Guarantors named therein and United States
                 Trust Company of New York, as Trustee (incorporated herein by
                 reference to Exhibit 4.1 to Registrant's Current Report on Form
                 8-K filed July 2, 1998).

     4.3(a)      First Supplemental Indenture dated as of August 3, 1999 by and
                 between McNaughton Apparel Group Inc., a Delaware corporation
                 formerly known as Norton McNaughton, Inc., Norton McNaughton of
                 Squire, Inc., a New York corporation, Miss Erika, Inc., a
                 Delaware corporation, Jeri-Jo Knitwear, Inc., a Delaware
                 corporation formerly known as JJ Acquisition Corp., Norty's,
                 Inc., a Delaware corporation, and United States Trust Company
                 of New York, a New York banking corporation, as Trustee
                 (incorporated herein by reference to the

                                      E-3
<PAGE>

                         McNaughton Apparel Group Inc.
                           Exhibit Index (continued)


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

                 Exhibits to the Registrant's Current Report on Form 8-K filed
                 August 12, 1999).

     4.3(b)      Second Supplemental Indenture dated as of August 25, 1999 by
                 and between McNaughton Apparel Group Inc., a Delaware
                 corporation, formerly known as Norton McNaughton, Inc., Norton
                 McNaughton of Squire, Inc., a New York corporation, Miss Erika,
                 Inc., a Delaware corporation, Jeri-Jo Knitwear, Inc., a
                 Delaware corporation, formerly known as JJ Acquisition Corp.,
                 Norty's, Inc., a Delaware corporation, and United States Trust
                 Company of New York, a New York banking corporation, as Trustee
                 (incorporated herein by reference to Exhibit 10.1 of the
                 Registrant's Form 10-Q for the quarter ended July 31, 1999).

     4.4         Exchange and Registration Rights Agreement dated as of June 18,
                 1998 among Norton McNaughton, Inc., NatWest Capital Markets
                 Limited and ING Baring (U.S.) Securities, Inc. (incorporated
                 herein by reference to Exhibit 4.2 to the Registrant's Current
                 Report on Form 8-K filed July 2, 1998).

     10.1*****   1994 Stock Option Plan.

     10.1(a)     Amended Norton McNaughton, Inc. 1994 Stock Option Plan
                 (incorporated herein by reference to Exhibit 10.2 to the
                 Registrant's Quarterly Report on Form 10-Q for the quarter
                 ended May 4,1996).

     10.2**      1994 Employee Stock Purchase Plan.

     10.3/xxxx/  Norton McNaughton, Inc. Executive Stock Option Plan.

     10.4/xxx/   ME Acquisition Corp. Bonus Plan for Senior Executives.

     10.5        Norton McNaughton, Inc. 1998 Long Term Incentive Plan
                 (incorporated herein by reference to the Registrant's
                 Registration Statement on Form S-8 No. 333-60881).

     10.6        Norton McNaughton, Inc. Stock Option Plan for Non-Employee
                 Directors (incorporated herein by reference to the Registrant's
                 Registration Statement on Form S-8 No. 333-60881).

     10.7        Norton McNaughton, Inc. Option Bonus Plan for Senior Executives
                 of JJ Acquisition Corp. (incorporated herein by reference to
                 the Registrant's Registration Statement on Form S-8 No. 333-
                 60881).

     10.8        Amended and Restated Employment Agreement dated June 7, 1999,
                 between Norton McNaughton of Squire, Inc. and Sanford Greenberg
                 (incorporated herein by reference to the Exhibits to the
                 Registrant's Quarterly Report on Form 10-Q for the quarter
                 ended May 1, 1999).

     10.9****    Amended and Restated Employment Agreement dated as of November
                 4, 1995 between Norton Sperling and Norton McNaughton of
                 Squire, Inc.

                                      E-4
<PAGE>

                         McNaughton Apparel Group Inc.
                           Exhibit Index (continued)


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

     10.9(a)      Separation Agreement between Norton McNaughton of Squire, Inc.
                  and Norton Sperling dated May 3, 1997 (incorporated herein by
                  reference to Exhibit 10.1 to the Registrant's Current Report
                  on Form 8-K filed May 9, 1997).

     10.9(b)/xx/  Amendment dated November 25, 1997 to Separation Agreement
                  dated May 3, 1997 between Norton McNaughton of Squire, Inc.
                  and Norton Sperling.

     10.10*       Employment Agreement dated as of November 4, 1993 between
                  Amanda J. Bokman and Norton McNaughton of Squire, Inc.

     10.10(a)     Amendment dated April 1, 1995 to Employment Agreement as of
                  November 4, 1993, between Amanda J. Bokman and Norton
                  McNaughton of Squire, Inc. (incorporated herein by reference
                  to Exhibit 10 to the Registrant's Quarterly Report on Form 10-
                  Q for the quarter ended May 5, 1995).

     10.10(b)/xx/ Amendment dated October 22, 1997 to the Employment Agreement
                  dated November 4, 1993 between Norton McNaughton of Squire,
                  Inc. and Amanda J. Bokman.

     10.10(c)+++  Amendment No. 2 dated as of September 10, 1999 to the
                  Employment Agreement dated November 4, 1993 between Norton
                  McNaughton of Squire, Inc. and Amanda J. Bokman.

     10.10(d)++++ Letter Agreement dated November 20, 2000 amending the
                  Employment Agreement dated November 4, 1993 between Norton
                  McNaughton of Squire, Inc. and Amanda J. Bokman.

     10.11        Amended and Restated Employment Agreement dated June 7, 1999,
                  between Norton McNaughton of Squire, Inc. and Peter Boneparth
                  (incorporated herein by reference to the Exhibits to the
                  Registrant's Quarterly Report on Form 10-Q for the quarter
                  ended May 1, 1999).

     10.12++      Employment Agreement dated as of November 11, 1998 between
                  Lynne F. Fish and Norton McNaughton of Squire, Inc.

     10.12(a)++++ Letter Agreement dated November 20, 2000 amending the
                  Employment Agreement dated November 11, 1998 between Lynne F.
                  Fish and Norton McNaughton of Squire, Inc.

     10.13        Second Amended and Restated Financing Agreement dated as of
                  November 29, 2000 among McNaughton Apparel Group Inc., its
                  subsidiaries, Banc of America Commercial Corporation, The CIT
                  Group/Commercial Services, Inc., Fleet Capital Corporation and
                  the other financial institutions from time to time party
                  thereto (incorporated by reference to Exhibit 10 to the
                  Registrant's Current Report on Form 8-K filed December 13,
                  2000).

     10.13(a)++++ Joinder and Assignment Agreement dated as of January 17, 2001
                  to the Second Amended and Restated Financing Agreement dated
                  as of November 29, 2000 by and among McNaughton Apparel Group
                  Inc.,

                                      E-5
<PAGE>

                         McNaughton Apparel Group Inc.
                           Exhibit Index (continued)


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

                  its subsidiaries, GMAC Commercial Credit LLC, as successor to
                  Banc of America Commercial Corporation, The CIT
                  Group/Commercial Services, Inc., Fleet Capital Corporation and
                  the other financial institutions from time to time party
                  thereto.

     10.14/x/     Factoring Agreement entered into between Miss Erika, Inc. and
                  NationsBanc Commercial Corporation dated September 25, 1997.

     10.14(a)++++ Amendment dated November 29, 2000 to the Factoring Agreement
                  entered into between Miss Erika, Inc. and NationsBanc
                  Commercial Corporation dated September 25, 1997.

     10.15/x/     Amended and Restated Factoring Agreement entered into between
                  Norton McNaughton of Squire, Inc. and NationsBanc Commercial
                  Corporation dated September 25, 1997.

     10.15(a)++++ Amendment dated November 29, 2000 to the Amended and Restated
                  Factoring Agreement entered into between Norton McNaughton of
                  Squire, Inc. and NationsBanc Commercial Corporation dated
                  September 25, 1997.

     10.16++++    Non-Notification Factoring Agreement entered into between
                  Jeri-Jo Knitwear, Inc. and NationsBanc Commercial Corporation
                  dated June 18, 1998.

     10.16(a)++++ Amendment dated November 29, 2000 to the Non-Notification
                  Factoring Agreement entered into between Jeri-Jo Knitwear,
                  Inc. and NationsBanc Commercial Corporation dated June 18,
                  1998.

     10.17*       Pledge Agreement dated as of January 14, 1994 made by Sanford
                  Greenberg in favor of Norton McNaughton of Squire, Inc.

     10.17(a)+++  First Amendment to Pledge Agreement dated July 15, 1994,
                  amending and supplementing the Pledge Agreement dated as of
                  January 14, 1994 made by Sanford Greenberg in favor of Norton
                  McNaughton of Squire, Inc.

     10.17(b)     Second Amendment to Pledge Agreement dated March 27, 1995,
                  amending and supplementing the Pledge Agreement dated as of
                  January 14, 1994 made by Sanford Greenberg in favor of Norton
                  McNaughton of Squire, Inc. (incorporated herein by reference
                  to Exhibit 10.1 to the Registrant's Quarterly Report on Form
                  10-Q for the quarter ended May 5, 1995).

     10.18*       Pledge Agreement dated as of January 14, 1994 made by Norton
                  Sperling in favor of Norton McNaughton of Squire, Inc.

     10.18(a)+++  First Amendment to Pledge Agreement dated July 15, 1994,
                  amending and supplementing the Pledge Agreement dated as of
                  January 14, 1994 made by Norton Sperling in favor of Norton
                  McNaughton of Squire, Inc.

                                      E-6
<PAGE>

                         McNaughton Apparel Group Inc.
                           Exhibit Index (continued)


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

     10.18(b)     Second Amendment to Pledge Agreement dated March 27, 1995,
                  amending and supplementing the Pledge Agreement dated as of
                  January 14, 1994 made by Norton Sperling in favor of Norton
                  McNaughton of Squire, Inc. (incorporated herein by reference
                  to Exhibit 10.2 to the Registrant's Quarterly Report on Form
                  10-Q for the quarter ended May 5, 1995).

     10.19*       Amended and Restated Non-Negotiable Limited Recourse
                  Promissory Note of Sanford Greenberg dated as of November 5,
                  1993 payable to Norton McNaughton of Squire, Inc. in the
                  principal amount of $920,000.

     10.19(a)+++  Second Amended and Restated Non-Negotiable Limited Recourse
                  Promissory Note dated July 15, 1994, amending the Amended and
                  Restated Non-Negotiable Limited Recourse Promissory Note of
                  Sanford Greenberg dated as of November 5, 1993 payable to
                  Norton McNaughton of Squire, Inc. in the principal amount of
                  $920,000.

     10.19(b)     Third Amended and Restated Non-Negotiable Limited Recourse
                  Promissory Note dated March 27, 1995 amending the Amended and
                  Restated Non-Negotiable Limited Recourse Promissory Note of
                  Sanford Greenberg dated as of November 5, 1993 payable to
                  Norton McNaughton of Squire, Inc. in the principal amount of
                  $920,000 (incorporated herein by reference to Exhibit 10.6 to
                  the Registrant's Quarterly Report on Form 10-Q for the quarter
                  ended May 5, 1995).

     10.20*       Amended and Restated Non-Negotiable Limited Recourse
                  Promissory Note of Norton Sperling dated as of November 5,
                  1993 payable to Norton McNaughton of Squire, Inc. in the
                  principal amount of $920,000.

     10.20(a)+++  Second Amended and Restated Non-Negotiable Limited Recourse
                  Promissory Note dated July 15, 1994, amending the Amended and
                  Restated Non-Negotiable Limited Recourse Promissory Note of
                  Norton Sperling dated as of November 5, 1993 payable to Norton
                  McNaughton of Squire, Inc. in the principal amount of
                  $920,000.

     10.20(b)     Third Amended and Restated Non-Negotiable Limited Recourse
                  Promissory Note dated March 27, 1995 amending the Amended and
                  Restated Non-Negotiable Limited Recourse Promissory Note of
                  Norton Sperling dated as of November 5, 1993 payable to Norton
                  McNaughton of Squire, Inc. in the principal amount of $920,000
                  (incorporated herein by reference to Exhibit 10.7 to the
                  Registrant's Quarterly Report on Form 10-Q for the quarter
                  ended May 5, 1995).

     10.21*       Form of Indemnification Agreement with Directors and Executive
                  Officers.

     10.22*       Agreement dated March 17, 1993 between Norton McNaughton of
                  Squire, Inc. and Toni-Linda Productions, Inc., as amended
                  December 15, 1993.

                                      E-7
<PAGE>

                         McNaughton Apparel Group Inc.
                           Exhibit Index (continued)


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

     10.22(a)**** Amendment dated November 7, 1995 to Agreement dated March 17,
                  1993 between Norton McNaughton of Squire, Inc. and Toni-Linda
                  Productions, Inc., now known as Cutting Edge Services, Inc.

     10.23*       Sublease Agreement dated January 17, 1994 between Norton
                  McNaughton of Squire, Inc. and Toni-Linda Productions, Inc.

     10.23(a)**** Amendment dated November 7, 1995 to Sublease Agreement dated
                  January 17, 1994 between Norton McNaughton of Squire, Inc. and
                  Toni-Linda Productions, Inc., now known as Cutting Edge
                  Services, Inc.

     10.24*       Limited Guaranty dated December 30, 1993 made by Norton
                  McNaughton of Squire, Inc. in favor of Braun Management, Inc.

     10.24(a)**** Amendment dated November 7, 1995 to Limited Guaranty dated
                  December 30, 1993 made by Norton McNaughton of Squire, Inc. in
                  favor of Braun Management, Inc.

     10.25*       Agreement dated January 7, 1993 between Norton McNaughton of
                  Squire, Inc. and Railroad Enterprises, Inc.

     10.26        6.00% Promissory Note of Railroad Enterprises, Inc. dated May
                  1, 1996 payable to Norton McNaughton of Squire, Inc., in the
                  principal amount of $300,000 (incorporated herein by reference
                  to Exhibit 10.1 to the Registrant's Quarterly Report on Form
                  10-Q for the quarter ended May 4, 1996).

     10.27        Agreement dated as of July 5, 1999 by and among Norton
                  McNaughton of Squire, Inc., a New York corporation, Railroad
                  Enterprises, Inc., a New Jersey corporation, and Cutting Edge
                  Services, Inc., a New Jersey corporation (incorporated herein
                  by reference to the Exhibits to the Registrant's Current
                  Report on Form 8-K filed August 12, 1999).

     10.28        Agreement of lease dated May 14, 1999, between North Point
                  Park, LLC and McNaughton Apparel Holdings Inc. (incorporated
                  herein by reference to the Exhibits to the Registrant's
                  Quarterly Report on Form 10-Q for the quarter ended May 1,
                  1999).

     10.28(a)     First Amendment, dated May 27, 1999, to Agreement of Lease
                  dated May 14, 1999, between North Point Park, LLC and
                  McNaughton Apparel Holdings Inc. (incorporated herein by
                  reference to the Exhibits to the Registrant's Quarterly Report
                  on Form 10-Q for the quarter ended May 1, 1999).

     10.29        Agreement of Guaranty dated May 14, 1999, between North Point
                  Park, LLC and McNaughton Apparel Group Inc. (incorporated
                  herein by reference to the Exhibits to the Registrant's
                  Quarterly Report on Form 10-Q for the quarter ended May 1,
                  1999).

     10.30*       Guaranty dated May 19, 1992 made by Norton McNaughton of
                  Squire, Inc. in favor of 5 Empire Boulevard Associates.

                                      E-8
<PAGE>

                         McNaughton Apparel Group Inc.
                           Exhibit Index (continued)


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

     10.31*       Agreement dated February 1, 1993 between Norton McNaughton of
                  Squire, Inc. and May Company.

     10.32*       Lease Agreement dated December 7, 1993 between Gettinger
                  Associates and Norton McNaughton of Squire, Inc.

     10.33*       Lease Agreement dated October 4, 1991 between 1400 Broadway
                  Associates and McNaughton Affiliates, Inc.

     10.34*       Lease Agreement dated April 30, 1993 between The Arsenal
                  Company and Norton McNaughton of Squire, Inc.

     10.35        Lease Agreement dated February 1, 1995 between Norton
                  McNaughton of Squire, Inc. and The Arsenal Company
                  (incorporated herein by reference to Exhibit 10 to the
                  Registrant's Quarterly Report on Form 10-Q for the quarter
                  ended February 3, 1995).

     10.35(a)     Cancellation Agreement between The Arsenal Company, LLC and
                  Norton McNaughton of Squire, Inc. dated April 30, 1997
                  (incorporated herein by reference to Exhibit 10.1 to the
                  Registrant's Quarterly Report on Form 10-Q for the quarter
                  ended May 3, 1997).

     10.36****    Split Dollar Agreement dated March 8, 1994 between Norton
                  McNaughton, Inc. and Northwestern Mutual Life Insurance
                  Company for Sanford Greenberg.

     10.37****    Split Dollar Agreement dated March 8, 1994 between Norton
                  McNaughton, Inc. and Northwestern Mutual Life Insurance
                  Company for Norton Sperling.

     10.38/xxx/   Employment Agreement dated August 29, 1997 between ME
                  Acquisition Corp. and Stuart Bregman.

     10.39/xxx/   Employment Agreement dated August 29, 1997 between ME
                  Acquisition Corp. and Howard Zwilling.

     10.40/xxx/   Employment Agreement dated August 29, 1997 between ME
                  Acquisition Corp. and Roberta Ciacci.

     10.41/xxx/   Employment Agreement dated August 29, 1997 between ME
                  Acquisition Corp. and Elizabeth Moser.

     10.42/xxx/   Employment Agreement dated August 29, 1997 between ME
                  Acquisition Corp. and Kenny Tse.

     10.43+       Agency Agreement dated October 9, 1997 between The Ozer Group
                  LLC and Norty's, Inc.

     10.44+       Consulting Agreement dated November 7, 1997 between DJM Asset
                  Management, Inc. and Norton McNaughton of Squire, Inc.

     10.45+       Lease Agreement dated December 16, 1993 between Gettinger
                  Associates, LP and Miss Erika, Inc.

                                      E-9
<PAGE>

                         McNaughton Apparel Group Inc.
                           Exhibit Index (continued)


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

     10.46+        Lease Agreement dated April 1, 1975 between Empire Carpet
                   Corporation and Miss Erika, Inc.

     10.46(a)+     Amendment dated January 17, 1978 to Lease Agreement dated
                   April 1, 1975 between Empire Carpet Corporation and Miss
                   Erika, Inc.

     10.46(b)+     Second Amendment dated February 17, 1981 to Lease Agreement
                   dated April 1, 1975 between Empire Carpet Corporation and
                   Miss Erika, Inc.

     10.46(c)+     Third Amendment dated March 5, 1982 to Lease Agreement dated
                   April 1, 1975 between Empire Carpet Corporation and Miss
                   Erika, Inc.

     10.46(d)+     Fourth Amendment dated August 15, 1983 to Lease Agreement
                   dated April 1, 1975 between Empire Carpet Corporation and
                   Miss Erika, Inc.

     10.46(e)+     Lease Modification and Extension Agreement dated January 24,
                   1985 between Teterboro Associates and Miss Erika, Inc. to
                   Lease Agreement dated April 1, 1975.

     10.46(f)+     Amendment to Lease dated August 8, 1985 to Lease Modification
                   and Extension Agreement dated January 24, 1985 between
                   Teterboro Associates and Miss Erika, Inc.

     10.46(g)+     Second Lease Modification and Extension Agreement dated
                   December 18, 1986 to the Amended Lease Modification and
                   Extension Agreement dated August 8, 1985 between Teterboro
                   Associates and Miss Erika, Inc.

     10.46(h)+     Third Lease Modification and Extension Agreement dated
                   January 18, 1989 to the Amended Lease Modification and
                   Extension Agreement dated August 8, 1985 between Teterboro
                   Associates and Miss Erika, Inc.

     10.46(i)+     Fourth Lease Modification and Extension Agreement dated June,
                   1991 to the Amended Lease Modification and Extension
                   Agreement dated August 8, 1985 between Teterboro Associates
                   and Miss Erika, Inc.

     10.46(j)+     Fifth Lease Modification and Extension Agreement dated May
                   30, 1995 to the Amended Lease Modification and Extension
                   Agreement dated August 8, 1985 between Teterboro Associates
                   and Miss Erika, Inc.

     10.46(k)+     Sixth Lease Modification and Extension Agreement dated March
                   5, 1997 to the Amended Lease Modification and Extension
                   Agreement dated August 8, 1985 between Teterboro Associates
                   and Miss Erika, Inc.

     10.47         Guaranty dated as of April 15, 1998 made by Norton
                   McNaughton, Inc. in favor of Jeri-Jo Knitwear Inc., Jamie
                   Scott, Inc., Susan Schneider, Leslie Schneider and Scott
                   Schneider (incorporated herein by reference

                                     E-10
<PAGE>

                         McNaughton Apparel Group Inc.
                           Exhibit Index (continued)


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

                   to Exhibit 10.1 to the Registrant's Current Report on Form 8-
                   K filed April 22, 1998).

     10.48         Lease dated June 18, 1998 between 80 Carter Drive Associates
                   and Jeri-Jo Knitwear, Inc. (incorporated herein by reference
                   to Exhibit 10.1 to the Registrant's Current Report on Form 8-
                   K filed July 2, 1998).

     10.49         Guaranty of Lease dated June 18, 1998 by Norton McNaughton,
                   Inc. in favor of 80 Carter Drive Associates (incorporated
                   herein by reference to Exhibit 10.2 to the Registrant's
                   Current Report on Form 8-K filed July 2, 1998).

     10.50         Lease dated June 1, 1998 by and between Gettinger Associates
                   and Jeri-Jo Knitwear, Inc. (incorporated herein by reference
                   to Exhibit 10.1 to the Registrant's Current Report on Form 8-
                   K/A filed August 6, 1998).

     10.51         Lease Agreement dated July 21, 2000 between Gettinger
                   Associates and Miss Erika, Inc. for a portion of the fourth
                   floor of 1407 Broadway, New York, NY 10018 (incorporated
                   herein by reference to Exhibit 10.3 of the Registrant's Form
                   10-Q for the quarter ended August 5, 2000).

     10.52         Agreement dated as of May 1, 2000 by and between Norton
                   McNaughton of Squire, Inc. and McNaughton Apparel Holdings
                   Inc. (incorporated herein by reference to Exhibit 10.5 of the
                   Registrant's Form 10-Q for the quarter ended August 5, 2000).

     10.53         McNaughton Apparel Group Inc. Audit Committee Charter
                   (incorporated herein by reference to Exhibit 10.1 of the
                   Registrant's form 10-Q for the quarter ended May 6, 2000).

     10.54         Software License Agreement dated May 24, 2000 between
                   Essentus International Inc. and McNaughton Apparel Group Inc.
                   (incorporated herein by reference to Exhibit 10.2 of the
                   Registrant's Form 10-Q for the quarter ended May 6, 2000).

     10.55++++     License Agreement made as of August 7, 2000 by and among
                   McNaughton Apparel Holdings Inc. and Norton McNaughton of
                   Squire, Inc.

     10.56++++     License Agreement made as of August 7, 2000 by and among
                   McNaughton Apparel Holdings Inc. and Miss Erika, Inc.

     10.57++++     License Agreement made as of August 7, 2000 by and among
                   McNaughton Apparel Holdings Inc. and Jeri-Jo Knitwear, Inc.

     21++++        List of Registrant's Subsidiaries.

     23++++        Consent of Ernst & Young LLP.

     27++++        Financial Data Schedule (For SEC use only).
--------------------------------------------------------------------------------

                                     E-11
<PAGE>

                          McNaughton Apparel Group Inc.
                            Exhibit Index (continued)

*        Incorporated herein by reference to Exhibits to the Registrant's
         Registration Statement on Form S-1 No. 33-74200.

**       Incorporated herein by reference to the Registrant's Registration
         Statement on Form S-8 No. 33-80370.

****     Incorporated herein by reference to Exhibits to the Registrant's Annual
         Report on Form 10-K for the period ended November 4, 1995.

*****    Incorporated herein by reference to the Registrant's Registration
         Statement on Form S-8 No. 33-92252.

x        Incorporated herein by reference to the Registrant's Current Report on
         Form 8-K filed October 15, 1997.

xx       Incorporated herein by reference to the Registrant's Current Report on
         Form 8-K/A filed December 15, 1997.

xxx      Incorporated herein by reference to the Registrant's Registration
         Statement on Form S-8 No. 333-39049.

xxxx     Incorporated herein by reference to the Registrant's Registration
         Statement on Form S-8 No. 333-29195

+        Incorporated herein by reference to Exhibits to the Registrant's Annual
         Report on Form 10-K for the period ended November 1, 1997.

++       Incorporated herein by reference to Exhibits to the Registrant's Annual
         Report on Form 10-K for the period ended October 31, 1998.

+++      Incorporated herein by reference to Exhibits to the Registrant's Annual
         Report on Form 10-K for the period ended November 6, 1999.

++++     Filed herewith.

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

                                     E-12
<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.

Date:    February 2, 2001        MCNAUGHTON APPAREL GROUP INC.
                                        (Registrant)



                                 By:  /s/ Sanford Greenberg
                                    ---------------------------------
                                      Sanford Greenberg, Chairman of the Board
                                      and Director

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities indicated on February 2, 2001.

         Signature                    Title

/s/ Sanford Greenberg                 Chairman of the Board and Director
----------------------------
(Sanford Greenberg)

/s/ Peter Boneparth                   Chief Executive Officer, President,
----------------------------          Chief Operating Officer and
(Peter Boneparth)                     Director

/s/ Amanda J. Bokman                  Vice President, Chief Financial Officer,
----------------------------          Secretary, Treasurer and Director
(Amanda J. Bokman)                    (principal financial and accounting
                                      officer)

/s/ Stuart Bregman                    Director
----------------------------
(Stuart Bregman)

/s/ Bradley P. Cost                   Director
----------------------------
(Bradley P. Cost)

/s/ Ben Mayo                          Director
----------------------------
(Ben Mayo)

/s/ Robert Siegel                     Director
----------------------------
(Robert Siegel)

                                      S-1
<PAGE>

                         MCNAUGHTON APPAREL GROUP INC.

<TABLE>
<CAPTION>
     Index to Consolidated Financial Statements, Financial Statement Schedule and Supplementary Data

                                                                                                 Page
                                                                                                 ----
<S>                                                                                            <C>
Financial Statements:

         Report of Independent Auditors                                                          F-2

         Consolidated Balance Sheets at November 4, 2000 and November 6, 1999                    F-3

         Consolidated Statements of Operations for Each of the Three Years
         in the Period Ended November 4, 2000                                                    F-4

         Consolidated Statements of Stockholders' Equity for Each of the
         Three Years in the Period Ended November 4, 2000                                        F-5

         Consolidated Statements of Cash Flows for Each of the Three Years
         in the Period Ended November 4, 2000                                                    F-6

         Notes to Consolidated Financial Statements                                              F-7


Financial Statement Schedule:

      II - "Valuation and Qualifying Accounts"                                                   F-22
</TABLE>

Note:    Schedules other than that referred to above have been omitted as
         inapplicable or not required under the instructions contained in
         Regulation S-X or the information is included elsewhere in the
         financial statements or the notes thereto.

Supplementary Data:

<TABLE>
<S>                                                                                              <C>
         Quarterly Financial Data (Unaudited)                                                       F-23
</TABLE>

                                      F-1
<PAGE>

                        Report of Independent Auditors

Board of Directors and Stockholders
McNaughton Apparel Group Inc.

We have audited the accompanying consolidated balance sheets of McNaughton
Apparel Group Inc. and Subsidiaries (the "Company") as of November 4, 2000 and
November 6, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended November 4, 2000. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at November 4, 2000 and November 6, 1999 and the consolidated results of
their operations, changes in their stockholders' equity and their cash flows for
each of the three years in the period ended November 4, 2000 in conformity with
accounting principles generally accepted in the United States. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.


                                                      ERNST & YOUNG LLP

New York, New York
January 8, 2001

                                      F-2
<PAGE>

                          McNaughton Apparel Group Inc.
                           Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                                            November 4,           November 6,
                                                                                               2000                  1999
                                                                                     ------------------------------------------
                                                                                                     (In Thousands)
<S>                                                                                     <C>                      <C>
Assets
Current assets:
   Cash and cash equivalents                                                            $      468               $  13,842
   Due from factor                                                                          99,695                  82,189
   Inventory                                                                                59,720                  40,917
   Income taxes receivable                                                                     163                   2,145
   Prepaid expenses and other current assets                                                 2,908                   3,787
                                                                                        ----------               ---------
   Total current assets                                                                    162,954                 142,880

   Fixed assets, net                                                                        13,416                  10,177

   Notes receivable from management stockholders                                             1,596                   2,287

   Intangible assets, net                                                                  246,425                  63,198

   Deferred financing costs                                                                  5,651                   6,642

   Other assets                                                                              1,270                   2,914
                                                                                        ----------               ---------

   Total assets                                                                         $  431,312               $ 228,098
                                                                                        ==========               =========

Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                                                                     $   24,120               $  14,237
   Revolving credit loan                                                                    65,820                     725
   Income taxes payable                                                                      2,470                   7,151
   Earn-out obligations payable                                                             20,000                  10,000
   Accrued expenses and other current liabilities                                           17,351                  17,160
                                                                                        ----------               ---------
   Total current liabilities                                                               129,761                  49,273

   12 1/2% Senior Notes due 2005                                                           125,000                 125,000
   Earn-out obligations payable                                                             59,000                   2,000
   Subordinated promissory notes                                                            10,000                       -
   Other long-term liabilities                                                               2,072                   1,758
                                                                                        ----------               ---------
   Total liabilities                                                                       325,833                 178,031

   Commitments and contingencies

   Stockholders' equity:

   Common stock, $0.01 par value, authorized 30,000,000 shares and 20,000,000
   shares, respectively, 10,628,256 and 8,096,324 shares issued,
   respectively, and 9,759,456 and 7,445,324 shares outstanding, respectively                  106                      81

   Capital in excess of par                                                                 54,362                  23,989

   Retained earnings                                                                        58,413                  31,532

   Treasury stock, at cost 868,800 and 651,000 shares, respectively                         (7,402)                 (5,535)
                                                                                        ----------               ---------

   Total stockholders' equity                                                              105,479                  50,067
                                                                                        ----------               ---------
   Total liabilities and stockholders' equity                                           $  431,312               $ 228,098
                                                                                        ==========               =========
</TABLE>

See accompanying notes.

                                      F-3
<PAGE>

                          McNaughton Apparel Group Inc.
                      Consolidated Statements of Operations
                    (In Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>
                                                                                                 Year Ended
                                                                            ------------------------------------------------------
                                                                                    November 4,       November 6,       October 31,
                                                                                       2000              1999              1998
                                                                            ------------------------------------------------------
<S>                                                                                 <C>               <C>               <C>
Net sales                                                                           $  506,289        $  407,812        $  344,604

Cost of goods sold                                                                     362,483           303,769           273,703
                                                                                    -----------       ----------        ----------

Gross profit                                                                           143,806           104,043            70,901

Selling, general and administrative expenses                                            67,525            64,146            54,965

Depreciation and amortization                                                           10,860             5,282             2,370
                                                                                    ----------        ----------        ----------

Income from operations                                                                  65,421            34,615            13,566

Interest expense and amortization of deferred financing costs                           20,221            18,712            11,788

Other income, net                                                                         (361)             (364)             (165)
                                                                                    ----------        ----------        ----------

Income before provision for income taxes and extraordinary item                         45,561            16,267             1,943

Provision for income taxes                                                              18,680             7,736             1,495
                                                                                    ----------        ----------        ----------

Income before extraordinary item                                                        26,881             8,531               448

Extraordinary item, net of $840 tax benefit                                                  -                 -            (1,161)

                                                                                    ----------        ----------        ----------
Net income (loss)                                                                   $   26,881        $    8,531        $     (713)
                                                                                    ==========        ==========        ==========

Basic earnings per share:

Income before extraordinary item                                                    $     3.39        $     1.15        $     0.06

Extraordinary item, net                                                                      -                 -             (0.16)
                                                                                    ----------        ----------        ----------
Net income (loss)                                                                   $     3.39        $     1.15        $    (0.10)
                                                                                    ==========        ==========        ==========

Weighted average number of common shares outstanding                                     7,924             7,432             7,413
                                                                                    ==========        ==========        ==========

Diluted earnings per share:

Income before extraordinary item                                                    $     3.05        $     1.11        $     0.06

Extraordinary item, net                                                                      -                 -             (0.16)
                                                                                    ----------        ----------        ----------

Net income (loss)                                                                   $     3.05        $     1.11        $    (0.10)
                                                                                    ==========        ==========        ==========

Weighted average number of common shares outstanding assuming dilution                   8,802             7,708             7,432
                                                                                    ==========        ==========        ==========
</TABLE>

See accompanying notes.

                                      F-4
<PAGE>

                         McNaughton Apparel Group Inc.
                Consolidated Statements of Stockholders' Equity
      Years Ended November 4, 2000, November 6, 1999 and October 31, 1998

<TABLE>
<CAPTION>
                                                  Common Stock           Capital in         Retained       Treasury
                                                  ------------
                                               Shares      Amount       Excess of Par       Earnings         Stock         Total
                                            ------------------------------------------------------------------------------------
                                                                               (In Thousands)
<S>                                         <C>            <C>            <C>              <C>             <C>           <C>
Balance at November 1, 1997                       8,061    $ 81           $23,903          $ 23,714        $(5,535)      $ 42,163

     Net loss for the year                            -       -                 -              (713)             -           (713)

     Issuance of common stock through
     stock purchase plan                              4       -                20                 -              -             20
                                                -------    ----           -------          --------        -------       --------
Balance at October 31, 1998                       8,065      81            23,923            23,001         (5,535)        41,470

     Net income for the year                          -       -                 -             8,531              -          8,531

     Issuance of common stock through
     stock purchase plan                             30       -                62                 -              -             62

     Exercise of stock options                        1       -                 4                 -              -              4
                                                -------    ----           -------          --------        -------       --------
Balance at November 6, 1999                       8,096      81            23,989            31,532         (5,535)        50,067

     Net income for the year                          -       -                 -            26,881              -         26,881

     Treasury stock acquired, 217,800
     shares at cost                                   -       -                 -                 -         (1,867)        (1,867)

     Issuance of 216,995 shares for Miss
     Erika earn-out obligation                      217       2             2,002                 -              -          2,004

     Issuance of 2,000,000 shares for
     Jeri-Jo earn-out obligation                  2,000      20            25,980                 -              -         26,000

     Issuance of common stock through
     stock purchase plan                             14       -                87                 -              -             87

     Exercise of stock options                      301       3             1,832                 -              -          1,835

     Tax benefit from exercise of stock
     options                                          -       -               472                 -              -            472
                                                -------    ----           -------          --------        -------       --------
Balance at November 4, 2000                      10,628    $106           $54,362          $ 58,413        $(7,402)      $105,479
                                                =======    ====           =======          ========        =======       ========
</TABLE>


See accompanying notes.

                                      F-5
<PAGE>

                         McNaughton Apparel Group Inc.
                     Consolidated Statements of Cash Flows
                                (In Thousands)

<TABLE>
<CAPTION>
                                                                                                     Year Ended
                                                                               -----------------------------------------------------
                                                                                    November 4,       November 6,       October 31,
                                                                                       2000              1999              1998
                                                                               -----------------------------------------------------
<S>                                                                            <C>                     <C>               <C>
Net income (loss)                                                                     $ 26,881         $  8,531          $   (713)

Adjustments to reconcile net income (loss) to net cash provided by operating
activities:

Depreciation and amortization of fixed assets                                            2,658            2,018             1,415
Write-off of fixed assets                                                                  504               32                 -
Amortization of intangible assets                                                        7,698            3,265               957
Amortization of deferred financing costs                                                 1,729            1,338               996

Changes in operating assets and liabilities:
   Due from factor                                                                     (17,506)           3,809            (9,671)
   Inventory                                                                           (18,803)           6,469               (11)
   Income taxes receivable                                                               1,982              377               679
   Prepaid expenses and other current assets                                              (415)          (2,514)            4,265
   Other assets                                                                          1,644             (158)           (1,938)
   Accounts payable                                                                      9,883           (1,695)              987
   Income taxes payable                                                                 (4,681)           7,151                 -
   Accrued expenses and other current liabilities                                          191            3,531             5,587
   Other long-term liabilities                                                             314               39                (1)
                                                                                      --------         --------          --------
Net cash provided by operating activities                                               12,079           32,193             2,552
                                                                                      --------         --------          --------

Investing activities
Purchase of fixed assets                                                                (6,401)          (3,966)           (2,430)
Purchase of net assets of Jeri-Jo, net of cash of $1,312                                     -                -           (54,253)
Additional purchase price to Jeri-Jo                                                   (75,081)               -                 -
Additional purchase price to Miss Erika                                                 (9,546)         (10,094)                -
Notes receivable from management stockholders                                              691              184               184
                                                                                      --------         --------          --------
Net cash used for investing activities                                                 (90,337)         (13,876)          (56,499)
                                                                                      --------         --------          --------

Financing activities
Purchase of treasury stock                                                              (1,867)               -                 -
Net advances (repayments) under revolving credit agreements                             65,095           (3,114)          (40,634)
Repayment of acquired company's debt                                                         -                -           (10,900)
Issuance of 12 1/2% Senior Notes due 2005                                                    -                -           125,000
Deferred financing costs                                                                  (738)          (1,632)           (4,863)
Proceeds from issuance of common stock, net                                              2,394               66                20
Repayment of term loan                                                                       -                -           (15,000)
                                                                                      --------         --------          --------
Net cash provided by (used for) financing activities                                    64,884           (4,680)           53,623
                                                                                      --------         --------          --------

Increase (decrease) in cash                                                            (13,374)          13,637              (324)
Cash at beginning of year                                                               13,842              205               529
                                                                                      --------         --------          --------
Cash at end of year                                                                   $    468         $ 13,842          $    205
                                                                                      ========         ========          ========

Supplemental disclosures
Income taxes paid                                                                     $ 18,558         $    792          $    400
Interest paid                                                                         $ 18,710         $ 16,391          $  5,346
</TABLE>

See accompanying notes.

                                      F-6
<PAGE>

                         McNaughton Apparel Group Inc.
                  Notes to Consolidated Financial Statements

1.    Summary of Significant Accounting Policies

Organization and Principles of Consolidation

      McNaughton Apparel Group Inc. (the "Company") was incorporated in Delaware
on December 30, 1993.

      The consolidated financial statements include the accounts of McNaughton
Apparel Group Inc. and its wholly-owned subsidiaries. All material balances and
transactions have been eliminated in consolidation. Data for the fiscal year
ended October 31, 1998 reflects the acquisition of Jeri-Jo Knitwear, Inc.
("Jeri-Jo") on June 18, 1998.

Principal Business Activity

      The Company operates in one segment, women's apparel. Through its
wholly-owned subsidiaries, the Company designs, sources, markets and distributes
a broad line of brand name, moderately-priced women's and juniors' career and
casual clothing. The Company's customer base consists principally of department
stores, national chains, mass merchants and specialty retailers located in the
United States.

Fiscal Year

      The Company operates on a 52-53 week accounting period. The Company's
fiscal year ends on October 31, if such date falls on a Saturday, or the first
Saturday following October 31. Data for each of the fiscal years ended November
4, 2000, November 6, 1999, and October 31, 1998 includes the results of
operations for 52, 53, and 52 weeks, respectively.

Inventory

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

Fixed Assets

      Fixed assets are stated at cost. Depreciation of fixed assets is provided
for by the straight-line method over the estimated useful lives of the assets
ranging from three to ten years for financial reporting purposes. Leasehold
improvements are amortized using the straight-line method over the term of the
related lease.

Deferred Financing Costs

      Deferred financing costs were incurred in fiscal 1998 in connection with
the Company's previous credit facility, which was refinanced on November 29,
2000. Such financing costs were amortized on a straight-line basis over the
three-year term of the related credit facility. The balance of such costs will
be written off as an extraordinary item in the first quarter of fiscal 2001.

      Deferred financing costs were incurred in connection with the Company's
issuance of $125.0 million 12 1/2% Senior Notes due 2005 (the "Senior Notes").
Such deferred financing costs are being amortized on a straight-line basis over
the seven-year term of the Senior Notes. See Note 10.

Revenue Recognition

      Revenues are recorded at the time of shipment of merchandise. The Company
establishes reserves for sales discounts, returns and allowances. Sales
discounts represent customary trade discounts which may be negotiated with the
Company's customers as a payment term of the sale. Sales allowances represent
sales rebates which may be granted to customers and other miscellaneous
deductions from accounts receivable. The Company records sales discounts granted
as a reduction of sales at the time of shipment. Sales returns and allowances
are reserved for as a reduction of sales based upon estimated future returns and
allowances related to current sales.

                                      F-7
<PAGE>

                         McNaughton Apparel Group Inc.
            Notes to Consolidated Financial Statements (Continued)

1.    Summary of Significant Accounting Policies (continued)

Intangible Assets

      Goodwill, trademarks and tradenames resulting from the acquisition of Miss
Erika and Jeri-Jo are being amortized by the straight-line method over twenty
years.

      Intangible contract rights acquired in connection with the agreement
entered into on August 9, 1999 with Railroad Enterprises, Inc. ("Railroad") and
Cutting Edge Services, Inc., formerly Toni-Linda Productions, Inc. ("Cutting
Edge") (the "Agreement") were amortized over the term of the management
arrangement provided for in the Agreement. As of November 4, 2000, these
intangible contract rights had been fully amortized. See Note 11.

Deferred Rent

      Rent expense on leases is recorded by the straight-line method over the
lease period. The excess of rent expense over the actual cash paid has been
recorded as other long-term liabilities.

Earnings Per Share

      Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the period presented. Diluted earnings per
share is computed based on the weighted average number of common shares
outstanding during the period and the effect of dilutive options outstanding
during the period using the treasury stock method. For fiscal 2000, fiscal 1999
and fiscal 1998, the dilutive effect of options outstanding during the period
using the treasury stock method was approximately 878,000 shares, 276,000 shares
and 19,000 shares, respectively.

Cash and Cash Equivalents

      For purposes of the statements of cash flows, cash and cash equivalents
include all liquid debt instruments with a maturity of three months or less when
purchased.

Credit Risk

      The Company sells its accounts receivable to a factor. At November 4,
2000, the amount due from factor was $99.7 million. Other financial instruments
which potentially subject the Company to concentration of credit risk consist
principally of temporary cash investments. The Company places its temporary cash
investments with high quality financial institutions. The Company continually
monitors its cash position. At November 4, 2000, the Company had no temporary
cash investments.

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 amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.

Accounting for Stock Options

      The Company has elected to follow Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under the Financial Accounting
Standard Board's Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB Opinion No. 25, because the exercise price of the Company's employee stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recognized. See Note 13 for pro forma
disclosures required by SFAS No. 123.

                                      F-8
<PAGE>

                         McNaughton Apparel Group Inc.
            Notes to Consolidated Financial Statements (Continued)

1.    Summary of Significant Accounting Policies (continued)


      Recent Technical Accounting Pronouncements

      In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities,"("SFAS No. 133"), as amended, which is
effective for all quarters of the fiscal year beginning after June 15, 2000.
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging securities. The Company expects that the adoption of
SFAS No. 133 will not have a material impact on the Company's consolidated
financial position, results of operations and cash flows.

2.    Acquisitions

Miss Erika
----------

      On September 30, 1997, the Company completed the acquisition of
substantially all the assets and the assumption of substantially all the
liabilities of Miss Erika, a privately-held manufacturer of women's
moderately-priced apparel. The purchase price of Miss Erika consisted of $24.0
million in cash paid at the closing, the assumption of $2.5 million of
indebtedness and certain other contractual obligations. In addition, the Company
agreed to pay an additional contingent payment in cash and/or the Company's,
$0.01 par value, common stock ("Common Stock") based upon earnings achieved by
Miss Erika for the two fiscal years ended November 6, 1999. As originally
agreed, the aggregate contingent payment payable by the Company was equal to the
amount by which four times the average of Miss Erika's earnings before interest
expense, income taxes, depreciation and amortization, as defined in the Miss
Erika purchase agreement ("Miss Erika EBITDA"), for the two fiscal years ended
November 6, 1999, exceeded $24.0 million. The additional consideration paid for
Miss Erika was accounted for as additional purchase price and was reflected in
intangible assets.

      On August 4, 1999, the Company retired, at a discount, 64.3% of the
earn-out obligation payable to the sellers of Miss Erika for $10.0 million in
cash. The portion of the earn-out obligation which was retired was owned by two
investment funds and their affiliates who were interested in monetizing their
portion of the contingent earn-out payment due to closure of the funds in which
these investments were held. The early cash payment resulted in a savings to the
Company of approximately $10.0 million, net of consent fees of $1.2 million paid
to senior noteholders under the indenture dated as of June 18, 1998 governing
the Senior Notes (the "Indenture") compared to what would have otherwise been
due and payable in February 2000. The remaining earn-out obligation of
approximately $11.6 million, representing 35.7%, was paid in March 2000,
approximately $9.6 million of which was paid in cash and approximately $2.0
million of which was paid in Common Stock. No additional earn-out payments are
payable in connection with the Miss Erika acquisition. The additional
consideration paid for Miss Erika was accounted for as additional purchase price
and reflected in intangible assets.

Jeri-Jo
-------

      On June 18, 1998, the Company completed the acquisition of Jeri-Jo,
acquiring substantially all the assets and assuming substantially all the
liabilities of the privately-held apparel importers of moderately-priced
juniors' and misses' updated sportswear. The purchase price paid in the Jeri-Jo
acquisition was (i) $55.0 million in cash at the closing of the acquisition,
(ii) the assumption of indebtedness of $10.9 million and certain other
contractual obligations. In addition, the Company agreed to pay an additional
contingent payment in cash and its Common Stock in the event that certain
earnings targets were achieved by Jeri-Jo for the two years subsequent to the
closing of the Jeri-Jo acquisition with such payment being made no later than
August 30, 2000. The Jeri-Jo purchase agreement required that the Company pay at
least 50% of the required contingent payment in cash and the Indenture limited
this cash payment to 75% of the total contingent payment. The aggregate
contingent payment payable by the Company was equal to the excess of (1) the sum
of (A) five times Jeri-Jo's average earnings before interest expense, income
taxes, depreciation and amortization, as defined in the Jeri-Jo purchase
agreement ("Jeri-Jo EBITDA"), for the two years ending June 30, 2000, plus (B)
0.50 times any such average Jeri-Jo EBITDA between $17.0 million and $20.0
million, plus (C) one times any such average Jeri-Jo EBITDA over $20.0 million,
over (2) $55.0 million. This earn-out payment totaled $190.0 million and has
been paid in full by the payment of $95.0 million in cash, the issuance of the
Company's $69.0 million three-year subordinated promissory notes, of which $10.0
million was issued in August 2000 and $59.0 million was issued on December 1,
2000, and the issuance of 2.0 million shares of Common Stock (valued at $13.00
per share). The issuance of shares of Common Stock in partial payment of the
Jeri-Jo earn-out payment has resulted in dilution to the Company's stockholders.
The additional consideration paid for Jeri-Jo was accounted for as additional
purchase price and reflected in intangible assets.

                                      F-9
<PAGE>

                         McNaughton Apparel Group Inc.
            Notes to Consolidated Financial Statements (Continued)

2.    Acquisitions (continued)

Jeri-Jo
-------

      The acquisitions were accounted for as purchases, and Miss Erika's and
Jeri-Jo's results are included in the consolidated statements of operations
beginning September 30, 1997 and June 18, 1998, respectively. The unaudited pro
forma consolidated results of operations for the year ended October 31, 1998,
assuming consummation of the Jeri-Jo acquisition and related financings at the
beginning of the respective period are as follows:

                                                       Fiscal Year
                                                  Ended October 31, 1998
                                        ----------------------------------------
                                                                     Pro forma
                                           As reported              (unaudited)
                                        ------------------    ------------------

Net sales                                     $344,604                $394,839
Income from operations                        $ 13,566                $ 21,316
Depreciation and amortization                 $  2,370                $  3,751
Income before extraordinary
   item                                       $    448                $    881
Net loss                                      $   (713)               $   (280)
Net loss per share:
   Basic                                      $  (0.10)               $  (0.04)
   Diluted                                    $  (0.10)               $  (0.04)


3.    Sales to Major Customers

      For the years ended November 4, 2000, November 6, 1999 and October 31,
1998, net sales made to three customers were approximately 15%, 14%, and 13%,
approximately 20%, 14% and 14%, and approximately 17%, 16% and 15%,
respectively.

4.    Due From Factor

      The Company sells its accounts receivable to a factor without recourse, up
to a maximum established by the factor for each customer. Receivables sold in
excess of these limitations are subject to recourse in the event of nonpayment
by the customer. At November 4, 2000, November 6, 1999 and October 31, 1998, the
amounts due from factor of $99.7 million, $82.2 million and $86.0 million,
respectively, did not include any accounts receivable with recourse. The factor
receives a commission for all purchased accounts receivable which is calculated
as 0.3% of the net amount of gross sales less sales discounts. Factor
commissions for the fiscal years ended November 4, 2000, November 6, 1999 and
October 31, 1998 were approximately $1.7 million, $1.4 million and $1.3 million,
respectively.

5.    Inventories

      Inventories consist of the following:

                                              November 4,           November 6,
                                                 2000                  1999
                                            ------------------------------------
                                                       (In Thousands)
         Raw materials                         $ 2,141               $ 3,116
         Work-in-process                         1,057                 1,104
         Finished goods                         56,522                36,697
                                               -------               -------
                                               $59,720               $40,917
                                               =======               =======

                                     F-10
<PAGE>

                         McNaughton Apparel Group Inc.
            Notes to Consolidated Financial Statements (Continued)


6.    Fixed Assets

      Fixed assets are summarized as follows:

                                                  November 4,        November 6,
                                                     2000               1999
                                               ---------------------------------
                                                         (In Thousands)
        Machinery and equipment                     4,374              $ 1,940
        Furniture and fixtures                      1,830                1,518
        Computer equipment                         10,470                8,624
        Leasehold improvements                      4,921                3,828
                                                  -------              -------
           Total                                   21,595               15,910
        Less accumulated depreciation
             and amortization                       8,179                5,733
                                                  -------              -------
                                                  $13,416              $10,177
                                                  =======              =======

7.    Notes Receivable From Management Stockholders

      In 1993, the Company loaned certain management stockholders $3.0 million
in the aggregate. Each loan is evidenced by a limited recourse promissory note
with interest accruing at 5.84% per annum. The Company's recourse on the
promissory notes is limited to the management stockholders' pledges of a portion
of their Common Stock of the Company.

      In the event of any sale or transfer of shares of Common Stock by any of
the management stockholders, such person is required to make a principal
repayment of his loan from the Company in an amount equal to the product of (i)
the percentage representing the number of shares sold by such person to the base
amount set forth in the promissory note, and (ii) the outstanding balance of the
notes as of the date of the promissory note. No other principal payments are
required under the loans except for the payment at maturity. The loans mature on
November 5, 2003 at which time full payment is to be made by the management
stockholders for the balance of their respective loans. As of the end of fiscal
2000, all necessary payments had been made under the terms of the loans by the
management stockholders.

      As of November 4, 2000, the fair market value of the Company's Common
Stock held by such persons was approximately $18.1 million and the fair market
value of the stock pledged by the management stockholders as security for the
loans was approximately $7.5 million. The aggregate principal balance of all
loans to management stockholders was approximately $1.6 million. The loan
balance set forth above reflects the required principal payments of
approximately $1.4 million resulting from sales of Common Stock by management
stockholders and pay-down of loans. Interest income relating to these loans for
the years ended November 4, 2000, November 6, 1999 and October 31, 1998 amounted
to approximately $118,000, $148,000 and $147,000, respectively.

8.    Intangible Assets

      Intangible assets consist of the following:

                                                    November 4,      November 6,
                                                       2000              1999
                                                   -----------------------------
                                                           (In Thousands)

        Tradenames and trademarks                      $17,585          $17,591
        Goodwill                                       238,558           48,921
                                                      --------          -------
                                                       256,143           66,512
        Less accumulated amortization                    9,718            3,314
                                                      --------          -------
                                                      $246,425          $63,198
                                                      ========          =======

                                     F-11
<PAGE>

                         McNaughton Apparel Group Inc.
            Notes to Consolidated Financial Statements (Continued)


9.    Accrued Expenses and Other Current Liabilities

      Accrued expenses and other current liabilities consist of the following:

<TABLE>
<CAPTION>
                                                             November 4,              November 6,
                                                                2000                     1999
                                                           ---------------------------------------
                                                                        (In Thousands)
           <S>                                             <C>                          <C>
           Interest on $125.0 million 12 1/2%
              Senior Notes                                      $ 6,511                 $ 6,837
           Contractual bonuses payable                            4,458                   2,706
           Payable to Railroad and Cutting Edge
              in connection with the Agreement                        -                   1,967
           Reserve for litigation                                   229                     932
           Profit sharing contribution payable                    1,020                     879
           Other accrued expenses and current
              liabilities                                         5,133                   3,839
                                                                -------                 -------
                                                                $17,351                 $17,160
                                                                =======                 =======
</TABLE>

10.   Financing Arrangements and Extraordinary Item

      Concurrent with the closing of the Jeri-Jo acquisition on June 18, 1998,
the Company entered into a $175.0 million secured revolving credit and letter of
credit facility with Banc of America Commercial Corporation, The CIT
Group/Commercial Services, Inc. and Fleet Bank N.A. (as amended, the "Prior
Credit Agreement"). The facility was used to finance ongoing working capital
requirements of the Company and its subsidiaries. The Prior Credit Agreement was
a three-year secured revolving credit and letter of credit facility, with
interest on outstanding borrowings determined, at the Company's option, based
upon stated margins below the prime rate at Banc of America, N.A. or in excess
of LIBOR rates. At November 4, 2000, the interest rate under the Prior Credit
Agreement was 125 basis points below the prime rate (based upon the then
existing prime rate, the interest rate under the Prior Credit Agreement was
8.25% per annum). Available credit under the Prior Credit Agreement was as
follows: revolving credit advances not to exceed $60.0 million, documentary
letters of credit not to exceed $130.0 million ("Documentary LC's"), stand-by
letters of credit not to exceed $15.0 million ("Standby LCs"), and a $30.0
million standby letter of credit to partially secure the Company's cash
contingent payment obligation in connection with the Jeri-Jo acquisition.
Aggregate Documentary LCs and Standby LCs could not exceed $130.0 million. Under
the Prior Credit Agreement, the aggregate credit available to the Company was
equal to the lesser of (i) $175.0 million or (ii) the sum of 85% of eligible
accounts receivable and 60% of eligible inventory, plus an overadvance amount
ranging from zero to $30.0 million depending on the fiscal month of the Company
and the time in such fiscal month. The Company and its subsidiaries guaranteed
the Company's obligations under the Prior Credit Agreement and granted a lien on
substantially all of their respective assets to secure the obligations under the
Prior Credit Agreement. The weighted average interest rate on the revolving
credit facility was 8.0% for fiscal 2000 and 7.3% for fiscal 1999.

      The extraordinary item, net of tax, of $1.2 million at October 31, 1998
resulted from the write-off of deferred financing costs of $2.0 million
associated with the early extinguishment on June 18, 1998 of the credit facility
that preceded the Prior Credit Agreement.

      At November 4, 2000, borrowings, letters of credit outstanding and
additional available credit, including a $20.0 million overadvance facility,
under the Prior Credit Agreement were $65.8 million, $100.8 million, and $16.1
million, respectively. At November 6, 1999, borrowings, letters of credit
outstanding and additional available credit, including a $5.0 million
overadvance facility, under the Prior Credit Agreement were $725,000, $122.3
million and $28.4 million, respectively. In addition, the Company had cash and
cash equivalents totaling $13.8 million as of that date.

      The Prior Credit Agreement contained a number of restrictive covenants,
including covenants which limited incurrence of liens and indebtedness, limited
transactions with affiliates, acquisitions, sales of assets, investments and
other restricted payments, and required that the Company maintain certain fixed
charge coverage, cash flow coverage and leverage ratios and meet specified
minimum levels of working capital and net worth.

                                     F-12
<PAGE>

                         McNaughton Apparel Group Inc.
            Notes to Consolidated Financial Statements (Continued)


10.   Financing Arrangements and Extraordinary Item (continued)

      On June 18, 1998, the Company also issued the Senior Notes due 2005. The
proceeds of the Senior Notes were used to finance the Jeri-Jo acquisition and to
refinance then existing indebtedness of the Company and Jeri-Jo. The Company's
obligations under the Senior Notes are unsecured and are guaranteed by all of
the Company's subsidiaries. The Indenture contains a number of restrictive
covenants, including limitations on the incurrence of liens and indebtedness,
limit transactions with affiliates, sales of assets, investments and other
restricted payments. On August 3, 1999, the Company executed the First
Supplemental Indenture, which amended the Indenture to provide for, among other
matters, the early extinguishment of a portion of the outstanding earn-out
obligation payable to certain of the sellers of Miss Erika and a restriction as
to the amount of cash that could be paid with respect to the Company's earn-out
obligation incurred in connection with its acquisition of Jeri-Jo.

      Long-term debt is as follows:
                                                     November 4,     November 6,
                                                        2000            1999
                                                   -----------------------------

        12 1/2% Senior Notes due 2005                $125,000         $125,000
        Subordinated Promissory Notes due 2003         10,000                -
                                                     --------         --------
                                                      135,000          125,000
        Less current maturities                             -                -
                                                     --------         --------
        Total long-term debt                         $135,000         $125,000
                                                     ========         ========


      On November 29, 2000, the Company entered into a $210.0 million long-term
senior secured credit facility with a bank group which replaced the Prior Credit
Agreement (the "Existing Credit Agreement"). This new credit facility provides
for an increase to $225.0 million during its term and includes a $125.0 million
sublimit for revolving credit borrowings, a sublimit for the issuance of standby
and documentary letters of credit ranging from $120.0 million to $135.0 million
and, initially, a $35.0 million sublimit for overadvances (that is, revolving
credit borrowings in excess of the borrowing base formula set forth in the new
credit facility). On January 17, 2001, the facility was increased to $220.0
million. Under the new credit facility, the aggregate credit available to the
Company equals the lesser of (a) $220.0 million (which may increase to $225.0
million during the term) and (b) the sum of 85% of eligible accounts receivable
and 60% of eligible inventory, plus an overadvance amount ranging from zero to
$35.0 million depending on the fiscal month and the time in that fiscal month.
In addition, the new credit facility (1) has a three year maturity, (2) bears
interest, at the Company's option, at fluctuating interest rates based upon
various margins in excess of LIBOR or the prime rate of Bank of America N.A.,
depending on the level of the leverage ratio (the interest rates payable under
the new credit facility are higher than those payable under the Prior Credit
Agreement), (3) is secured by substantially all of its assets and the assets of
the Company's subsidiaries, and (4) contains a number of financial and other
restrictive covenants, including covenants which limit incurrence of liens and
indebtedness, limit transactions with affiliates, acquisitions, sales of assets,
investments and other restricted payments, and requires the Company to maintain
certain fixed charge coverage, cash flow coverage and leverage ratios and meet
specified minimum levels of net worth. The Company continues to factor accounts
receivable pursuant to factoring arrangements.

      On December 1, 2000, the Company issued $59.0 million of subordinated
promissory notes as the final payment under the Jeri-Jo earn-out obligation. The
Company had previously issued $10.0 million of subordinated promissory notes in
August 2000 as another partial payment of that obligation (see Note 2). The
notes are subordinated to the Company's senior secured credit facility and
Senior Notes, mature on November 30, 2003, bear interest at a floating rate for
non-overadvance revolving credit borrowings under the new credit facility
(currently 9.3% per annum), and require quarterly principal repayments following
the repayment of overadvances under the new credit facility, subject to limits
imposed by the new credit facility.

                                     F-13
<PAGE>

                         McNaughton Apparel Group Inc.
            Notes to Consolidated Financial Statements (Continued)


11.   Commitments and Contingencies

Operating Leases

      The Company operates in leased premises and leases other assets under
operating leases expiring through 2015. Some of the leases contain escalation
clauses and renewal options. The future minimum rental commitments under
non-cancelable operating leases are as follows:

         Fiscal Year                                (In Thousands)
         -----------                                --------------
         2001                                          $ 4,475
         2002                                            3,966
         2003                                            3,485
         2004                                            2,431
         2005                                            2,224
         Thereafter                                      7,076
                                                       -------
                                                       $23,657
                                                       =======

      Rent expense for the years ended November 4, 2000, November 6, 1999 and
October 31, 1998 amounted to approximately $4.5 million, $3.7 million and $3.4
million, respectively.

Employment Agreements

      In June 1999, the Company entered into an amended and restated employment
agreement with its Chief Executive Officer, President and Chief Operating
Officer providing for a base salary of $754,000 per annum and terminating on
November 1, 2003. The employment agreement was amended as of November 4, 2000 to
provide for, among other things, annual increases in base salary to $800,000
(fiscal 2001), $900,000 (fiscal 2002) and $1,000,000 (fiscal 2003). In June
1999, the Company also entered into an amended and restated employment agreement
with its Chairman of the Board. The amended employment agreement provides for a
base salary of $754,000 per annum through November 2, 2001, with an automatic
one year extension at the same base rate if certain events do not occur. The
agreement also provides that upon the termination of the agreement and if such
agreement is not renewed, the employee will be retained by the Company as a
consultant for the following two years and will be compensated at the rate of
$75,000 per month.

      The Company has entered into employment agreements with certain executive
officers (including those described above) which provide for aggregate minimum
annual compensation of approximately $4.7 million through November 2001, $1.6
million through November 2002 and $1.0 million beyond November 2002. All
employment agreements provide that the payment of discretionary bonuses will be
determined at the discretion of the Compensation Committee of the Board of
Directors. In addition, in fiscal 2000, the Company adopted a bonus plan for
senior officers which provided for the payment of bonuses based upon the
attainment of certain earnings targets, as established by the Compensation
Committee of the Board of Directors. During the fiscal year ended November 4,
2000, the Company paid an aggregate of $950,000 under this plan and on a
discretionary basis to two senior officers.

      The employment agreements entered into in connection with the Miss Erika
acquisition provide for contractual bonuses and bonus stock option grants based
upon the attainment of certain Miss Erika EBITDA targets, as defined therein.
Contractual bonuses pursuant to these contracts were approximately $4.0 million,
$2.7 million and $2.3 million, in fiscal 2000, fiscal 1999 and fiscal 1998,
respectively (see Note 9). In addition, the Company granted bonus stock options
of 840,000 options, 504,000 options and 392,000 options pursuant to these
employment agreements for the fiscal years ended November 4, 2000, November 6,
1999 and October 31, 1998, respectively (see Note 13).

Related Party Transactions

      Miss Erika has an agreement for inland shipping services with a local
trucking company whose primary customer is Miss Erika and whose headquarters are
in the Miss Erika warehouse. Miss Erika represents more than 95% of the trucking
company's revenues and is therefore able to negotiate favorable rates and
scheduling. The owner/manager of the trucking company is an employee of Miss
Erika. Total charges for the fiscal years ended November 4, 2000, November 6,
1999 and October 31, 1998 were $766,480, $696,800 and $696,800, respectively.

                                     F-14
<PAGE>

                         McNaughton Apparel Group Inc.
            Notes to Consolidated Financial Statements (Continued)


11.   Commitments and Contingencies (continued)

Related Party Transactions (continued)

      The Company has entered into a lease agreement with a partnership of which
certain partners are employees of Jeri-Jo and shareholders of the Company which
provides for monthly rental payments. Management believes the rental rates under
such lease agreement are at fair market value. Rents paid pursuant to this
agreement for the fiscal years ended November 4, 2000, November 6, 1999 and
October 31, 1998 were $395,883, $395,883 and $146,256, respectively.

Stock Repurchase

      The Company's Board of Directors has authorized a stock repurchase
program, under which the Company may repurchase up to $11.5 million of the
Company's Common Stock. The Company expects that the shares may be purchased
from time to time in the open market and in block transactions. As of November
4, 2000, the Company had purchased a total of 868,800 shares at an aggregate
cost of approximately $7.4 million. The Company's ability to repurchase shares
of Common Stock is restricted by the Indenture and Existing Credit Agreement.

Litigation

      On July 14, 1998, Norton's distribution and cutting contractors, Railroad
Enterprises and Cutting Edge, respectively (collectively, "Plaintiffs"), filed
an action in the New York State Supreme Court for New York County which, as
amended, was entitled Cutting Edge Services, Inc. and Railroad Enterprises, Inc.
                      ---------------------------------------------------------
v. Norton McNaughton of Squire, Inc. and Norton McNaughton, Inc. Plaintiffs had
----------------------------------------------------------------
claimed that Norton breached its contracts with them because, among other
things, Miss Erika and Jeri-Jo had failed to use Plaintiffs' services as
allegedly required under Norton's contracts with Plaintiffs. This action sought
substantial compensatory and punitive damages and related declaratory relief
concerning rights under the contracts. In connection with the Cutting Edge and
Railroad lawsuit, as well as other pending litigation, the Company established a
litigation reserve of $2.5 million in fiscal 1998.

      On August 9, 1999, the Company and Norton entered into an Agreement with
Railroad and Cutting Edge, pursuant to which, among other matters, the foregoing
lawsuit was terminated and Norton purchased certain assets of Railroad and
Cutting Edge, including fixed assets, machinery and equipment at their
facilities, and Railroad's and Cutting Edge's rights under their then existing
agreements with Norton. The purchase price (the "Purchase Price") was $5.5
million payable as follows: $3.0 million at closing; thereafter, $108,333.33 per
month, payable at month-end from July 31, 1999 through March 31, 2000, and
$508,333.33 per month payable at month-end from April 30, 2000 through May 31,
2000, $408,333.33 payable on June 30, 2000, and $100,000 payable on December 31,
2000. Norton also retained Railroad to provide consulting services relating to
the relocation of its warehouse and distribution facilities to South Carolina
for a total fee of $500,000 payable on a monthly basis over a one-year period.

      The Agreement also provided for the termination of Norton's then existing
long-term agreements with Railroad and Cutting Edge. Railroad managed the assets
Norton purchased and continued performing all of Norton's receiving, warehousing
and distribution services from Railroad's New Jersey facility through August 11,
2000.

      Pursuant to the Agreement, Railroad and Cutting Edge agreed to obtain
releases of Norton's limited guarantees from the landlords of their respective
warehouse leases. On September 23, 1999, Norton received a release from the
landlord of Cutting Edge's warehouse lease in exchange for a payment of
approximately $230,000. As provided in the Agreement, this amount was withheld
from subsequent Purchase Price installments. In September, 2000, Norton received
a release of its guaranty obligations from the landlord of Railroad's warehouse.
Correspondingly, the Company released to Railroad the $500,000 that it had
withheld from the Purchase Price Installments relating to this amount. Finally,
the Agreement provided for the early termination of Norton's East Rutherford,
New Jersey piece goods warehouse sublease from Cutting Edge, which occurred on
September 30, 1999.

      The $5.5 million Purchase Price was allocated to current assets in the
amount of $2.2 million, representing the estimated value of the intangible
contract rights acquired, fixed assets in the amount of $600,000, and the
remaining $2.7 million was offset against the $2.5 million reserve for
litigation established in fiscal 1998 with the balance being charged to expense
in fiscal 1999. The intangible contract rights were amortized over the term of
the management arrangement provided for in the Agreement. The fixed assets were
being amortized over five years, however, the Company wrote off the remaining
value of these assets in fiscal 2000. The Company fully expensed in fiscal 1999
its obligation of $500,000 under the Railroad consulting arrangement provided
for in the Agreement.

                                     F-15
<PAGE>

                         McNaughton Apparel Group Inc.
            Notes to Consolidated Financial Statements (Continued)

11.   Commitments and Contingencies (continued)

Litigation (continued)

      The Company is involved in certain legal actions and claims arising in the
ordinary course of business. Management believes that such litigation and claims
will be resolved without material adverse effect on the Company's business,
financial condition, results of operations and cash flow. At November 4, 2000
and November 6, 1999, the Company had a reserve for litigation of approximately
$200,000 and $900,000, respectively, in connection with ongoing claims. See Note
9.

12.   Income Taxes

Income taxes are provided using the liability method prescribed by SFAS No. 109,
"Accounting for Income Taxes." Under the liability method, deferred income taxes
reflect tax carryforwards and the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial statement
and income tax purposes, as determined under enacted tax laws and rates. The
financial effect of changes in tax laws or rates is accounted for in the period
of enactment. Provision for income taxes before extraordinary item for the
fiscal years ended November 4, 2000, November 6, 1999 and October 31, 1998 is
comprised of the following:

<TABLE>
<CAPTION>
                                                                                      Year Ended
                                                            ---------------------------------------------------------------
                                                              November 4,             November 6,             October 31,
                                                                 2000                    1999                     1998
                                                            ---------------------------------------------------------------
                                                                                    (In Thousands)
         <S>                                                  <C>                     <C>                     <C>
         Current:
                  Federal                                        $14,126                $4,164                   $1,187
                  State and local                                  2,903                 1,385                      573
                                                                 -------                ------                   ------
                                                                  17,029                 5,549                    1,760

         Deferred:
                  Federal                                          1,215                 1,952                     (180)
                  State and local                                    436                   235                      (85)
                                                                 -------                ------                   ------
                                                                   1,651                 2,187                     (265)
                                                                 -------                ------                   ------
                                                                 $18,680                $7,736                   $1,495
                                                                 =======                ======                   ======
</TABLE>

      Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities. At November 4, 2000,
there were net deferred tax liabilities of $475,565 relating primarily to
amortization of intangible assets. At November 6, 1999 and October 31, 1998,
there were net deferred tax assets of $1,012,000 and $3,526,000, respectively,
relating primarily to deferred payment of accrued expenses, depreciation and
uniform capitalization of inventory costs, which were partially offset by net
operating loss carryforwards.

      Reconciliation of the statutory federal tax rate and the effective rate
for the fiscal years ended November 4, 2000, November 6, 1999 and October 31,
1998 is as follows:

<TABLE>
<CAPTION>
                                                      2000                      1999                      1998
                                                     Amount        %           Amount          %         Amount           %
                                                     ------      ---           ------        ---         ------         ---
                                                                             (Dollars In Thousands)
<S>                                                  <C>         <C>           <C>           <C>         <C>            <C>
Federal statutory tax rate                           $15,508     34%           $5,577        34%          $  661        34%
State and local taxes, net of federal
   income tax benefit                                  2,672      6             1,427         9              178         9
Effect of tax audits                                     500      1               400         3              600        31
Other, net                                                 -      -               332         2               56         3
                                                     -------     --            ------        --           ------        --

Provision for income taxes                           $18,680     41%           $7,736        48%          $1,495        77%/(1)/
                                                     =======     ==            ======        ==           ======        ==
</TABLE>

_____________________
(1)   The difference between the statutory rate and actual effective rate in
      fiscal 1998 related to the resolution of tax examinations covering fiscal
      years 1991 through 1996 and the corresponding impact on state and local
      taxes.

                                      F-16
<PAGE>

                         McNaughton Apparel Group Inc.
            Notes to Consolidated Financial Statements (Continued)

13.   Employee Benefit Plans

Stock Option Plans

      Pursuant to the Company's 1994 Stock Option Plan, as amended, and the
Company's 1998 Long Term Incentive Plan, the Company may grant stock options to
eligible individuals to purchase up to 1,150,000 shares of its Common Stock. The
exercise price for stock options may not be less than 100% (110% for holders of
10% or more of the Company's outstanding stock) of the fair market value of the
stock on the date of grant and the options will vest at the discretion of the
Stock Option Committee of the Board of Directors. All options granted have 10
year terms.

      The Company granted stock options in fiscal 1997 to its Chief Executive
Officer, President and Chief Operating Officer, Mr. Boneparth, under his
employment agreement and outside of the Company's stock option plans to purchase
an aggregate of 700,000 shares of Common Stock of the Company at an exercise
price of $5.50 per share, which was the fair market value of the Common Stock on
the date of grant. Such options were vested in full as of November 4, 2000.
Options granted have 10 year terms.

      The Company granted stock options to certain Miss Erika executives and
employees in fiscal 1997 under the Miss Erika Stock Option Plan to purchase an
aggregate of 140,000 shares of Common Stock of the Company at an exercise price
of $5.44 per share, which was the fair market value of the Common Stock on the
date of grant. In addition, pursuant to the employment agreements with certain
executive officers of Miss Erika, bonus options may be granted in the event
certain earnings targets for Miss Erika are exceeded (see Note 11). For the
fiscal year ended October 31, 1998, bonus stock options were granted under the
Miss Erika Stock Option Plan to purchase an aggregate of 392,000 shares of
Common Stock of the Company at an exercise price of $3.63 per share, which was
the fair market value of the Common Stock on the date of grant. For the fiscal
year ended November 6, 1999, bonus stock options were granted under the Miss
Erika Stock Option Plan to purchase an aggregate of 504,000 shares of Common
Stock of the Company at an exercise price of $7.625 per share, which was the
fair market value of the Common Stock on the date of grant. For the fiscal year
ended November 4, 2000, bonus stock options were granted under the Miss Erika
Stock Option Plan to purchase an aggregate of 840,000 shares of Common Stock of
the Company at an exercise price of $14.00 per share, which was the fair market
value of the Common Stock on the date of grant. All options vested on the date
of grant and have 10 year terms.

      On April 15, 1998, the Company granted an aggregate of 15,000 stock
options to non-employee directors under the Stock Option Plan for Non-Employee
Directors. The exercise price of such options was $5.38 per share, which was the
fair market value of the Common Stock on the date of grant. All options have 10
year terms and vest over two years.

      On June 18, 1998, the Company granted an aggregate of 546,429 stock
options to executive management of Jeri-Jo under their respective employment
agreements. The exercise price of such options was $6.38 per share, which was
the fair market value of the Common Stock on the date of grant. All options have
10 year terms. An aggregate of 100,000 of such options vested on the date of
grant with the remainder vesting on October 28, 2000.

      On April 15, 1999, the Company granted an aggregate of 15,000 stock
options to non-employee directors under the Stock Option Plan for Non-Employee
Directors. The exercise price of such options was $4.69 per share, which was the
fair market value of the Common Stock on the date of grant. All options have 10
year terms and vest over two years.

      On April 28, 1999, the Company granted 100,000 stock options to its Chief
Executive Officer, President and Chief Operating Officer, Mr. Boneparth. The
exercise price of such options was $5.50 per share, which was the fair market
value of the Common Stock on the date of grant. All options have 10 year terms
and vest over three years.

      On April 28, 1999, the Company granted 60,000 stock options to its
Chairman under the 1998 Long-Term Incentive Plan. The exercise price of such
options was $5.50 per share, which was the fair market value of the Common Stock
on the date of grant. All options have 10 year terms and vest over three years.

      On April 14, 2000, the Company granted an aggregate of 15,000 stock
options to non-employee directors under the Stock Option Plan for Non-Employee
Directors. The exercise price of such options was $8.375 per share, which was
the fair market value of the Common Stock on the date of grant. All options have
10 year terms and vest over two years.

      The Company granted stock options to certain Jeri-Jo executives in fiscal
1999 under the Jeri-Jo Stock Option Plan to purchase an aggregate of 200,000
shares of Common Stock of the Company at an exercise price of $5.50 per share,
which was the fair market value of the Common Stock on the date of grant. These
options have 10 year terms and vest on June 18, 2001. In addition, pursuant to
the then existing employment agreements with certain executive officers of
Jeri-Jo, bonus options were granted due to certain earnings targets for Jeri-Jo
that were exceeded. For the 12 months ended June 30, 1999, bonus stock options
were granted under the Jeri-Jo Stock Option Plan to purchase an aggregate of
440,000 shares of Common Stock of the Company at an exercise price of $9.00

                                      F-17
<PAGE>

                         McNaughton Apparel Group Inc.
            Notes to Consolidated Financial Statements (Continued)

13.   Employee Benefit Plans (continued)

Stock Option Plans (continued)

per share, which was the fair market value of the Common Stock on the date of
grant. For the twelve months ended June 30, 2000, bonus stock options were
granted under the Jeri-Jo Stock Option Plan to purchase an aggregate of
1,160,000 shares of Common Stock of the Company at an exercise price of $15.375
per share, which was the fair market value of the Common Stock on the date of
grant. These options have 10 year terms and vested on the date of grant.

      The change in outstanding options under the Company's stock option plans
for each of the three years in the period ended November 4, 2000, expressed in
number of shares, is as follows:

<TABLE>
<CAPTION>
                                                                                             Range of Exercise
                                                       Number of Shares                       Price Per Share
                                                       ----------------                 ---------------------------
<S>                                                    <C>                              <C>
Outstanding at November 1, 1997                           1,636,500                       $  5.44 - $17.25
    Granted                                               1,013,429                       $  3.63 - $ 6.38
    Canceled                                               (118,000)                      $  5.50 - $14.00
    Exercised                                                     -                               -
                                                       ------------
Outstanding at October 31, 1998                           2,531,929                       $  3.63 - $17.25
    Granted                                               1,198,000                       $  2.75 - $ 9.00
    Canceled                                               (124,734)                      $  5.38 - $14.00
    Exercised                                                  (832)                      $  6.00 - $ 6.50
                                                       ------------
Outstanding at November 6, 1999                           3,604,363                       $  2.75 - $17.25
    Granted                                               2,672,500                       $  7.25 - $15.38
    Canceled                                               (270,172)                      $  6.00 - $ 9.00
    Exercised                                              (300,781)                      $  2.75 - $ 8.94
                                                       ------------
Outstanding at November 4, 2000                           5,705,910                       $  2.75 - $17.25
                                                       ============
</TABLE>

Options outstanding at November 4, 2000 are as follows:

<TABLE>
<CAPTION>
                                                                Weighted Average
                                                                   Remaining
       Range of Exercise Prices        Number of Shares         Contractual Life        Weighted Average            Shares
                                         Outstanding               (in years)            Exercise Price          Exercisable
       ------------------------        ----------------         ----------------        ----------------         -----------
       <S>                             <C>                      <C>                     <C>                      <C>
         $ 2.75 - $ 5.44                   640,836                    7.79                  $ 4.01                 596,668
              $5.50                      1,172,670                    7.23                  $ 5.50                 799,333
         $ 6.00 - $ 7.63                 1,456,404                    7.94                  $ 6.92               1,301,403
         $ 7.88 - $14.00                 1,258,000                    9.49                  $12.47               1,099,500
         $15.38 - $17.25                 1,178,000                    9.67                  $15.40               1,178,000
                                        ----------                                                              ----------
                                         5,705,910                    8.48                  $ 9.28               4,974,904
                                        ==========                                                              ==========
</TABLE>

      As of November 4, 2000, 107 individuals held options, 12,406 shares were
available for future grants under the Company's 1994 Stock Option Plan, 764,000
shares were available for future grants to Miss Erika employees under the Miss
Erika Stock Option Plan, no shares were available for future grants to certain
Jeri-Jo executives under the Jeri-Jo Stock Option Plan, 65,000 shares were
available for non-employee directors under the Stock Option Plan for
Non-Employee Directors and 291,500 shares were available for future grants under
the Company's 1998 Long-Term Incentive Plan.

      The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
employee stock options because, as discussed below, the alternative fair value
accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB Opinion No. 25, because the
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.

      Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 2000, fiscal 1999 and fiscal 1998: risk-free interest
rates of 5.6% for fiscal 2000, 5.6% for fiscal 1999 and 5.8% for fiscal 1998;
zero dividend yields, volatility factor of the expected market price of the
Company's Common Stock of 0.72 for fiscal

                                      F-18
<PAGE>

                         McNaughton Apparel Group Inc.
            Notes to Consolidated Financial Statements (Continued)

13.   Employee Benefit Plans (continued)

Stock Option Plans (continued)

2000, 0.75 for fiscal 1999 and 0.56 for fiscal 1998; a weighted average expected
life of the option of 4.5 years for fiscal 2000, 5.6 years for fiscal 1999 and
5.6 years for fiscal 1998. Based on the assumptions set forth above, the
weighted average fair value of the options granted in fiscal 2000 was $7.68 per
share on the date of grant.

      The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

      For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for earnings per share
information):

<TABLE>
<CAPTION>
                                                                   Year Ended
                                                -----------------------------------------------
                                                November 4,      November 6,        October 31,
                                                    2000             1999               1998
                                                    ----             ----               ----
         <S>                                    <C>              <C>                <C>
         Net income (loss):
             As reported                           $26,881          $8,531            $  (713)
             Pro forma                             $13,599          $5,596            $(1,988)

         Basic earnings (loss) per share:

             As reported                           $  3.39          $ 1.15            $ (0.10)
             Pro forma                             $  1.72          $ 0.75            $ (0.27)
</TABLE>

Stock Purchase Plan

      Pursuant to a Stock Purchase Plan adopted on January 7, 1994, an aggregate
of 100,000 shares of Common Stock was made available for purchase to eligible
employees. The purchase price of the Common Stock under the plan is 85% of the
stock price, as defined. Participating employees may authorize the Company to
withhold a portion of their compensation, subject to certain limitations, to
purchase the shares. As of November 4, 2000, 67,422 shares of Common Stock have
been issued under this plan.

Savings Plan

      Effective January 1, 1995, the Company began sponsoring an employee
savings plan under Section 401(k) of the Internal Revenue Code for all Norton
and McNaughton Apparel Holdings Inc. (the South Carolina Warehouse) full-time
employees with six months of continuous service. Eligible employees may make
pre-tax contributions of up to 15% of their annual compensation subject to the
maximum allowable contribution. Employee contributions of up to 6% of
compensation are matched by the Company at a rate of 35%. Employees are 100%
vested in their pre-tax contributions immediately, and become vested in the
employer matching contributions as follows: 20% vested after one year of
service, 40% vested after two years of service, 60% vested after three years of
service, 80% vested after four years of service and 100% vested after five years
of service. The Company's matching contributions under this plan for the years
ended November 4, 2000, November 6, 1999 and October 31, 1998 were $146,536,
$146,334 and $179,389, respectively.

      Effective January 1, 1988, the Company began sponsoring an employee
savings plan under Section 401(k) of the Internal Revenue Code for all Jeri-Jo
full-time employees with one year of continuous service. Eligible employees may
make pre-tax contributions of up to 15% of their annual compensation subject to
the maximum allowable contribution. The Company contributes 3% of all eligible
employees' compensation to the plan and matches employee contributions up to 50%
of the first 5% of compensation. Employees are 100% vested in their pre-tax
contributions immediately, and become vested in the employer matching
contributions as follows: 20% vested after two years of service, 40% vested
after three years of service, 60% vested after four years of service, 80% vested
after five years of service and 100% vested after six years of service. The
Company's matching contribution under Jeri-Jo's plan for the year ended November
4, 2000, November 6, 1999 and October 31, 1998 (from the date of acquisition of
June 18, 1998) was $221,908, $166,666 and $58,833, respectively.

                                      F-19
<PAGE>

                         McNaughton Apparel Group Inc.
            Notes to Consolidated Financial Statements (Continued)

13.   Employee Benefit Plans (continued)

Profit Sharing Plan

      The Company sponsors a profit sharing plan covering Miss Erika employees
with more than one year of continuous service. Vesting occurs at a rate of 25%
per year and employees are fully vested after four years. Profit sharing plan
assets consist primarily of stocks, bonds and U.S. Government securities. The
plan provides for an accrual of up to 15% of each employee's gross compensation
plus bonus, up to a maximum contribution of approximately $30,000 per employee.
The accrual amounted to $1,020,000 in fiscal 2000, $879,000 in fiscal 1999 and
$720,000 in fiscal 1998. (See Note 9).

14.   Fair Values of Financial Instruments

      The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:

      Cash and cash equivalents: The carrying amounts reported in the
consolidated balance sheets approximate fair value.

      Short-term debt: The carrying amounts reported in the consolidated balance
sheets approximate fair value.

      Long-term debt: The fair value of the 12 1/2% Senior Notes due 2005 is
based on the quoted market price.

      The carrying amounts and fair values of the Company's financial
instruments are as follows:

<TABLE>
<CAPTION>
                                                                                     November 4, 2000
                                                                                     ----------------
                                                                       Carrying
                                                                        Amount                   Fair Value
                                                                       ------------------------------------
                                                                                   (In Thousands)
<S>                                                                    <C>                       <C>
Cash and cash equivalents                                              $      468                $      468
Short-term debt:
   Revolving credit loan                                                   65,820                    65,820
Long-term debt:
   12 1/2% Senior Notes due 2005                                          125,000                   116,250
Subordinate promissory note due 2003                                       10,000                    10,000

                                                                                    November 6, 1999
                                                                                    ----------------
                                                                       Carrying
                                                                        Amount                   Fair Value
                                                                       ------------------------------------
                                                                                   (In Thousands)
Cash and cash equivalents                                              $  13,842                 $  13,842
Short-term debt:
   Revolving credit loan                                                     725                       725
Long-term debt:
  12 1/2% Senior Notes due 2005                                          125,000                    85,000
</TABLE>

15.   Shareholder Rights Plan

      On January 19, 1996, the Company's Board of Directors adopted a
Shareholder Rights Plan in which shareholders of record on February 8, 1996
received a dividend distribution of one common share purchase right for each
outstanding share of the Company's Common Stock held. Each right entitles the
holder to purchase from the Company Common Stock at an initial exercise price of
$32.00.

      The rights are not exercisable or transferable apart from the Common Stock
until the earlier to occur of (i) ten days following a public announcement that
a person or group of affiliated or associated persons have acquired beneficial
ownership of 20% or more of the outstanding Common Stock of the Company, or (ii)
ten business days following the commencement of, or announcement of, an
intention to make a tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a person or group of 20% or more of
such outstanding Common Stock.

      The rights are redeemable by the Company's Board of Directors at a price
of $0.01 per right at any time prior to the acquisition by a person or group of
beneficial ownership of 20% or more of the Company's Common Stock.

                                      F-20
<PAGE>

                         McNaughton Apparel Group Inc.
            Notes to Consolidated Financial Statements (Continued)

15.   Shareholder Rights Plan (continued)

      If a person or group acquires 20% or more of the Company's outstanding
Common Stock, each right will entitle the holder to purchase, at the right's
exercise price, a number of shares of the Company's Common Stock having a market
value at that time of twice the right's exercise price. If the Company is
acquired in a merger or other business combination transaction, each right will
entitle its holder to purchase, at the right's exercise price, a number of the
acquiring company's common shares having a market value at that time of twice
the right's exercise price.

      The Rights Plan was amended on August 2, 2000 to permit the issuances of
the Company's Common Stock and options to purchase Common Stock in connection
with the Agreement of Purchase and Sale dated April 15, 1998, as amended by and
among JJ Acquisition Corp., Jeri-Jo Knitwear, Inc., Jamie Scott, Inc. and the
Stockholders of Jamie Scott, Inc. and related employment agreements without
triggering the exercisability of the rights under the Rights Plan.

                                      F-21
<PAGE>

                         McNaughton Apparel Group Inc.
                Schedule II - Valuation and Qualifying Accounts
                                (In Thousands)

<TABLE>
<CAPTION>
                                                  Balance at
                                                   Beginning          Costs and                        Balance at
                Description                         of Year            Expenses      Deductions/(1)/   End of Year
                -----------                       ----------          ---------      --------------    -----------
<S>                                               <C>                 <C>            <C>               <C>
Year ended November 4, 2000
Reserve for sales discounts, returns
and allowances                                      $6,367            $41,598          $41,869           $6,096

Year ended November 6, 1999
Reserve for sales discounts, returns
and allowances                                      $3,791            $38,384          $35,808           $6,367


Year ended October 31, 1998
Reserve for sales discounts, returns
and allowances                                      $2,198            $49,336/(2)/     $47,743           $3,791
</TABLE>


____________________________

(1)  Discounts, returns and allowances granted to customers and charged against
     reserve.
(2)  Includes Jeri-Jo Knitwear, Inc.'s acquired reserve at June 18, 1998.

                                      F-22
<PAGE>

                          McNaughton Apparel Group Inc.
                      Quarterly Financial Data (Unaudited)
                      (In Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                            First        Second        Third        Fourth           Fiscal
                                                           Quarter       Quarter      Quarter       Quarter           Year
                                                           -------       -------      -------       -------           ----
<S>                                                        <C>           <C>          <C>           <C>             <C>
FISCAL 2000
Net sales                                                  $87,718       $162,376     $119,547      $136,648        $506,289
Gross profit                                                23,862         45,595       35,163        39,186         143,806
Net income                                                   2,117         10,832        6,642         7,290          26,881

Basic per share data:
Net income                                                 $  0.29       $   1.44     $   0.87      $   0.79        $   3.39
                                                           =======       ========     ========      ========        ========
Weighted average number of common
   shares outstanding                                        7,390          7,513        7,592         9,201           7,924
                                                           =======       ========     ========      ========        ========

Diluted per share data:
Net income                                                 $  0.27       $   1.32     $   0.78      $   0.70        $   3.05
                                                           =======       ========     ========      ========        ========
Weighted average number of common
   shares outstanding assuming dilution                      7,958          8,211        8,562        10,477           8,802
                                                           =======       ========     ========      ========        ========

FISCAL 1999
Net sales                                                  $66,619       $123,972     $ 92,856      $124,365        $407,812
Gross profit                                                15,167         28,788       25,099        34,989         104,043
Net income (loss)                                           (1,959)         3,042        2,483         4,965           8,531

Basic per share data:
Net income (loss)                                          $ (0.26)      $   0.41     $   0.33      $   0.67        $   1.15
                                                           =======       ========     ========      ========        ========
Weighted average number of common
   shares outstanding                                        7,419          7,428        7,434         7,445           7,432
                                                           =======       ========     ========      ========        ========

Diluted per share data:
Net income (loss)                                          $ (0.26)      $   0.41     $   0.32      $   0.62        $   1.11
                                                           =======       ========     ========      ========        ========
Weighted average number of common
   shares outstanding assuming dilution                      7,419          7,494        7,856         8,063           7,708
                                                           =======       ========     ========      ========        ========

FISCAL 1998
Net sales                                                  $53,508       $ 94,116     $ 79,967      $117,013        $344,604
Gross profit                                                11,397         18,036       19,203        22,265          70,901
Income (loss) before extraordinary item                       (845)         1,316          456          (479)            448
Extraordinary item, net                                          -              -       (1,161)            -          (1,161)
Net income (loss)                                             (845)         1,316         (705)         (479)           (713)

Basic per share data:
Income (loss) before extraordinary item                    $ (0.11)      $   0.18     $   0.06      $  (0.06)       $   0.06
Extraordinary item, net                                          -              -        (0.16)            -           (0.16)
                                                           -------       --------     --------      --------        --------
Net income (loss)                                          $ (0.11)      $   0.18     $  (0.10)     $  (0.06)       $  (0.10)
                                                           =======       ========     ========      ========        ========
Weighted average number of common
   shares outstanding                                        7,411          7,413         7,413        7,414           7,413
                                                           =======       ========     ========      ========        ========

Diluted per share data:
Income (loss) before extraordinary item                    $ (0.11)      $   0.18     $   0.06      $  (0.06)       $   0.06
Extraordinary item, net                                          -              -        (0.15)            -           (0.16)
                                                           -------       --------     --------      --------        --------
Net income (loss)                                          $ (0.11)      $   0.18     $  (0.09)     $  (0.06)       $  (0.10)
                                                           =======       ========     ========      ========        ========
Weighted average number of common
   shares outstanding assuming dilution                      7,411          7,423        7,536         7,414           7,432
                                                           =======       ========     ========      ========        ========
</TABLE>

                                      F-23